Dynamic Silicon Valley
By David Henderson
Over at our sister Liberty Fund site, Law and Liberty, John Tamny has a hard-hitting piece titled “True Overlords Don’t Work This Hard.” It’s a response to a pretty negative piece on Silicon Valley by Michael Anton published earlier this month at Law and Liberty. Anton’s piece is titled “The Frivolous Valley and Its Dreadful Conformity.” Anton is a lecturer in politics and research fellow at Hillsdale College. Tammy is director of the Center for Economic Freedom at FreedomWorks.
Although I’m not a big fan of Tamny’s negative tone when discussing Anton, I am a total fan of both his positive tone in understanding the big picture and his evidence of the dynamism of Silicon Valley and, indeed, of free markets in general. I’ll highlight a few beautiful passages.
Commenting on Facebook recently, The Guardian’s technology writer Victor Keegan noted that the social network is “Well on the way to becoming what economists call a ‘natural monopoly.’ . . . Users have invested so much social capital in putting up data about themselves it is not worth their changing sites . . . Its massive user base will help maintain its dominance.”
Actually, Keegan’s comment isn’t very recent. It was back in 2007 that he put pen to paper about dominance in social networking. He was writing about MySpace. Anyone heard of it lately?
Believe it or not, some have. Hard as it may be for readers to imagine, there’s still traffic on MySpace. It’s just not what it once was. While it surpassed Google in 2006 as the most visited website in the United States, it’s not even among the 1,000 most visited sites today. MySpace exists, but this former “monopoly” is no longer a player. Such is life in economic sectors largely untouched by the grasping hands of politicians. The team picture of top players is ever-changing.
Think about that the next time someone tells you that Facebook now has a dominant position (true) that can’t be dislodged (false.)
Contrary to the musings of a writer who, again, has not “worked in the Valley or in tech,” the on-the-ground reality of Silicon Valley is that long-term success there amounts to an endless fight against failure. Netflix may be worth over $150 billion today, but it’s only a thriving corporation insofar as it long ago recognized how tenuous its hold on the marketplace was. Having beaten Blockbuster with DVDs in the mail, its executives understood that consumers are a fickle lot. So Netflix innovated. It enabled streaming so that customers could watch movies right away (as opposed to two days later). Then, having witnessed up close the viewing habits of its customers, Netflix did the previously unheard of: It produced and released whole seasons of original shows all at once.
To put it plainly, Netflix can claim a nosebleed market capitalization today simply because it never viewed itself as an overlord.
Neither has Amazon. Though the Seattle Internet retail giant isn’t part of Silicon Valley geographically, it’s most certainly Silicon Valley in spirit. We shouldn’t ignore how very uncertain its long-term survival has been (long-term shareholders have suffered too many 20 percent corrections in its share price to count). Amazon prospers precisely because it doesn’t take its present status at all for granted. Even with a market cap that exceeds $800 billion, Amazon runs scared. Its every action is an indication of its internal knowledge that the commercial landscape is ever-changing. That’s why founder Jeff Bezos has spent billions on projects that never panned out. Along those lines, how many readers are reading this bit of commentary on an Amazon Fire smartphone? Probably not too many. Bezos succeeds precisely because he’s willing to experiment in myriad ways to meet the needs of his customer base.
Notable about Bezos’s customer base is that it isn’t large. While Amazon is surely the biggest kid on the block in the Internet retail space, seemingly lost on Anton is how small the Internet retailer’s actual market share is. In fact it’s 4 percent—which explains why Amazon has begun expanding into bricks-and-mortar. Bezos gets what’s lost on the Antons of the world who seem convinced (as John Kenneth Galbraith once was about General Motors) that Amazon has wiped out the competition on the way to selling the whole market. Back to reality, Bezos currently competes for a dominant percentage of what’s less than 5 percent, and is in the process of dipping Amazon’s proverbial toe into what is a much bigger market. And if his self-acknowledged track record is at all predictive, Bezos’s foray into traditional retail will be littered with mistakes.
Shades of John Kenneth Galbraith
Anton writes that Valley companies no longer seek “to meet real needs, but to create and satisfy new wants.” And that’s a bad thing? Is he too young to remember when Americans decidedly were not demanding laptops, smartphones, Internet, WiFi, books/CDs/DVDs online, or rides on demand? Thank goodness Valley visionaries are anticipating our needs! Who among us could live without the products previously mentioned for even a day in modern times?
As I wrote in my bio of John Kenneth Galbraith in The Concise Encyclopedia of Economics:
Galbraith made his biggest splash with his 1958 book, The Affluent Society, in which he contrasted the affluence of the private sector with the squalor of the public sector. Many people liked that book because of their view that Galbraith, like Thorstein Veblen before him, attacked production that was geared to “conspicuous consumption.” But that is not what Galbraith did. In fact, Galbraith argued that “an admirable case can still be made” for satisfying even consumer wants that “have bizarre, frivolous, or even immoral origins.” His argument against satisfying all consumer demands is more subtle. “If the individual’s wants are to be urgent,” he wrote, “they must be original with himself. They cannot be urgent if they must be contrived for him. And above all, they must not be contrived by the process of production by which they are satisfied. … One cannot defend production as satisfying wants if that production creates the wants” (p. 124).
Friedrich Hayek made the most fundamental criticism of Galbraith’s argument. Hayek conceded that most wants do not originate with the individual. Our innate wants, he wrote, “are probably confined to food, shelter, and sex.” All other wants we learn from what we see around us. Probably all our aesthetic feelings—our enjoyment of music and literature, for example—are learned. So, wrote Hayek, “to say that a desire is not important because it is not innate is to say that the whole cultural achievement of man is not important.”
As you can see, Tamny makes the same critique of Anton that Hayek made of Galbraith.
Tamny’s whole piece is well worth reading.