The Other Digital Divide
Hi, Can here. Today we discuss how Silicon Valley seems to be taking off in the pandemic, while the rest of the country is suffering
American Carnage
If America were a person and you asked her how she’s doing, what kind of an answer would you expect to get?
Probably not a positive one. The country is being ravaged, both by a virus and a reality TV-star turned president, soon to come apart at the seams. The unemployment numbers are literally off the charts, and millions of people are soon going to risk eviction as they won’t be able to make their rent. It is truly a bloodbath out there, from the looks of it. And, literally, the winter is coming which will surely put many of the virus related trauma into overdrive.
First, the kids will either go to school and get their parents (and teachers) sick, or won’t, and drive them insane at home. The cold weather will trap people in their homes, increasing the contagiousness. And if all that is not enough, let me remind you: we are a little under 3 months away from one of the most consequential elections of our lifetime. People will risk their lives to vote, and now more so that the leader of the free world is trying to suppress the vote by kneecapping the national postal service.
There’s no hope. It’s all bad. We are fucked.
Enter Silicon Valley
But, what if America was not a regular person but was someone, say, who works in tech? What would she say?
Probably something along the lines of “it’s alright”:
The stabilization has created a surreal disconnect between tech start-ups and the broader economy. While retailers, restaurant chains and many other companies are filing for bankruptcy and are dealing with one of the worst downturns on record, the tech industry has largely sidestepped the worst of the destruction.
In fact, she might even be happier than ever. Obviously, many small companies [1] and especially those in industries like travel have taken a hit, but many of the big ones seem to be doing just fine. In fact, not just fine, but doing better than ever, at least comparatively so.
This is some serious alpha:
Why it’s important: Tech giants are becoming ever more important to the US economy. The six US-listed companies worth over $500 billion on Jan. 1 were Apple, Microsoft, Alphabet, Amazon, Facebook and Berkshire Hathaway. Aside from Berkshire Hathaway, the only non-tech company that made the cut, all of these companies valuation grew by more than 16% from Jan. 1 to July 22. Amazon is up nearly 70%. Without these five tech companies, the S&P 500 would have fallen by 5% since the start of the year, according to the New York Times. Berkshire Hathaway’s market cap actually fell by 15%.
I know people love to say “stock market is not the economy” but that really does not do justice what is going on here. Again, I’m on record arguing that “software is eating the world” is actually a good tagline, albeit a bit overused, but that also does not capture the polarization of returns to capital in tech here.
Before we go any further, let’s talk about why this is happening. For better or worse, the virus has accelerated The Great Restructuring of our economy. Almost overnight, we decided that we are going to do even more things online (hence software eating the world) and those who are better poised to take a bite out of that are seen as the potential winners. When you couple that with the fact that the overall pie seems to be shrinking, you can see where things are going. There are fewer holes to stuff your money in, and even a smaller number of those holes are guaranteed to not burn it.
Again, you can see how see plays out in real life. Entire streets worth of small, retail businesses are shutting down their physical locations, but they still need to sell things. So, they turn to Shopify to open an online store. Shopify uses Stripe for payments, which takes a cut. And Stripe runs their servers on Amazon, which again benefits. Shopify is seen as the new darling of the tech Twitter, but if your bet is that they’re going to replace all the promenade streets and shopping malls of the world, they are still woefully undervalued. Same for Stripe, and Amazon.
The Good
On one hand, this is expected and it is a good thing. These companies lowered the barriers to entry for millions of people to start a business online. If you want to sell something, you no longer need to rent a dingy space in a strip-mall and people no longer need to drive their gas-guzzling SUVs to your store and back. The world is forever changed. Now, you can just click a few buttons, and in less than a few minutes, the entire world becomes your addressable market.
Especially in these dire times, this can be a lifeboat for many small businesses. I know about this personally. My brother has a couple retail stores in a touristic area of Spain. As tourists, especially from the US and China, have disappeared, and the foot traffic dwindled to nothing, his only real source of revenue is the Shopify store he has, which he also promotes using ads on Instagram and Google. Again, this is tech in action, doing well while doing good, as the ever cheery Stripe founders would never let you forget.
On the other hand, it is hard not to be worried.
The Bad
One of the lesser-discussed impact of domination of the economy by the tech behemoth is how productive they are, per employee, compared to their competitors in other industries. Walmart, for example, employs more than 1.5M people in the US, whereas Amazon has around 275,000 employees. The Seattle behemoth is able to achieve 1.6T in market cap compared to Walmart’s 375B. This is a stylistic comparison, more than academic one, but the fact that Amazon is able to get more than 4 times the market cap with less than 20% of Walmart’s employees can be both a cause for celebration, that technology is good, and concern, that employment is not just money in people’s pockets but a source of dignity for many.
The reason, for example, my brother is able to sell his good online with just a clicks is that instead of having to rent stores and hire people, he can benefit from the works of a bunch of Shopify employees. But when you think about how each of those Shopify employees serve not just my brother, but thousands, if not millions, of people, you can see where things go awry in the macro scale.
My brother’s stores are closed and so are all the other ones in that touristic part. He no longer employs people, and neither do hundreds of other stores like his. He says the entire downtown is like a ghost town, with boarded up stores as far as the eye can see. Now, multiply that small part of Catalonia by thousands, and you can see how this is not a small crisis that will go away anytime soon. You just cannot optimistic-tweet this away from sunny California.
Again, there’s no denying that we would always be moving more and more of the economy online. I am a huge benefactor of this trend, both financially as someone who works (well, not currently) in tech but also as a civilian. I am glad I can make a doctor’s appointment using nothing but my phone, and I buy things on Amazon all the time. I talk to my friends and family in HD for free using the super-computer in my pocket and I still am amazed we got there so fast from when I had to wait for minutes for an MP3 to download on my dial-up connection.
But, maybe we need to take a step back.
And The Ugly
The current debate that’s going on how deindustrialization of America by the way of moving entire industries overseas in 70s feels like an apt analogy to what is going on now.
The arguments of the decades past were not that much different from what tech is offering now. That by lowering the cost of production, we’d be increasing efficiency and that would eventually benefit everyone. We’d be getting cheaper TVs, which we did, and eventually people who were laid off from factories would be able to find equally dignified jobs, which did not really happen.
And you can take the similarities even further. Today, lots of people are rightfully worried about how not only we deindustrialized huge swaths of the country, but we also put all our eggs in one basket, which is held by our fiercest financial enemy.
This is not that much different, for example, than building our entire information age economy on ad-supported business. Now, a couple adtech companies like Facebook and Google have ravaged newspapers, and we are left millions of people getting their news from QAnon groups. No one did anything wrong [2] and everyone played largely by the rules, but we ended at a very bad place. We can rationalize all this as good things in academic language and give them fancy names, but the end result is a dire, sad one for our liberal democracies, which we may not even have for much longer. The dreaded unintended consequences do not just apply to regulation, but to any macroeconomic policy or phenomenon.
But let’s go back to my original point. The divide between Silicon Valley and the rest of the country is wider it has ever been. Half my Twitter is people looking to angel-invest their millions in apps, and the other is reporters documenting the latest lows America has hit. This doesn’t bode well for the country, and will become a political and social flashpoint sooner than later. It surely is not sustainable. If the tech industry wants to enjoy its relative welcome, it should do more. This doesn’t necessarily mean working on pro-social, civic-minded enterprises, but also fighting for policies that can bridge the gap. Even when those policies can mean a haircut here or a trim there. We all need to do more than tweet good wishes and promote our companies here.
Margins is where Ranjan Roy, a former Wall Street trader turned content strategist, and Can Duruk, a Silicon Valley technologist write about the technology of business, and the business of technology.
Notes
1: Maybe there’s really no better example to show how the divide between tech and the real is widening than hearing that The Creamery shutting its doors. For those who are not as steeped in the San Francisco tech bubble: The Creamery was a small coffeeshop in SoMa where, especially in early 2010s, you could not get a table without running into some VC who is there to beta-test a new iPhone app or a tech reporter rubberneck for a scoop. The news of its closing brought together, for a brief period, both the tech journalists and the investor / exec class on my Twitter feed. Thoughts and prayers! f
2: I am waving my hands here quite a bit. I am not a lawyer, but it sure seems like there was quite a bit of anti-competitive behavior that led us here also. Ranging from Google pushing its own products to consumers who use Google Search to Facebook buying its competitors, there’s no doubt that there are reparations to be made.
So, first, it takes a trader to use stock valuation as the numerator of a productivity equation. If we didn't live in the "everything bubble" that's been 100% financed by the fed, things would look different.
Anyone who's lived through the deindustrialization of steel or autos knows the "find other work" thing is somewhere between an optimistic fantasy and a cynical sop. The reality is, the other, equivalent work goes to an increasingly small subset of young people. If we were to look at outcomes normalized for position in society, the picture would be pretty grim.
The idea that Amazon is a great success only fits in a world where retail is an awesome outcome. So, one of the basic assumptions of the discussion is off. The same goes for advertising (Google, Twitter and FB's real business, given that they can't actually sell their products). (Don't get me started on Uber - low cost transportation based on exploiting people who can't factor the expense of running a personal car as a business into employment decisions. Microsoft, making us more "productive" for forty years based on nobody's metrics. Apple, the Hermes of smartphones. It's embarrassing, nobody does anything worthwhile or honorable.)
And, yeah, the whole thing is ripping up the American fabric, so the only problem with the good, bad, and ugly is that it's all pretty ugly. The entire article reeks of SV bubble thinking.
Covid accelerated exposure of the fractures that forty years of neoliberal "greed is good" / "core business" / "profit is the only objective function" have created. Anyone who's made money in the past ten years largely owes it to the fed mortgaging our future. The "Greenspan put" was amateur hour... child's play.
So, we are left with haves vs have nots, SV and finance vs everyone else, educated vs ignorant, science-believing vs superstitions... Nobody at the top has valued the health of our communities for more than forty years. And, everyone is armed.
Thanks neoliberals!
The very best part of the article was the fp pointer.
With our current degree of living in two different realities, the idea that we could mount an effective challenge to China's onslaught is pretty laughable. Markets decide everything and the market will tell us if we need rare earths from Africa...only way after it's already too late. (It will probably make a fascinating business school case study about how markets mostly don't work well after all, given their deep problems with local optima and lack of strategic forethought... they're just better than Stalinism implemented with 1940s communication technology -- at the hands of Republicans, that seems to be the only comparison ever made.)
Our future rides on two things: (a) our position holding the reserve currency and (b) that miracles really exist.
(Btw, this is the third version I've typed in because whatever SV does in terms of making auth and accounts work well totally sucks.)
Amazon has 876k employees. https://ir.aboutamazon.com/news-release/news-release-details/2020/Amazon.com-Announces-Second-Quarter-Results/