CommentsNEW GEOGRAPHY--The consumer technology boom, largely responsible for a resurgence in California’s economy after the tech wreck of 2001, seems to be coming to an end. The signs are widespread: slowing employment, layoffs from bell-weather social media companies, the almost embarrassing difficulty of finding buyers for Twitter, the absorption of Yahoo by Verizon and the acquisition by Microsoft of LinkedIn.
This is not to minimize the great things which have been accomplished over 15 years of massive investment in these technologies. Mark Zuckerberg founded Facebook in 2004, and is now worth some $55 billion, up $15 billion from last year. In 2015, more than 1 billion people globally used Facebook applications every single day. The “app economy” created by Steve Jobs and Apple is equally impressive. What would we have done with our free time if it were not for Farmville, Angry Birds and Pokemon Go?
The tech boom has changed the face of wealth in America. Tech oligarchs, mostly clustered in the Bay Area, which dominates some 40 percent of employment in search and web publishing, now account for one quarter of the wealth of the Forbes 400 richest Americans. This tilting of wealth is not going away, and may shape the business world for a generation.
Concentration and contraction
Overall though, the economic impact of these technologies has been limited. Google’s Alphabet Inc. and Facebook Inc. together employ fewer than 75,000 people, one-third fewer than Microsoft, worth only a fraction its value. Snapchat, the star of Silicon Beach, employs several hundred people, hardly enough to reverse a long-term decline in Southern California tech employment.
More troubling still are changes in the Bay Area tech culture. In its 1980s heyday, Silicon Valley was a Wild West of start-ups, new companies and ideas, and lots of jobs. Today, it resembles increasingly the cozy and fundamentally uncompetitive world of Detroit’s Big Three — Ford, Chrysler and General Motors. The Valley is increasingly dominated by a handful of companies — Google, Facebook and Apple — while conditions for startups, even well-funded ones, have deteriorated markedly.
Despite the hype surrounding the possible IPO for Snapchat, new firms raised $15 billion in venture capital during the third quarter of 2016 — ending in September — down 28.6 percent from $21 billion for the same period one year ago. The third quarter of 2016 marked the fifth straight quarterly decline in completed financings and the lowest number recorded by PitchBook since the fourth quarter of 2010, signaling that investors are writing bigger checks for fewer deals.
Rather than the Wild West, we are seeing consolidation in social media, which depends largely on advertising revenue. Google and Facebook claimed 64 percent of that revenue, according to Pivotal Research. Google scooped up $30 billion and Facebook gathered $8 billion, while other smaller companies have lost market share over the last five years.
As promising start-ups are swallowed up at an alarming rate, the likely scenario, as we have seen in other industries, may be secular stagnation. With less competition and innovation, the track record of oligarchies, particularly regionally incestuous ones, is not a great one, as anyone who deals with new Microsoft or Apple operating systems, can attest. Even Sergei Brin, a co-founder of Google, recently suggested that start-ups would be better off launching somewhere else.
One door closes, another opens
The preponderance of evidence is pointing to the end of the boom era in social media growth. Already, there are clear signs of slowing, with layoffs growing rapidly and more companies looking for space in less expensive, less highly regulated areas.
Yet this shift from social media may prove a long-term benefit both to the national economy and California. The sad truth is that for all the billions earned in stock market value, social media, unlike past tech booms, has done precious little to boost economic productivity. According to the Pew Center for Internet, Science and Tech, 56 percent of workers who use social media platforms for work-related purposes agree that social media distracts from the work they need to do, with 30 percent agreeing strongly.
Rather than thrilling tweens with their first Tweets, technology companies may be shifting to far more important callings. In the Bay Area and elsewhere, firms are delving into promising fields including autonomous vehicles, machine learning, artificial intelligence, financial technology, biomedical research and even space exploration. These endeavors do more than simply keep people entertained and informed about their friends. They may create the basis for longer-lasting growth in the productive economy, not only here in California, but around the nation.
Will California be able to maintain its innovation dominance in this next tech cycle? The Golden State faces the twin headwinds of high housing prices and restrictive regulations. These growing technologies require interfacing with the analog (aka real) world, relying more on 30-something, experienced engineers and data scientists than the millennial hipsters and coders who have fueled social media and casual gaming. California needs to make housing affordable and lessen regulatory burden for business if it plans to lead the next wave.
(Joel Kotkin is the R.C. Hobbs Presidential Fellow in Urban Futures at Chapman University in Orange and executive director of the Houston-based Center for Opportunity Urbanism. Marshall Toplansky is senior advisor to Chapman University in the area of Data & Analytics, as well as an adjunct faculty member at the Argyros School of Business and Economics. This piece appeared most recently at New Geography.)
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Jobs and the Economy: Can California Catch the Next Tech Wave?
