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Saturday, 20 December 2014

RobberBarons.com

Silicon Valley's undeserved moral exceptionalism

Silicon Valley likes to think of itself as morally exceptional. When Google went public in 2004, the Internet search company’s wunderkind founders, Larry Page and Sergey Brin, penned a letter to prospective shareholders that has become the Internet industry’s version of the Magna Carta. In it, they pledged that Google was “not a conventional company” but one focused on “making the world a better place.” Their manifesto followed a venerable tradition in Silicon Valley (meaning the swath of technology and Internet companies based in the cities and towns between San Francisco and San Jose). A decade earlier Apple co-founder Steve Jobs insisted that “being the richest man in the cemetery doesn’t matter to me … Going to bed at night saying we’ve done something wonderful … that’s what matters to me.”

The newest inductees to the Silicon Valley pantheon have continued to think very well of themselves and their motives. Mark Pincus, who introduced Farmville and Words With Friends to create pleasant online distractions, embraced comparable sentiments when taking Zynga public last year: “Games should do good. We want to help the world while doing our day jobs.” In the prospectus for what could be a record $10 billion initial public offering, Facebook founder Mark Zuckerberg promises that a similar philosophy will guide the social network. “Simply put: we don’t build services to make money; we make money to build better services. And we think this is a good way to build something. These days I think more and more people want to use services from companies that believe in something beyond simply maximizing profits.”

After the financial crisis and the great Wall Street swindles of the past few years, this all sounds refreshing. Toiling away in places with bucolic names like Sunnyvale and Mountain View, entrepreneurs create products intended to improve mankind and make the world a better place. The narrative offers an antidote to tales of bailed-out bankers collecting undeserved bonuses and job-crushing private-equity barons paying lower tax rates than their secretaries. But wishing to hold the moral high ground does not make it so - whether in industry, politics, or religion.

Though Silicon Valley’s newest billionaires may anoint themselves the saints of American capitalism, they’re beginning to resemble something else entirely: robber barons. Behind the hoodies and flip-flops lurk businesspeople as rapacious as the black-suited and top-hatted industrialists of the late 19th century. Like their predecessors in railroads, steel, banking, and oil a century ago, Silicon Valley’s new entrepreneurs are harnessing technology to make the world more efficient. But along the way, that process is bringing great economic and labor dislocation, as well as an unequal share of the spoils. Just last week, the Justice Department warned Apple that it planned to sue the company along with several U.S. publishers for colluding to raise the price of electronic books - monopolistic behavior that would have made John Rockefeller proud.

“During the second industrial revolution, the economy went through major transitions, led by 50 individuals who became incredibly wealthy, leading to huge unemployment,” says Joe Lonsdale, a 2003 graduate of the university founded by one of those tycoons, Leland Stanford. Indeed, Lonsdale is hoping to make his own fortune by “reinventing the infrastructure that powers global wealth” with his latest startup, Addepar. “Instead of the robber barons, today it is the technologists who are doing the destroying.”

A few Silicon Valley denizens are beginning to recognize the risks inherent in combining moralistic hubris with the Internet’s powers of creative destruction. At a closed-door meeting of high-tech honchos in Davos last month, Cisco Systems Chairman John Chambers and Glenn Hutchins, founder of the leading investment firm Silver Lake, warned of a potential backlash. Not unlike the torrent of bad publicity surrounding Wall Street after the financial meltdown, a flood of bad press or even new regulation could follow from continued technology-driven job losses or a major breakdown of cybersecurity.

The truth is, it’s increasingly tough for the establishment of Silicon Valley to argue that their business is any less evil, or does any more good, than the bulk of Corporate America. Underneath the haughty language of moral superiority lies the same profit motive that drives all businesses - and a ruthlessness rivaling history’s greatest industrial bullies.

EXPLOITATIVE MANUFACTURING
Take Apple’s manufacturing practices in China. By systematically outsourcing the assembly of iPhones and other gadgets to contract manufacturers like Foxconn, Apple has shaved its overall cost of production and plumped profit margins for shareholders. That’s neither unique nor necessarily evil. It’s a practice regularly adopted by toymakers, chemical producers, and food packagers, not to mention most of the rest of the consumer-electronics industry. But establishing an arm’s-length commercial relationship does not absolve a company from moral responsibility for the way its chosen partners treat workers.

Nike taught American business leaders this lesson more than a decade ago when its use of far-flung suppliers employing children in sweatshops became a public-relations debacle. Although Apple has a code of conduct for suppliers, audits them, and has published summaries of the results for several years, the company resisted more direct scrutiny until recently. Labor issues at Foxconn’s sprawling 230,000-worker complex in Shenzhen have attracted bad press for some time. It was not until that negative publicity spread from the relative obscurity of Mike Daisey’s off-Broadway monologue, “The Agony and Ecstasy of Steve Jobs,” to the front page of The New York Times and then to broadcast networks that Apple took more meaningful action, allowing the Fair Labor Association to conduct special audits of its suppliers’ factories in China.

INDIFFERENCE TO COPYRIGHT
Corporate shortcuts are not simply about reducing costs. They can, for instance, come in the form of looking the other way, something that Google and others are regularly accused of doing when it comes to respecting copyright law, especially as it relates to words, music, and video that tech companies don’t produce themselves. This tendency inspired two controversial anti-piracy bills, the Stop Online Piracy Act (SOPA) in the House and the Protect Intellectual Property Act (PIPA) in the Senate.

Near-passage of the legislation in January sent the Valley into a tizzy. As drafted, the bills would have forced Internet companies to block access to foreign sites that flout U.S. copyright laws. Opponents argued the laws would damage the freedom and openness of the Internet.

While both sides of the debate make legitimate points, it was remarkable how quickly legislators caved in to the website-blackout campaign mounted by Silicon Valley. Christopher Dodd, the former Connecticut senator who now chairs the Motion Picture Association of America, which supported the bills, calls it the “greatest backlash I’ve ever seen.”

Tellingly, big profit-driven sites like Google expressed sympathy but didn’t go dark - while the notably nonprofit Wikipedia, which had no revenues to lose, did switch off in protest.

DISREGARD FOR PRIVACY
A bigger battle remains to be fought on the privacy front, where Silicon Valley’s misdemeanors go beyond the fairly passive indifference that characterizes its approach to copyright.

Pushing the boundaries of what is generally considered acceptable, even decent, when it comes to exploiting personal information is a daily sport in the online world. That’s because a tweak here or there to the privacy settings of a social network or a tiny change to the code on a mobile application can mean a world of difference in the value of information an advertiser - or, in extremis, a government institution - can access about a usually unaware user.

Perhaps swayed by Silicon Valley’s altruistic spin, or slow to catch up with its rapid growth, Washington has, up to now, largely left the industry to regulate itself on privacy. That’s clearly not working. Hardly a day passes without some new revelation of an Internet or mobile company stepping a byte too far into the private business of its customers.

Among the more shocking of recent infractions, Google was found to have altered its computer code to trick the Safari web browser on Apple’s iPhones into overriding the privacy settings of millions of users. Once contacted by The Wall Street Journal about it, Google disabled the code.

The continual testing of limits is perhaps the dark side of the hacking culture extolled by leaders like Zuckerberg, who are steeped in the world of engineering. “There is a real sense of mission, with hackathons and staying up all night to solve this or that problem,” says Garth Saloner, the dean of Stanford’s business school. “It may seem slightly eccentric, but it’s tremendous fun for all involved. The only rule is there are no rules.”

While Saloner argues that most of the Internet’s top operators, like Facebook, strike a healthy balance between “adult supervision” and code writers “inventing something totally outside the lines,” Silicon Valley’s big kahunas aren’t necessarily the worst violators of privacy norms. Take last month’s kerfuffle around Path.com, a social-media application founded by a former Facebook executive, and backed by Shawn Fanning, whose Napster music file-sharing service was the godfather of online copyright infringement.

Path, which dubs itself a “smart journal that helps you share life with the ones you love,” was uploading users’ entire contact databases to its servers without permission. While Path amended the practice when outed by a savvy blogger, it quickly became clear it was not the only application swiping such personal data.

Individually, Silicon Valley’s privacy infractions can sound like minor peccadilloes. Some might have even been the result of perfectly legitimate oversights on the part of engineers so engrossed in their code writing that they’re unaware of the social implications of their work. Or it may be a consequence of a corporate culture that, to use a Facebook motto, preaches “Move Fast. Break Things.”

Either way, taken together they suggest that too many shortcuts are being taken to boost the value and profitability of the personal information being trafficked - the primary business line of many Internet companies.

CRONY CAPITALISM
Washington is beginning to understand that Silicon Valley cannot be trusted fully without supervision. On Feb. 23, the Obama administration introduced a Consumer Privacy Bill of Rights and vowed to persuade Congress to grant specific powers to the Federal Trade Commission and state attorneys general to enforce it. While Silicon Valley is presently adopting a cooperative approach to the White House initiative, the devil may come as the legislative details are hammered out.

It’s perhaps telling that, two days after the president unveiled his privacy proposal, Google named Susan Molinari, the combative former congresswoman from Staten Island, to head its D.C. office. There’s nothing inherently malicious about companies hiring hotshot lobbyists to protect their turf and, if possible, water down new rules. It’s just more “business as usual” than “don’t be evil,” which remains the first exhortation in Google’s corporate code of conduct.

THE MURDOCH MODEL
One of the ways the owners and founders of Silicon Valley companies have tried to maintain their guiding ethos is by asserting an exceptional level of control over shareholders. But this, too, has its own baronial shortcomings. Following Google and Zynga, Facebook’s IPO will segregate investors into the stock-market equivalent of first and second-class citizens, with Zuckerberg’s shares carrying 10 times the voting power of the stock being sold to the public.

Many of the venture capitalists and billionaires who invested in Facebook privately will also reap enormous gains from the deal - a list that includes Zynga founder Pincus. In return, many of these early investors are giving Zuckerberg the right to vote on their behalf. As a result, Zuckerberg will wield 57 percent of Facebook’s shareholder voting power with just around a fifth of the stock. That’s the kind of poor corporate governance that one day is likely to pit the interests of the founder against other shareholders, as it has at companies with similar structures like, most notoriously, Rupert Murdoch’s News Corp.

Which isn’t to say Silicon Valley has suddenly gone to the dark side. It’s just that its leading companies, among the largest and most powerful businesses in the world, are playing by the profit-seeking rules that prevail throughout the rest of corporate America. “Dreamers still go to California and have big visions about changing the world,” says David Tisch, managing director of TechStars NYC, which links startups with investors, and whose family knows about building businesses (Loews hotels, Bulova watches, and the New York Giants). “But most people are trying to get rich like anyone else.”

The original robber barons had decent intentions when they built railroads to connect America’s emerging cities and drilled oil wells that fueled the nation’s growth, but their empires still needed to be regulated, reined in, and in some cases broken up by vigilant watchdogs. Lofty words and ideals are fine for motivating employees and even for spurring sales, but they can also serve as cover for motives that clash with the broader interests of consumers and society. We need more than fancy promises in IPO prospectuses to ensure that the rise of the Silicon Valley engineer is good for the world.

Context News

This essay appears in the March 19 edition of Newsweek.

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