What Happened to Silicon Values?

By Bill Davidow

  Jun 25 2012, 11:51 AM ET 36

Compare Mark Zuckerberg and Larry Page to the founders of Hewlett Packard and Intel, and you'll find a paradigm shift as to how the tech industry treats its customers.

PRNewsFoto/Silicon Maps, Inc.

The Facebook IPO brought with it a flood of questions about how Silicon Valley has changed over the decades. I must be getting old because many people assume that I watched Silicon Valley evolve, and ask me to comment on the changes I've seen.

They assume correctly. I arrived in the San Francisco Bay Area as a young engineer in 1959, before there even was a Silicon Valley. Four years earlier, the physicist William Shockley had brought silicon businesses to the Santa Clara Valley when he founded Shockley Semiconductor Laboratory, and the transformation began. Out came the apricot orchards and in went Silicon Valley.

At the risk of sounding like someone who remembers only the bright spots of a golden age, I think it's worth exploring some of the values of the leaders who first shaped Silicon Valley, because they provide a sharp contrast to those of recent Internet entrepreneurs. The values of Mark Zuckerberg of Facebook, Larry Page of Google, and Mark Pincus of Zynga are currently influencing not only the business decisions their companies make but also the values of many other new Internet businesses.

When I arrived at Hewlett-Packard in 1965, the company was already a $300 million giant. Bill Hewlett's and Dave Packard's ideas and principles were in evidence everywhere. I learned a great deal listening to them in meetings and watching them manage. Dave's memorable quote, "More companies die of indigestion than starvation" -- roughly translated, "Focus, stupid" -- became one of my own guiding principles. I learned that sharp focus ensured great execution and created loyal customers. Dave's values became the company's values and the employees' values. His concern for the customer became the company's concern.

The company was focused on delivering advanced technology of great value, then servicing and supporting the customer to make sure he derived value from what he bought. Customers trusted Hewlett-Packard. I remember one customer who so trusted the salesman who took care of his account that he let the sales rep purchase what he needed. That period of trust went on for a long time. The salesman told me his secret: He never bought anything for the customer that the customer did not really need.

At both Hewlett-Packard and Intel, where I next worked, money was important -- but it wasn't the top priority. The goal was to do the right thing and do it well. If you did that, over time, rewards followed and shareholders supported your efforts. Intel and HP both eschewed the notion of two classes of stock, which gives disproportionate voting power to the founders -- something that is common in the valley now.

Many other things have changed in the valley over the past five decades. I've become increasingly concerned about one thing that is seldom discussed: the valley is no longer as concerned about serving the customer, and even sees great opportunity in exploitation. We are beginning to act like the bankers who sold subprime mortgages to naïve consumers. In such an environment, we are less likely to create the role models of the past who guided the valley to its future.

The unapologetic pursuit of wealth is perhaps the most obvious explanation. Less obvious is the loss of customer power.

In the past, serving a powerful and demanding customer kept us honest. At the dawn of Silicon Valley, most companies sold products to industrial companies and the government. More often than not, suppliers were managed by purchasing agents who possessed power and a long memory. If you violated customer trust, you were severely punished. Sometimes you were cut off as a supplier.

Many Silicon Valley customers are no longer industrial companies. They are consumers, not companies represented by purchasing agents, and those consumers have less power in dealing with their suppliers. (Nothing better gets a corporation's attention than a purchasing agent threatening to take away a $50 million order.) Instead of such people to keep us in line, we now have government regulators who are slow to react, subject to lobbying influence, and, in many cases, ineffective.

Internet consumers get locked in to one company and find it difficult to escape. In the process, they lose their power.

Facebook is a perfect example. You can spend a lot of time and energy learning the ins and outs of the site, and building your image on the site by posting pictures, videos, and messages. You spend a lot of time getting friends to pay attention to you, and you in turn spend a lot of time keeping track of them. If you leave Facebook, you leave both your virtual friends and your investment in the site behind.

There is an ever-increasing list of companies that can leverage lock-in in the pursuit of big profits and high stock prices -- Microsoft, Apple, Google, Facebook, Twitter, Zynga, Comcast, and Amazon. The emerging market for Internet cloud services creates still more opportunities to lock in customers. Massive databases put a great deal of information about our personal lives in the hands of government and businesses that can leverage it to make profits.

Lock-in creates dominant players -- witness Google, Facebook, Microsoft. And in this monopoly-driven environment, customers get exploited. Microsoft forces them to upgrade to expensive, overly complex, and bug-ridden software.

Apple controls our virtual landscape, bounded by iTunes to the north, the iPhone to the south, the iPad to the east, and the iPod to the west, giving it increasing power to deprive customers of choice. It exercises that power aggressively. Google appears to have a culture that condones shamelessly violating consumer privacy. How else can you explain a company that bypasses Apple's iPhone privacy settings in a reported attempt to strengthen advertising revenues?

It is hard to believe that Dave Packard or Andy Grove would ever tell a group of entrepreneurs that he did "every horrible thing in the book to just get revenues right away," or brag to trade publications that his company used behavioral psychologists to design "compulsion loops" into products to keep customers engaged. But Mark Pincus, the founder of Internet gaming giant Zynga, has done just that.

When corporate leaders pursue wealth in the winner-take-all Internet environment, companies dance on the edge of acceptable behavior. If they don't take it to the limit, a competitor will. That competitor will become the dominant supplier -- one monopoly will replace another. And when you engage in these activities you get a different set of Valley values: the values of customer exploitation.