Silicon Valley, Monopolies and the Model T

Silicon Valley is perhaps the most iconic place narrative of the late 2oth century. Politicians in numerous countries including Malaysia, China and Saudi Arabia tried to copy the model, without much success. They didn’t get it right, because Silicon Valley was not about office space in glass-clad corporate headquarters. Silicon Valley was about a particular place at a particular time. It was a place in people’s heads rather than a place on the map.

Silicon Valley happened in marginal spaces – in backyards and garages in the suburbs. What was important for Silicon Valley was its time and mentality. Being in the US was crucial, as back then the world’s largest market was right at its doorsteps.

If the time is right, the route from free-thinking, innovative garage inventor to old-school industrialist can be surprisingly short. In the Silicon Valley of the late 2010s, a few of the garage startups of the 1980s and 90s have become giant entities with a global presence. In the meanwhile, Facebook has a near-monopoly on personal information, Airbnb has a near-monopoly on private apartment rental services, Amazon has a near-monopoly on home deliveries, et cetera.

These are very different beasts from startups. The former innovators are not any more primarily driven by new ideas, they are now mainly driven by the intent to protect and expand their territory (read more about digital territory in Chapter 3 of Analying the Digital).

Facebook is currently the one-size-fits-all social media dominating the globe with 2 billion daily active users. The company now knows more about the habits, interests and social circles of people than any government. Ironically, the only alternatives to Facebook exist in Russia and China, the former competitors of the idea of the free market.

World map of social networks, January 2017. Source: SimilarWeb/Alexa. Image by Vicenzo Cosenza.

The mantra of “unicorns” and the famous benchmark of “10 million users a year” reflect that Silicon Valley’s ideas are not much different from Henry Ford’s one hundred years ago.

Henry Ford’s adoption of the conveyor belt assembly line for automobile manufacturing was groundbreaking at its time, and the Ford Motor Company soon dominated the new mobility industry at the very beginning of the 20th century. Henry Ford was convinced that scale alone would ensure success. He insisted that one single car model in one available color – black – would ensure his dominance of the market, if it was only produced in large enough numbers. This was the Model T.

By 1918, half of all cars in the United States were Model Ts. Just like today’s internet giants, Ford was a near-monopoly and global enterprise. Besides being manufactured in the US, Model Ts were made in factories in Canada, Mexico, Brazil, Argentina, UK, Norway, Denmark, Spain, France, Belgium, Germany, and Japan.

In the 1920’s, General Motors’ Alfred P. Sloan spotted the shortcomings of Ford’s one-size-fits-all approach and started to offer a wide range of automobiles for different consumer segments. Ford lost his market dominance, and Sloan was followed by a long line of innovators throughout the 20th century, including Toyota’s ‘Just in time’ to today’s autonomous electric cars.

The formation of dominating companies seems to be a recurring phenomenon of economic revolutions. Timing is crucial. If the Silicon Valley giants would start out of a garage today, they could not any more become as dominant, because others would already be there to defend their own market dominance. At the beginning of a paradigmatic economic shift, entrants can grow fast and enjoy all the advantages: A rapidly growing new market and little initial competition. But once they have grown big, their own market dominance makes entry more difficult for new startups.

That way, the same companies which profit from change in the early times of an economic revolution – the industrial revolution of the late 19th and early 20th century, the informational revolution of the late 20th and early 21st century – later contribute to stifle it.

It is in the self-interest of companies to dominate a market, while dominating companies are against the interest of the market they operate in. Ideally, markets works best when competition is diverse and fair. Practically, markets with diverse and fair competition are a rather rare occurance. In the overall development of economic revolutions, ideal markets are hard to find, they are rather a rare period of fragile equilibrium. Government regulations, or even the government takeover of the market, don’t work either – it did neither in the former USSR nor in Mao’s China, both of which switched to the free market model in the end.