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Economics For Business:Treating Consumers As Means Instead Of Ends Is A Fatal Flaw For Silicon Valley Business Models.

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Recently, some of the Big Tech companies of Silicon Value have been caught in anti-market behavior. They have censored or even banned some of their own consumers. Since value lies in consumer experience, and since capital is the net present value of future claims to revenue streams from consumers, these firms are destroying value and consuming capital. Why? How can this happen?

Where Is the consumer? 

The goal of business – the end, to use means-ends language – is to facilitate an experience for the consumer that they value. Using Austrian economics as its foundation, the Economics For Business project has built an innovative business paradigm and a complete business model framework on the principle of consumer value. Entrepreneurs are those who create new value, and they submit to evaluation by the consumer to determine their success. They maintain a clear line of sight to the consumer at all times, from the very first step in imagining a new business, new product or service or any improvement in their offering, all the way to the consumer’s ultimate usage experience.

Technology-driven means not thinking about the consumer.

The histories of many Silicon Valley tech firms reveal that they don’t have this line of sight to the consumer. Many started out to build a technology, one that performs efficiently, automates effectively, and exhibits cool features. There’s a pride in engineering, as there should be. But even the most beautiful technology can’t succeed without consumers in mind. The technology-driven approach to innovation must not contravene the principles of the consumer-driven approach to value.

When consumer value is not the business model.

Facilitating consumer value is a business model. Value is a learning process for consumers, of which exchange value (paying in dollars for value anticipated) is a component part. The revenue model for the entrepreneurial firm consists in earning this exchange. It’s all integrated. Some Silicon Valley companies (Google, for one) accepted investor funds and began operations without a business model in place. When consumer value is not integral to the firm, it’s quite possible that they lose their grip on the concept. They don’t create value for consumers, or for the economy. Or for investors, for that matter – they’re using investor funds in ways the consumer does not value.

In many Silicon Valley models, consumers are creators of content for the technology company to control, analyze and re-sell as data to the advertiser. Consumers are creating value for the platform, not vice versa.

Monetization as an afterthought.

We often hear the word “monetization” in descriptions of Silicon Valley business models. The word itself is quite revealing. It certainly doesn’t connote a commitment to serving the consumer. Monetization is the search for a revenue model after the technology is launched. Many of the monetization schemes are advertising-based, which can be problematic. They are often value-destroying for consumers, especially in the “interrupt and annoy” formats that are common on the internet today. Advertising is certainly not innovative – it’s been around for a very long time, long before Silicon Valley came into existence. When firms are selling consumers to advertisers, their commitment to consumer value becomes secondary.

It’s not that B2B business models are any less valid than B2C. They key is to remember the Austrian principle that value in any stage of the production chain is made possible only if there is consumer value at the end of the chain. Microsoft, for example, is a technology company primarily focused on B2B value propositions in areas like business productivity. They always have an eye on the next stage in the value chain: improved business productivity and efficiency enables Microsoft’s customers to, in turn, produce lower cost consumer services and enhanced consumer experiences. Microsoft has its eye not only on the immediate B2B customer, but also the next stage of the value chain.

A cultural problem.

Ultimately, the kinds of Silicon Valley companies to which these observations apply face a cultural problem. Consumer value and consumer service are not a sufficient part of their DNA. They were founded and developed to nurture technology – in some cases, brilliant technology, in others more mundane; they found technical ways to reach mass distribution based on the new power laws of digital networks; they found bolt-on monetization schemes that responded to mass reach. Culturally, the idea of consumer value has never been central to them.

Perhaps that’s why, today, we see Twitter censoring its users and throwing them off the platform, angering many more.

Generative products versus central control.

The value promise of today’s digital products and digital markets is exciting for consumers. The term “generative” has been coined to describe the new characteristics of products that give consumers leverage – make their jobs easier; that provide adaptability so that consumers can change them to suit their own purposes; and that are easy to master and easy to access. The spirit of generativity lies in unleashing end-user creativity.

Some Big Tech companies don’t seem to believe in the generativity of their products and their consumer relationships. They prefer centralization and control. They want to collect and control consumer data and turn it into their own closed products. That’s why they need so many engineers to build the algorithms and the data banks. That’s why they need so many content monitors to project their control. They are centralizers in a world of decentralization. This leaves them open to disruption by the next generation of entrepreneurs who start their journey from the point of view of what consumers value.

Mike Masnick’s proposal: Protocols, Not Platforms.

Our Knowledge Graphic: Silicon Valley Is Bad At Entrepreneurship

 

Silicon Valley Went All-In For Progressive Democrats. Now Those Progressives Are Out To Destroy Their Donors.

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The term “useful idiot,” often credited to Vladimir Lenin, applies to people supporting a cause or movement injurious to their own self-interest. Nowhere is this more relevant these days than in Silicon Valley, a place dominated by brilliant technologists and marketers who often seem to have the social and political acuity of middle schoolers, as evidenced by their strong support for progressive Democrats poised to destroy the underpinnings of their businesses.

California governor Gavin Newsom is expected to sign the recently passed Assembly Bill 5, which will effectively turn many contractors into employees. AB5 codifies the California Supreme Court’s unanimous May 2018 ruling in Dynamex Operations West, Inc. v. Superior Court of Los Angeles that many contractors should be treated as employees. The legislation’s prime backers are the state’s unions, which see it as an ideal way to organize now out-of-reach workers.

The new measure is potentially devastating, though, for companies like Uber, Lyft, and Postmates, all built around part-time employees, and none yet profitable. Many other tech firms—including profitable ones—use contractors for everything from app development to catering to cleaning. As many as 2 million Californians are employed in so-called gig work. If AB5 passes, job losses won’t just be felt by the ride-hailing firms but also by many other businesses, including newspapers, small trucking firms, some medical providers, and even franchise owners.

In the 1980s and 1990s, Silicon Valley, like many industries, placed its bets on both political parties. Moderate Republicans like Pete McCloskey, Ed Zschau, and Tom Campbell routinely won congressional elections, as did similarly minded members of the state legislature. But over the past few decades, the Valley has become politically monochromatic, with virtually no elected Republicans. Almost all contributions from Silicon Valley tech owners and employees in the 2016 and 2018 elections went to Democrats. Tech money helped Newsom outspend his GOP rival by three to one—with major contributions from former Yahoo CEO Marissa Mayer, and Lauren Jobs (widow of the Apple founder) at the top of the donor list. Former Google chairman Eric Schmidt heads data efforts for several Democratic presidential candidates, including Joe Biden, Kamala Harris, Cory Booker, and arch-populist Elizabeth Warren. Tech employees are, if anything, more progressive-leaning in their political contributions than their corporate masters.

Just a few years ago, these investments seemed to be paying off. The Obama administration was deferential to tech firms, steering away from any hint of antitrust action. Google representatives met in the White House weekly, and more than 250 people shuttled between working for Obama and Google during his presidency. Now, this power is being challenged. Google is being sued for monopolistic practices by 48 states. Though progressive California has stayed out of the fray, AB5 demonstrates that the tech moguls are losing ground there, too, to better-organized and more politically savvy public-employee and service unions.

The new legislature’s makeup reveals how much power has shifted to the unions. Beyond protecting gig workers, organized labor has broken with tech on education reform, long a Silicon Valley hot-button issue. Under the current legislative super-majority, the Democrats have worked overtime to make sure that California’s schools—ranked 40th on Education Week’s composite score of national school performance—remain mediocre by undermining charter schools, eliminating exit exams, banning suspensions for unruly students, and, as a recent proposal suggests, introducing a new ethnic-studies curriculum for public school students.

The Californian ruling caste’s progressive sentiments have not translated into broad-based economic benefits. According to an analysis by Chapman University’s Marshall Toplansky, California has created surprisingly few high-wage jobs over the past decade, with 86 percent below the median pay and some 40 percent paying under $40,000—in one of the nation’s most expensive states. In a tech-dominated economy, virtually every other sector has grown slowly, well below results in such key competitors as Texas and Arizona. And even the bounty of Silicon Valley has not helped the state’s middle class, since some 40 percent of all tech jobs have gone to foreign workers.

California, in fact, is creating a huge class of workers struggling to achieve anything close to middle-class standards. Gig-economy workers epitomize this trend. One survey of workers in 75 countries found that most gig contractors earn less than minimum wage, including in the United States. Roughly half of California’s giggers struggle with poverty. The reasons are not hard to identify: they lack many basic protections that full-time employees enjoy—for example, enforcement of civil rights laws.

Some identifiable progressives, like Chris Lehane and David Plouffe (who managed Obama’s 2008 campaign), maintain that the gig economy is “democratizing capitalism” by returning control of the working day to the individual. They point to opportunities that gig work provides for people to make extra money using their cars or homes. Uber and Lyft represent their employees as creatives or professionals, moonlighting as drivers to save up for a vacation or expensive date. That may be true for some, but for many others gig work can look more like modern serfdom.

The battle between the Valley and the socialist-oriented progressives is just beginning, both in California and around the country. The traditional Democratic elite has been recruited to argue the tech leaders’ case. Former senator Barbara Boxer works for Lyft, and Tony West, brother-in-law of presidential contender Kamala Harris, is counsel for Uber. They’re helping direct a wave of tech dollars into Sacramento and Washington to reverse the tide, including a proposed $90 million ballot measure to undermine AB5.

How long will Silicon Valley’s leaders accept these conditions? Both Lyft and Uber have shifted some of their operations out of state, Lyft to Nashville and Uber to north Dallas. Apple has opened a huge new operation in the suburbs outside Austin. But there may be no escape if the ascendant Elizabeth Warren or Bernie Sanders ends up in the White House, particularly with a Democratic majority in both houses of Congress. In these circumstances, Big Tech is likely to be treated in Washington with the kind of scorn that Amazon faced in New York City from local congresswoman Alexandria Ocasio-Cortez, now increasingly the national voice of the party grassroots. If Warren wins, tech companies and their high-wage upper-tier workers will have to deal with demands to put workers on their boards and pay huge taxes to fund expanded Social Security and Medicare programs. Privacy legislation could impede their highly profitable tracking and data-collection businesses, and antitrust enforcement could see the breakup of companies like Google and Facebook. At least one progressive, Oregon senator Ron Wyden, has even suggested that Facebook’s Mark Zuckerberg face “the possibility of a prison term.”

The tech elite has financed a Democratic Party that now appears to favor socialism over capitalism. A socialist movement is even percolating among Silicon Valley tech employees, many of whom see little opportunity to amass enough wealth to buy a house in the exorbitant Bay Area. Like those French aristocrats who backed revolutionary ideas in the late-eighteenth century only to find themselves riding tumbrels through angry crowds, tech elites have spent a fortune promoting a “woke” politics that is turning against them. They may not lose their heads, but they could find their riches fleeced by former allies. It couldn’t happen to a more deserving, self-involved, and cognitively gifted group of . . .  well, idiots.

Joel Kotkin is the presidential fellow in urban futures at Chapman University and executive director of the Center for Opportunity Urbanism. 

San Francisco’s Cafeteria Ban Is Protectionism at Its Finest

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Silicon Valley is no stranger to competition. The race to produce cutting-edge tech products that set you apart from the crowd is never-ending in a sector that is constantly upgrading. And in order to dominate the market, you have to be the best. But in addition to the market pressure tech companies face when it comes to the actual products, each brand is also vying to employ the best talent.

In the hunt for talented employees, both big tech companies and smaller startups have offered perks to sweeten the deal for potential employees. Google famously provided nap pods for its employees while other tech giants have offered onsite massages and doctors in order to look more appealing for job seekers. One of the most common perks provided by tech giants is onsite cafeterias where quality food is provided to employees at no extra cost.

In addition to increasing productivity by incentivizing employees to stay onsite and take shorter lunches, offering free food also provides relief to employees. And since Silicon Valley is not known for its low cost of living, free food is a real draw for potential employees. If they were going to have to pay astronomical costs to live in the city— sometimes as high as $3,400 a month for a one-bedroom apartment—then at least they could save a few bucks by eating lunch for free. This in-kind payment may be cheaper to provide than you’d think since the company might be able to get better deals on the food than individuals, since they’re buying in bulk.

Feeding one’s workers also fosters a familial atmosphere that may increase worker loyalty.

But the era of employee cafeterias may soon be coming to an end thanks to two San Francisco city officials. City supervisors Ahsha Safaí and Aaron Peskin recently proposed new regulations that would make onsite cafeterias illegal. If passed, the measure will ban the construction of employee cafeterias in new buildings, but existing cafeterias will be allowed to stay. Banning cafeterias in private buildings seems like an absurd quest to take on. But the new measure is more about protectionism and government control than anything else.

In 2011, tech companies were given a payroll tax break in exchange for moving into Mid-Market, a rough area in San Francisco near City Hall. The city had hoped that if these tech companies to move into the neighborhood, they would bring jobs and commerce with them. But this plan has not unfolded quite like city officials had planned.

While the tech companies themselves are doing just fine, other local businesses are struggling to keep their doors open. Many restaurants, in particular, had to close due to an inability to draw in customers. Of course, the restaurateurs were naturally frustrated but they chose to blame their low sales on the tech companies.

They reasoned that since some of these companies provide cafeterias, employees were choosing to stay on site to purchase food or snacks, rather than going to a nearby restaurant or cafe. Gwyneth Borden, executive director of the Golden Gate Restaurant Association, supported the cafeteria ban saying, “you can’t compete with free.”

And while it is surely more convenient to blame other people than it is to reevaluate your business plan, there are many other factors to consider when looking at this struggling neighborhood.

San Francisco is infamous for being disgusting. In addition to seeing people defecate in the street, it is not uncommon to see used needles and hard drug use taking place right outside of the buildings that are currently home to Square, Twitter, and Uber. In fact, each of these buildings is heavily secured in order to keep the craziness of the streets at bay. Recently, one store owner in this neighborhood had to kick someone out of his store for taking his pants off. That same person later came back to urinate on the store’s window. However, this same business owner has also been shocked that his store isn’t thriving when clearly, there are other issues far more problematic than free cafeterias.

The presence of these tech companies cannot magically clean up the streets of San Francisco. But city officials are acting as though Square, Twitter, and Uber have somehow failing to live up to the terms of the tax break by failing to transform the city. But the only thing required of these companies in order to receive the tax break was to move into Mid-Market, which they have.

Peskin, one of the architects of the new ban, tried to blame the tech industry and their lack of community for the continued degradation of the neighborhood saying:

“We don’t want employees biking or driving into their office, staying there all day long and going home. This is about getting people out of their office, interacting with the community and adding to the vibrancy of the community.”

But unfortunately for Peskin, city officials do not have the authority to dictate its residents’ behavior, especially when it comes to commerce.

James Manning, the director of user experience at Dolby Laboratories commented on the new measure to ban employee cafeterias:

“I’m not in favor of local government mandating where I can and cannot eat. The idea the food doesn’t need to be subsidized, that tech workers make so much, is a fallacy. Tech workers, the vast majority, with the cost of living here, are not wealthy.”

To be sure, when Manning speaks of subsidies, he speaks of them in a private fashion. To call these lunches “free” would be misleading, as they are subsidized by the companies and are a type of employee benefit. Choosing to offer free food to your employee is something you are doing at your own cost as a means of compensation for your employees. If, like many already do, a tech company chooses to offer onsite doctors to its employees, the government wouldn’t tell them to stop this practice because the neighborhood doctors were missing out on patients. And yet, this type of regulatory chaos is exactly what is happening with the cafeterias.

But as with most regulations, when you dig deeper you uncover the underlying motivation: protectionism from others refusing to compete.

Competition is tough. No one has ever said anything to the contrary. And when you have sacrificed your life savings to get a business off the ground only to see it fail, it is absolutely understandable for someone to be angry. But blaming others does little to remedy the problem. The same can be said for trying to legislate individual behavior in order to rig the competition; it is never justified and always wrong. But this is exactly what some of the neighboring businesses are doing.

Setting up shop in the Mid-Market neighborhood was a risk from the get go. After all, the homelessness and prevalent drug abuse had been there long before the new tech companies moved into town. Each entrepreneur knew this before opening their doors, but they relied on companies like Square and Twitter to hand them customers on a platter, rather than work for them.

Unfortunately, the food being offered at these “off-campus” restaurants was not enough to compete with the free lunch offered on site and it was certainly not enough to coax these employees out onto the dangerous streets. But this does not justify the creation of new laws.

To make matters worse for the tech companies, they are dealing with protectionism from all angles. Not only are restaurant owners angry, but other tech companies are seeing this proposed regulation as a chance to compete for talent.

“This could even the playing field a bit,” Paul Rava, the chief financial officer at Credit Sesame said. Credit Sesame is a startup that provides free credit scores and does not provide a cafeteria to its employees. Rava believes that by implementing this ban, his company along with others like Salesforce, which also does not have a cafeteria, will stand a better chance at attracting potential employees. Just like the restaurant owners, neighboring tech companies are also trying to use the government to shield themselves from competition.

The new restrictions are not set to be voted on until the fall at the earliest. One can only hope that common sense prevails in the meantime. Market competition is about a lot more than just the product you offer. Companies with great products, or great food, have often failed because their marketing strategy didn’t work, and this can also include choosing to open a business in a rough neighborhood. Location matters, especially for a restaurant, and if the neighborhood does not provide you with the sales you are looking for, you can choose to either take the risk and be ready to deal with the consequences, or move somewhere else. But resorting to protectionism in order to control the opposition is wrong. Period.

Peter Thiel Has Had Enough with Silicon Valley’s Love of Regulation

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Peter Thiel is a brilliant businessman. Ranked number four on Forbes “Midas List,” and number 315 on Forbes “400,” Thiel has a net worth of $2.6 billion. Without his entrepreneurial genius, the world would not know the ease of sending payments to vendors via Paypal, which he founded in 1999. But PayPal is just one of the many brainchildren of Thiel.

Thiel has been one of the most prominent players in the tech industry in Silicon Valley. But this chapter of his life about to come to an end. Fed up with the love of regulation so prominent in the San Francisco area, Thiel has decided to scale back his involvement in the mecca of the tech world.

Silicon Valley’s Love of Regulations 

On paper, Thiel’s successes may not set him apart from other tech giants in Silicon Valley. But Thiel is very different than most of his colleagues. Thiel has always been very open about his dedication to free market principles and libertarian-leaning politics. In fact, his political activism has also led him to dabble in revolutionary ideas of decentralization, including his support of floating islands called “seasteading.”

But it is precisely this love of liberty and unbridled innovation that is alienating him from others in San Francisco. During a debate at Stanford University, Thiel referred to Silicon Valley as, “a one-party state. That’s when you get in trouble politically in our society, when you’re all in one side.”

Silicon Valley has a long history of leaning more to the left side of the political spectrum.  Thiel rightfully believes that this political ideology is dangerous to innovators in the tech world, as it advocates for further regulation. Regulation that will, of course, inhibit the ability to bring many brilliant ideas to fruition.

This was one of his main reasons for supporting the now President Trump in the 2016 election cycle. Thiel caught a lot of criticism for this move, but it ultimately comes down to the more relaxed regulatory stance of the current administration.

Dedication to Principles 

Love him or hate him, Trump has done a great deal to lessen the regulatory blow felt by many innovators and entrepreneurs like Thiel. In fact, Trump has already slashed more regulations than Ronald Reagan who, prior to Trump, held the record for deregulation.

And even though Silicon Valley, as well as the rest of the economy, would benefit greatly from the slashing of regulatory policies, the hatred for Trump is blinding many. This has caused many to turn their backs on Thiel as well. In fact, the CEO of Netflix and Facebook board member, Reed Hastings, wrote in an email that Thiel’s support of Trump demonstrated, “catastrophically bad judgment.”

Between Silicon Valley’s love of increased regulation and their condemnation of Thiel’s political leanings, he is finally calling it a day and relocating to Los Angeles. In fact, Thiel, who also happens to serve as the director of the Facebook board, is considering abandoning this post as well, a position he has held since 2005.

Not only does his decision to leave highlight Thiel’s own dedication to his work and his free market principles, it also highlights the absurdity of Silicon Valley.

Our country is overburdened with regulation. And it is precisely this red tape that prevents would-be entrepreneurs from sharing their genius with the rest of the world. But perhaps, this is why the big shots in Silicon Valley are so opposed to fewer barriers to entry.

Many of the Silicon Valley’s biggest players benefit from increased regulations, as it keeps their competitors from gaining entry into the market. Established businesses can afford to comply with regulations, whereas the newer, smaller startups cannot. An increase in regulation shields these companies from actually having to compete in the market.  

But by slashing unnecessary regulation, which accounts for most, if not all of the regulations on the books today, more innovators are able to enter the market and compete with major players in the tech world. And when there are more players in the market, the consumers win.

Write for CFI