In a recent article for Vox, Timothy B. Lee discusses what he views as some of the economic problems associated with the new Pokemon Go app. While I don’t agree with everything in the piece, he does hit on some good points worth pondering. (Although I won’t address it here, the issue of skyrocketing housing prices in large cities is a major issue that requires some serious policy change; especially because these are the regions with the highest growth of high-income, high-skilled jobs.) In particular, I think he’s right when arguing: “a lot of [I]nternet-based businesses are so ethereal that they barely create any jobs in most markets.” Like it or not, there’s an awful lot of truth in that statement.
The modern digital economy simply doesn’t require the type of heavy capital investment that was needed for industries that rose in times past. New movie theaters and automobile plants require a lot of investment. They’re big, they’re physical, and they end up creating downstream industries (everything from auto dealerships and car repair shops to box factories for candy containers and farmland for corn seed that will become popcorn), which in turn produce a lot of jobs.
A handful of highly skilled, well-paid smartphone app developers can absolutely create a major sensation that brings a lot of joy to people’s lives. However, the benefits are relatively concentrated to a select few, and there’s little in the way of downstream economic impact: no significant demand for cell phone repair shops and no cyber cafes where one goes to play the game. I think Lee gets this point absolutely right. However, there’s one thing missing in all of this: Silicon Valley’s capacity for embracing change.
The Valley is, after all, ground zero for disruptive innovation and Schumpeterian destruction. If there’s one region that is perpetually positioned to embrace, and be emboldened by, transformative change, it’s the cradle of modern technological progress.
Consider Elon Musk’s empire. The recently unveiled gigafactory in the Nevada desert was constructed out of a need for many, many more lithium-ion batteries, as well as the reductions in cost per-kilowatt-hour necessary to make electric vehicles more cost competitive with internal combustion engines. As the company’s blog points out:
With a planned production rate of 500,000 cars per year in the latter half of this decade, Tesla alone will require today’s entire worldwide production of lithium ion batteries. The Tesla Gigafactory was born of necessity and will supply enough batteries to support our projected vehicle demand.
Upon completion of the final phase of construction, the gigafactory is poised to employ approximately 10,000 full time workers. Of course, autonomous robots will—and already do—supplement much of the work, but the actual value-add to the economy from Musk’s endeavor is far broader than adding new jobs.
The recent $2.6 billion Tesla-SolarCity merger announcement is another example of Musk’s clear focus on producing tangible “things” for consumers. The vision for these companies, after all, has always been a focus on clean energy consumables, with automobiles just one among many product offerings. Love him or hate him, Musk’s investments are in capital-intensive goods that are creating real, lasting value for consumers. And he’s not alone. Producing physical goods and disrupting traditional industries is increasingly the new lodestar for Silicon Valley.
Alphabet, Inc. is another example of a company making the forays outside software. The Google family has been investing heavily in robotics and automation for years, capitalizing on their significant knowledge bank of engineers and computer scientists. Investments in autonomous vehicle software, advanced machine learning algorithms, and robots aren’t just investments in esoteric nerd toys: they’re investments in technologies that will create thousands of new jobs, increase productivity across the entire spectrum of the American economy (from manufacturing to the service sector, and even into the knowledge sector), and contribute untold benefits to millions of people—not just domestically, but the world over.
Mark Zuckerberg is also getting in on the emerging technology game. Facebook recently completed its Area 404 research laboratory, where everything from future versions of Oculus Rift to the company’s new high-altitude Aquila drone will be researched, developed, and, presumably, manufactured. Musk, Alphabet, and Facebook are positioning their burgeoning empires to capitalize on economies of scale and proximal network effects of engineers and researchers located in centralized production facilities. Silicon Valley’s entrance into manufacturing, transportation, and utilities markets should come as no surprise. It was the inevitable next step from an industry whose products largely benefit non-information technology sector industries.
Software may still be eating the world, but in order to continue having substantial impact on the world of atoms, Valley innovators like Musk and Zuckerberg need to start exploring new industries where they can capture value. As the accompanying chart shows, there is a lot of room for value-capture in those three industries—prime targets for tech giants experiencing innovation wanderlust.
[Note]: The “utilities,” “manufacturing,” and “transportation and warehousing,” are largely self-explanatory categorizations. Information-communications-technology-producing industries and “value-added,” however, may require some clarification. As defined by the Bureau of Economic Analysis (BEA), information communications technology producing industries “consists of computer and electronic product manufacturing (excluding navigational, measuring, electromedical, and control instruments manufacturing); software publishers; broadcasting and telecommunications; data processing, hosting and related services; Internet publishing and broadcasting and Web search portals; and computer systems design and related services.” And as the BEA’s industry primer notes, value-added “is a measure of output after accounting for the intermediate inputs used in production. As such, it is also a measure of an industry’s contribution to GDP. The main components of value added include the returns to labor (as measured by compensation of employees) and returns to capital (as measured by gross operating surplus) and the returns to government (as measured by taxes on productions and imports less subsidies).”
And why not? After all, as of August 1st, the world’s top five companies by stock market capitalization were all American tech firms: Apple ($571b), Alphabet ($540b), Microsoft ($441b), Amazon ($364b), and Facebook ($357b). With a lot more value to be added by disrupting yet more industries, and plenty of cash on hand to do so, it’s no wonder that each of those firms are engaged in efforts to enter the manufacturing, transportation, utilities, entertainment, and other markets.
I’ll wager that’s a good thing. Because the lessons learned in disrupting communications platforms could very well translate to big economic gains in the industries of the 20th Century.
If, like me, you take seriously Lee’s complaint about Pokemon Go failing to deliver on downstream economic gains, then just wait. The Pokemon-catching app won’t draw people into new arcades, but more advanced augmented and virtual reality very well could. Though we might not have “holodeck” arcades just yet, VR systems could be coming to movie theater lobbies near you pretty soon. Imagine the complementary businesses likely to develop around that technology alone, and the picture of Silicon Valley companies as software-only developers starts to wane.
This is the new Silicon Valley. It’s not longer just about apps that aim to curb daily boredom; it’s not about creating products that aim to entertain and satisfy our curiosities; and it’s no longer focused on developing platforms that aim to simply connect us with one another. Now, it’s about creating a whole new world that we can physically touch and feel, not merely glance ethereally through the “tubes” of the Internet.
The digital economy is poised to collide in force with the economy of old, bringing the same disruption that cyberspace was built on to the real world. Software has already eaten the low-hanging fruits of the old economy; now Silicon Valley will consume the rest.