Don't Be Evil

by Rana Foroohar

  Big, of course, begets big. Charismatic CEOs and their PR teams drum out compelling narratives around these sectors (wearables, electric cars, the “sharing” economy, cybersecurity). Then they send market signals about their own “value” with announcements that play off these narratives: Uber’s $680 million purchase of self-driving truck firm Otto, for example. Venture capitalists and private equity investors keep the bubble going by buying into it at higher and higher valuations. As more and more heavyweight VCs bid up the value of start-ups, others have to follow. It’s up or out.

  The result has been not only a new bubble in IPO markets, but the undercutting of a host of public companies that actually do have to worry about profits. Two classic examples are Uber’s disruption of the taxi industry and Airbnb’s of hotels. This may be good for some of the VCs who can use the inflated values of the unicorns on their books to raise more money and charge more management fees. But I can’t see how it is good for economic value overall.

  Meanwhile, that capital, generated by valuations that are based as much on narrative as fact, is used less for R&D or as an investment in growth than to pay nosebleed salaries. As these pay packages skyrocket, of course, so does the price of property, services, and labor. You’d weep if you saw the price tags on depressing prefab ranch-style homes off Highway 101, which runs through Silicon Valley. The whole cycle is straight-up “madness of crowds,” as described by Charles Mackay in his seminal study on crowd psychology published back in 1841. The problem with this herd mentality is that typically only a few firms win, and those winners are likely to be the small number of companies that can use their network effect to capture and control data and user ecosystems. That’s why I look skeptically at the valuations of most technology groups, private and public, aside from the platform giants (and even those depend on the prevailing regulations and rules of digital trade not changing).

  There are many things about the current economy that remind me of my time working in venture capital in London. Then, as now, we were in the late stages of a credit cycle, with too much money chasing too little value. And then, like now, investors were counting on a spate of hot IPOs to pour a little more kerosene on markets that were clearly overinflated. We all know how that ended, on both sides of the Atlantic. That’s not to say that there wasn’t value created then, as there has been now. For every unsuccessful dog food retailer or expensive T-shirt purveyor that went out of business in the dot-com bust, there were miles of broadband cable laid, which created the infrastructure that Google and other companies now capitalize on. Today, the digital economy has conveniences and economies of scale where before there were none.

  But the bubble today is, in important ways, bigger and more dangerous. Venture capital money collapsed after 2000, came back up, fell again after the financial crisis of 2008, then rebounded to record levels after 2014. While technology has made starting a company cheaper, becoming a success is now much, much more expensive. That is because of an arms race to build the next unicorn start-up. As University of California academics Martin Kenney and John Zysman put it in “Unicorns, Cheshire Cats, and the New Dilemmas of Entrepreneurial Finance,” their paper on the shifts in start-up funding, “Start-ups are each trying to ignite the winner-take-all dynamics through rapid expansions characterized by breakneck and almost invariably money-losing growth, often with no discernible path to profitability.”

  As long as investors are willing to accept growth as a metric for value, the music can keep playing. But as the University of California academics note, “Unicorns are mythical beasts.” In the coming years, their financial reality, as well as the sustainability of the current funding model, will be subject to some much-needed testing. Some of the new crop of hyped-up companies may eventually turn into Cheshire cats, disappearing and leaving behind only the grins of those who got out before the bubble burst.24

  CHAPTER 5

  Darkness Rises

  Before he died, Steve Jobs told his biographer, Walter Isaacson, that he intended to devote his remaining time on earth to annihilating Google’s Android phone system, which he believed that Eric Schmidt—a man he’d invited to sit on his board, and whom he considered to be a close friend—had wantonly copied from Apple’s iPhone. “I will spend my last dying breath if I need to, and I will spend every penny of Apple’s $40 billion in the bank, to right this wrong,” Jobs said. “I’m going to destroy Android, because it’s a stolen product.”1

  He didn’t get the chance, obviously, though he certainly tried, filing one patent infringement lawsuit after another, to no avail. (The two companies eventually settled in 2014, more or less calling a truce.)2 As of the first quarter of 2018, Google’s Android mobile operating system represented a whopping 86 percent of the smartphone universe—leaving Apple’s iPhone, while still doing very well in monetary terms, a distant second.3

  Jobs’s comment may have been slightly melodramatic, but it wasn’t paranoid. The truth was that Eric Schmidt had spent time on Apple’s board: many years in fact, even after joining Google in 2001 as CEO. And it seemed clear that he had indeed acquired a number of good ideas from the company; the Android system, developed during those years, was nearly identical in many ways to Apple’s iOS—an unlikely coincidence that ultimately resulted in Schmidt being dismissed from Apple’s board in 2009.

  But it’s not as though the practice of “borrowing” ideas from a competitor was exactly outside the norm in the tech world. In 2003, for example, Facebook purchased an Israeli cybersecurity start-up called Onavo to track what competitors were doing; Facebook would then copy anything that seemed like it might be profitable. It was an internal “early bird” warning system that alerted the company to start-ups that were doing well, while giving Facebook an unusually detailed look at what users were doing on those systems.4

  In essence, Onavo represented a legal form of corporate spying, one that produced intel that Facebook used to both undermine existing competitors and cut untold numbers of new ventures off at the pass. In 2016, for example, Facebook began paying closer attention to Snapchat, the rival that had grown wildly popular among the younger set. Snapchat’s most distinguishing features were impermanence (instead of being immortalized on a “wall” until the end of time, messages sent via Snapchat would automatically disappear soon after being read) and its animated filters (a user could overlay a photo of themselves with, say, cat ears and whiskers). Coincidentally (or not) it was right at this time that Facebook’s own company Instagram launched a feature called Stories, with similar features. In early 2019, Facebook announced they would shut down the digital crystal ball that was Onavo after it was reported in TechCrunch that Facebook had allegedly been paying kids and teens $20 a pop in gift cards to install the spying app on their phones.5

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  ALL OF THAT has been well documented elsewhere.6 But Android’s similarity to iOS certainly highlights how far Google had strayed from whatever idealistic roots it might once have had. By the early 2000s, as the company moved toward the inevitable payday of IPO—the dream of every Silicon Valley entrepreneur or investor—there was little remaining pretense that Google was anything other than a leviathan of a company looking to monetize everything that it could in preparation for its debut on the public markets. As for the infamous “Don’t be evil” mantra? “It’s bullshit,” said Jobs.7

  This ideological shift was most publicly marked by the 2001 hiring of Schmidt. Around that time, Google was still ramping up its advertising model, and it wasn’t yet clear what a gold mine it would become. The investors felt that adult supervision was needed, in the form of a hard-nosed manager who could turn the company’s brilliant ideas into soaring stock prices. Page and Brin had the audacity to suggest to their investors that Steve Jobs was the only candidate they would consider, but the VCs made it clear that the two were on another planet if they thought they would get someone like Jobs—already running two publ
ic companies and a legend to boot—to come on board. They needed someone smart and savvy, but low-profile enough to play backup singer to the two founders—or at least not expect to be a rock star themselves. That was when John Doerr, a famed partner at Kleiner Perkins, suggested Eric Schmidt, the CEO of the networking company Novell, who’d previously been CTO of Sun Microsystems. He was in his forties. He wore suits. He understood bottom lines. But he was also a real engineer, someone who spoke the language of the founders.8

  Like many Silicon Valley elites, Schmidt grew up privileged, the son of a psychologist and a Johns Hopkins professor, raised in Falls Church, Virginia. In typical fashion for those of his pedigree, he was an overachiever who earned eight varsity letters in distance running and excelled in the sciences, graduating from Princeton with a degree in electrical engineering. (He later got both an MA and a PhD from the University of California, Berkeley.) Schmidt was a tech geek, having worked as a programmer at Bell Labs and Xerox PARC early in his career. But he also had the business acumen and social skills (at least, relative to the rest of the pack in the Valley) required for management, and had quickly moved up the ranks at Sun Microsystems, where he started as a software manager in 1983.

  Sun had a fast-moving culture, and one that capitalized on the new “open-source” software movement, which was all about putting code into the public domain, thus allowing developers to share work and ideas so as to build an ecosystem around a company much faster. Open-source has many advantages, and plenty of economists and technologists would say it’s crucial to innovation and economic growth, because it allows entrepreneurs to build on one another’s ideas; it’s the polar opposite of the “walled-garden” approach of the kind that, say, Apple employs. But it can also make it difficult for companies to protect their intellectual property—a point that would become salient years later, as tech giants Google and Apple began using their power to reshape the innovation ecosystem to fit their own strategic goals.

  Mr. Schmidt Goes to Washington

  Within a year of his arrival at Google, Schmidt had a group in place and had created a thriving business model. Now, the trick was to protect it. Google’s search engine was impressive, but in order to keep monetizing the data it generated, Google would need to make sure that it remained free, easily accessible, and unencumbered by copyrights, privacy rules, or any sort of patented intellectual property that would make it tougher for Google to capture as much traffic as humanly possible. That would require a regulatory and legal strategy, and a team of (official and unofficial) lobbyists and lawyers to do Google’s bidding in Washington, D.C. So Schmidt, Page, Brin, and a small group of other insiders began interviewing candidates to head up their government policy team.

  Enter Peter Harter, a top lobbyist for Silicon Valley, who had previously led government policy for Netscape and helped the company bring successful antitrust suits against Microsoft. Harter, a lawyer with a specialty in intellectual property, was a tech insider, but he also knew politics—he’d been on the front lines when a previous generation of Big Tech firms had squared off, and was well-connected both in Washington and in the Valley. Harter had worked with Eric Schmidt while he was CTO at Sun Microsystems, where he’d lobbied around issues including export controls on encryption software, and at Novell, on antitrust issues. He’d worked alongside the attorney Kent Walker—whom he referred to as “the guy in charge of s—t cleanup” at Google—when he was at Netscape, and traveled in the same circles as Google insiders like David Drummond, now chief legal officer, who’d been the tech giant’s first outside counsel. Since leaving Netscape, Harter had formed his own government affairs consulting practice, where his client list was made up of blue-chip firms such as Microsoft. I’ve known him to be an unapologetic conservative, the type who will mock vegetarians and hypocritical liberals (humorously, I must say), but also as someone willing to work for whoever could afford him. So in 2002, when a Google executive named Omid Kordestani came calling, asking him to weigh in on the privacy issues harming Google’s model, he was intrigued.

  Harter eagerly accepted the proffered invitation to the Googleplex, a sprawling Palo Alto campus bigger and far better funded than many East Coast colleges, to meet with Schmidt, Page, Brin, and a number of other executives in a series of all-day meetings. “Google was thinking of ways to accelerate revenue growth, and get the best IPO valuation,” says Harter. “You were starting to see the advent of the smartphone, video coming online, and lots of open-source, and peer-to-peer sharing, thanks to Napster [the music sharing service started by Sean Parker, later president of Facebook, that was eventually shut down because of copyright infringement].” Harter says that Google could “easily see, looking at the litigation over Napster, that they needed a growth map in Washington to get ahead of any opposition.”9

  Harter understood that Google needed to devalue intellectual property and prioritize access to user data in order to ensure its supremacy—and by all accounts, the Googlers understood that, too. In fact, that was one of their major competitive advantages. As Shoshana Zuboff lays out in her book The Age of Surveillance Capitalism, Page, Brin, and Schmidt (along with Hal Varian) were the first in Silicon Valley to fully understand the concept of “behavioral surplus,” in which “human experience is subjugated to surveillance capitalism’s market mechanisms and reborn as ‘behavior.’ ”10 What she’s saying, in simple terms, is that everything we do, say, and think—online and in many cases offline—has the potential to be monetized by platform tech firms. All human activity—the things we post, our videos, our books, our inventions—is potentially raw material to be commodified by Big Tech. “Google is to surveillance capitalism what the Ford Motor Company and General Motors were to mass-production-based managerial capitalism,” she writes.11 Nearly everything we do can be mined by the platform giants. But only if they can keep information free. That means keeping the value of personal data opaque, or ignoring copyrights on content, or—in the case of other types of intellectual property—by making it tougher to protect.

  All of this corroborates what Harter has told me about his meeting in the Googleplex. He says that topics like antitrust policy, copyright, file sharing, and privacy were very much on the minds of Schmidt, Page, and Brin by that time. “One of the questions was, ‘How do we avoid what happened to Napster?’ ” He outlined what he thought the Google strategy should be if they wanted to best protect the company’s interests: Spend loads of money and lobbying power to make sure that Google wouldn’t have to pay for the intellectual property and content that search was monetizing, and fight hard to keep liability exemptions in place, so that they wouldn’t be responsible for things that users did on their platform. “I told them, ‘Basically, you have to out-lobby the other guys, and prepare to litigate and generate support for your lawsuits in the media, the policy, and the political communities.’ I remember Eric nodding and saying, ‘I think that sounds right.’ ” Sadly (or perhaps not) for Harter, he didn’t get the public policy position, which ultimately went to Andrew McLaughlin, who became director of global public policy at Google in January 2004, and later went to work for President Obama as deputy chief technology officer of the United States. (A PR representative for Schmidt and the other Googlers told me that they “don’t remember” the entire meeting.)12 Still, says Harter, “what they have rolled out since was basically the strategy we discussed on that day.”

  Innovators Versus Implementers

  Google, Apple, Facebook, and others often position themselves in the public debate as “innovators,” and that’s true up to a point. As we’ve already seen, by the time these firms went public, most of their biggest and best innovations were behind them. From the IPO on, the game is more about implementing technologies—theirs and others’—to gain business model advantage. In the technology field, and increasingly in most fields, having access to the best intellectual property and data, and paying as little for it as possible, is everything. One of the
ways in which Google and other Big Tech companies were able to gain an advantage over intellectual property was by pushing for an overhaul of the U.S. patent system, the first in thirty-some years, which reached its climax in 2011 with the passing of the America Invents Act.

  To understand why this is important, you need to understand how patents have historically worked to protect innovators: Imagine that you are the founder of a small biotech company in the United States. You have spent millions of dollars and years of time developing a new diagnostic test for a blood disease. You are about to revolutionize your field. Following the passage of the AIA, it became harder for you to get a patent for your game-changing discovery, because shifts in the system meant that your invention was no longer protected due to changes in the list of what could and couldn’t be patented, and the way in which innovators were allowed to defend their IP.

  For example, even if patents were granted, following the AIA, the right to use them could be challenged in a non-court adjudication system, allowing other firms to quickly invalidate intellectual property. Unable to fully monetize their investment, many smaller companies, inventors, and innovators begin funneling their money and ideas to other places, like Europe and parts of Asia. Suppliers and talent begin moving there, too. While the story isn’t one-sided, I have heard from many American investors, entrepreneurs, academics, lobbyists, and lawyers—including some of those who actually helped craft the AIA—who believe that the U.S. patent system has swung radically in the wrong direction. Over the past fifteen years or so it has moved, they say, from a system that was arguably overzealous in granting patents, to one in which the country’s top minds can no longer monetize their research. That is, of course, a state of affairs that could have dramatic consequences for U.S. competitiveness in a world in which most economic value lives in intellectual property.