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Summary:

Facebook’s meteoric rise and multibillion-dollar valuation may have created an incentive for thousands of entrepreneurs and investors, but veteran venture capitalist Bill Davidow says its philosophy of customer exploitation has also helped distort the values that Silicon Valley technology companies used to hold dear.

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Regardless of whether some investors thought it was a damp squib instead of a moon-shot, the Facebook IPO was a landmark event in Silicon Valley terms — a multibillion-dollar share issue by a company that has become a global behemoth virtually overnight. While that may have given thousands of entrepreneurs and investors big ideas about the future, there are those who argue Facebook’s success has also done something else: namely, changed Silicon Valley culture for the worse. One of the most recent critics to advance this theory is Bill Davidow, a venture-capital veteran who says the social network has altered the values that tech entrepreneurs used to hold dear.

Davidow, who was trained as an electrical engineer, is a partner emeritus at Mohr Davidow Ventures, one of the oldest VC firms in the Valley with about $2-billion in investment funds under management. The author of several books such as Overconnected: The Promise and Threat of the Internet, he also has a long history in the technology sector — including early roles at Hewlett-Packard, General Electric and Intel Corp. Mohr Davidow, which focuses on IT, life sciences and clean energy, has invested in companies such as Brocade Networks, 23andme and Rocket Fuel.

A business based on the exploitation of users?

In a piece he wrote for The Atlantic magazine, Davidow talks about how Silicon Valley culture has changed as result of companies such as Facebook and Google, and in particular how he sees the focus of many companies changing when it comes to the consumer. In the past, he says, large companies like Intel and HP had large customers, and they had to serve them well or risk losing them. Newer Silicon Valley companies are different, he says:

[T]he 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.

As giants like Google and Apple and Amazon and Facebook battle for supremacy, Davidow says, their main weapon is the ability to lock web users into their ecosystems and then exploit the data provided by consumers, along with the other elements of this unbalanced relationship. He doesn’t mention it, but a great example of what I think Davidow means is the way that Facebook routinely seems to change the terms of its offerings primarily for its own benefit — including the way it recently made facebook.com email addresses the default for all users without telling anyone.

Would older Silicon Valley companies have treated their customers this way? It’s hard to imagine how — but then, their businesses were very different, in a time before social media took over the world. Davidow argues that this kind of behavior is almost required in today’s environment, since everyone is after the same goal: accumulating as large a user base as possible, so that it can be monetized in some way. If Google can’t generate what it needs with Google+, then Facebook wins — and if Facebook can’t make inroads into mobile, then Apple wins. As Davidow puts it:

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… and when you engage in these activities you get a different set of Valley values: the values of customer exploitation.

If you are not paying then you are the product

The fundamental shift behind what Davidow is describing is that consumers are not really Facebook’s customers — as more than one person has pointed out, they are actually the product that is being sold. Since users don’t actually pay cash for the services they get, they have to pay for them in some other way, and in most cases it’s with the information they provide by using the network. So Facebook devotes huge amounts of its time and resources to figuring out how to get users to share more, and that’s what Davidow sees as exploitation.

Facebook isn’t the only company the veteran VC accuses of doing this: he also mentions how Zynga founder Mark Pincus has confessed to doing “every horrible thing in the book” to get revenues, and bragged about designing “compulsion loops” into products to keep customers engaged. And he slams Apple for building a walled-garden ecosystem that gives it the power to deprive customers of choice — a power he says it exercises aggressively — and Google for having a culture that “condones shamelessly violating consumer privacy.”

Are Davidow’s criticisms just a lament from the old guard about the rise of new firms with different values, or does he have a point about the world that Facebook and Google and Apple have created? Probably a bit of both. But it’s worth considering whether the benefits we get from free services are worth the trade-offs we make in order to get them, and what kinds of incentives the success of Facebook and others are creating for the companies that follow them.

Post and thumbnail images courtesy of Flickr user Mark Strozier

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  1. Harold Verhagen Tuesday, June 26, 2012

    Great article! It really highlights the problem behind generating a user base before generating a revenue model. Using users as data goes well against the interest of consumer service.

    In my personal opinion, this has also shifted much of the startup scene where companies focus on getting investment before prototype. Getting users before generating money and do so for years.

    It might work in some cases: such as FB and Twitter (discussable point). But the reality is that providing a service costs money… And companies should consider covering their costs before dreaming of being the next facebook.

    Anyway… the worst part of this story is that users/customers/consumers/data or whatever you wish to call them now believe that every thing should be free.

    It’s a dilema that affects us all…

    Thanks for the article – Nice moderation last week at Mobile Monday NYC!

    1. Thanks for the comment, Harold — and for the compliment as well.

  2. I actually think Davidow is right, but I’m not as worried about it, as it is just a passing phase. The ad-supported model for websites is not sustainable for all kinds of sites, and ultimately the behavior of those giants will change. Also, some of those companies (cough, cough, Facebook, cough, cough, zygna) will lose influence, as their user base loses interest and moves on the next version of a personal time sink.

    But what is sad is that Silicon Valley is no longer a silicon valley. Companies there used to make things, but now there are more engineers creating websites than actual products. They may create products that use the engines which are built on silicon, but so do banks, insurance companies, entertainment, media, transportation, etc. – the companies that are transforming the valley are no more “silicon” than any other region of the nation.

    The bigger threat of these new companies is that they don’t make anything. We can’t be a nation of consumers forever, we have to produce something, and ads won’t cover the cost of everything we need to import. If these kinds of companies continue to attract investment capital and engineering talent, we’ll continue on our way of being just another country with lots of economic problems.

    1. Hammer, meet nailhead. I call this the myth of the service economy. Where you don’t actually make anything, just talk about it. There’s no foundation to such an economy. You can’t eat it, you can’t wear it, you can’t sleep in it.

      I’m a little less optimistic that it’s a quickly passing fad. This has been coming for awhile. 20 years ago I read people concerned with what would happen when the “greed is good” generation grew up and started running things. Well, here we are. Lazy greed. Forget trying to work harder or come up with the better mousetrap. Just throw ethics and morality out the window and work the easiest scam you can come up with.

      1. I meant the focus on time-sink websites is a passing phase. I don’t think the manufacturing issue is a passing phase, though, it is a great concern, and while I think the trend can be reversed, it’s not going to be easy. A lot has to do with the value of the dollar vs. the renminbi, but even once the dollar is appropriately valued, we still need to be our technological/industrial/education infrastructure.

    2. That’s a great point about Silicon Valley not producing much as far as products built on Silicon, and I’m sure the ones who do are outsourcing to China/Asia.

  3. nobody can leave facebook. it has network effects. everyone is trapped. I hope the FTC/SEC blocks Facebook from buying one of its strongest competitors — Instagram. Instagram is a photo based social network that now has 65,000,000 users. its one of the strongest competitors facebook has seen to date. Facebook has network effects. Without network effects Mark and Co. would have had strong competition a long time ago. Instagram is one of the few companies that found a hole in Facebook’s armour through its early jump on mobile platforms. It would be a shame to simply watch Facebook buy away the competition. Do the right thing FTC/SEC and block the buyout. Make Facebook compete.

  4. While I agree with this view of Facebook and Google, I think it’s a bit excessive to lump in Apple and Amazon. The latter two make the vast majority of their profits from selling real, physical goods. In addition, Apple’s “walled-garden” iOS App Store is a separate problem from Facebook and Google’s monetization strategies. Classic Silicon Valley business strategy has not always hinged on interoperability or open systems. Quite the contrary actually. There was a time when all of your applications came from the systems vendor and anything custom was just that, custom. You would hire your own programmers to write your custom business software and retain them to keep it running. With Apple, it is clear what the customer/vendor relationship is. You provide Apple with your money in exchange for goods and services provided by them. They are able to increase their revenues by making more compelling products that consumers want to buy. There is a direct incentive for them to continue to make those products and services better in order to make more revenue.

    This relationship is much more indirect with Facebook and Google. The mere fact that Facebook has been able to garner such large amount of investments while promoting such a vastly different and more opaque strategy is disturbing.

    1. Good point. A so called “walled garden” or closed ecosystem is one way (and the way Apple has been since the release of the Lisa) to ensure that your products work as advertised. As opposed to a wild west of professional coders and amateur hackers and all the continuum in between. There is nothing intrinsically evil or bad about this. If you want to play in that ecosystem and are a professional coder, you can play by the established rules and your product will join with the others that are known to work. If you are part of the legions who aren’t as good as they think they are or feel like they don’t need to follow the coding rules and their sloppy implementation is just as good because it works on their machine, then you can whine all you want but a structured organization that tests and wants to ensure their customer experience is not going to willingly let you mess them up. Sorry, it’s a meritocracy. And you must be this tall to get on this ride.
      This is entirely separate from the shady “monentization” schemes folks are coming up with these days to take basic utilities and rather than sell the utility outright as was done previously, run the utility off a server and sell the information gathered from it’s use.

  5. An entire generation of entrepreneurs has been RUINED by the promise of billions building social sites and inane iPhone time wasters. Otherwise smart people, who have a chance at changing the world with their skills, would rather play a form of entrepreneurship lotto trying to build a facebook killer or the next instagram than seek and solve complex often illusive problems that improve the human condition. IPhone apps are a one in a 500,000 shot, but hey, all they need is the TechCrunch bump (the dead pool is not market research).

    Good for businesses who have succeeded in gaining market share in a bloody game social entrepreneurship Mega Millions. Even better for them if they can give me a free product that from which I derive immense utility and the only thing I have to do is ignore a few banner ads.

    The values of the valley have changed, but its not because people are now approximately cows in a barn or mining data I freely gave facebook is evil. It’s because real human innovation and progress is hard, takes daily grind, a lot of work, and comes with no promise of instant bucks.

    I’ve got description, prescription, and jabs for days on the topic, but quick cash has a megaphone to the ears of valley. After all, the only prescription I know of is the doctrine of altruism and a burning desire to make the world a better place. That’s an easy doctrine to preach and a hard one to implement. Maybe an occasional spoonful of Ted can make it go down some nascent thoughts. Now that guy has some ideas worth spreading.

  6. If some companies really are acting against the interests of their customers, those companies will ultimately fail. Count on it.

  7. Instead of lazy ivy-leaguers going to hollywood and exploiting consumers in film and television, we now get lazy ivy-leaguers going to the San Fransisco sewers and exploiting consumers in crappy VC narcicism pojects and bratty time-suck exploits.

  8. What a great article to read this Sunday morning! As my grandfather would always say “Nothing is ever free in life! One way or another you’re paying for it!”

    1. Thanks, Rosalind.

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