Bubble Fears: My Interview with El Punt Avui

Well, this is a first for me. I was interviewed via e-mail last week by Victor Sancho, U.S. correspondent for El Punt Avui, Barcelona's leading Catalan-language newspaper. The interview was published today--in Catalan. Most of the questions focused on how the technology economy is evolving in Silicon Valley. For the benefit of readers who don't speak Catalan (I certainly don't), I thought I'd post the original interview here. Sancho's questions are in italics.

In your vision, what’s the current situation of tech companies in Silicon Valley? After years of entrepreneurship and development, it is now a place for big consolidated enterprises or it is the same place it used to be?

Since the 1960s Silicon Valley has always been a place where there are large and small companies operating alongside one another. Today there are many big companies here – obviously Google, Apple, and Facebook are the ones people pay the most attention to, but there’s also Hewlett-Packard, Oracle, Cisco, Intel, eBay, Yahoo, and others. But at the same time, there are also more small companies in Silicon Valley than ever before, mostly because the amount of capital required to start a technology company today is so small and the supply of capital is so large. If you’re asking whether the region is as friendly to entrepreneurs and startups as it used to be, I think the answer is yes, perhaps even more so than in the past.

With 1Q 2014 results released, in your opinion, what’s the reason because all the most important companies (except Facebook) have had a worst result compared with the same period of 2013?

I don’t think there is any single reason. If you take just one example, Google, their revenues and profits are actually up from the same period in 2013, but they’re increasing at a slower rate than a year ago. That’s probably because the market for search-based advertising on the desktop Web is maturing, while more and more people are accessing the Web from their smartphones, and and the company isn’t yet able to charge as much for mobile ads. So their share prices dropped a little bit after their April earnings report.

Most of the biggest companies are investing on mobile technologies, buying companies or developing tools, and most of them think the future lays in that strategy. Is there any trust in that?

I think it’s clear that the number of people accessing information and services on their smartphones and tablets continues to rise quickly, especially in poor and developing countries, while usage of desktop computers and the desktop Web is leveling off. Every company in Silicon Valley is aware of that trend, and I haven’t talked to a single Valley CEO or startup founder who thinks the mobile revolution is just hype. I don’t think desktop or laptop computing will ever go away, but the balance will keep shifting toward mobile. There are plenty of young people today who do almost all of their computing on mobile devices.

What do you think about those recent episodes of buying/selling new companies for a millionaire price, when probably those companies are not yet worth those figures?

The most extreme example recently is Facebook’s purchase of WhatsApp, a company with only about 35 employees and $20 million in annual revenue, for $19 billion in cash and Facebook shares. It’s certainly eye-opening when you hear that amounts like that are changing hands for such tiny companies. I think there are two things behind this trend. First, companies like Facebook, Google, and Apple have enormous piles of cash, and they need to do something with it; also, their share prices are very high, which gives them even more leverage if they want to sweeten the deal with some of their own shares. Second, the companies that attract these kinds of prices usually have very large user bases: Instagram had more than 50 million users when Facebook bought it, and WhatsApp had 450 million. When you consider how difficult and expensive it can be to acquire new users, the high prices make a little more sense. (But only a little!)

What's the importance of yesterday's Alibaba announcement?

Alibaba sells more stuff than any other e-commerce company in the world, and it is the fourth-largest technology company in the world in terms of capitalization (only Microsoft, Google, and Apple are larger). It has 80 percent market share in the world’s fastest-growing economy, China. By deciding to go public in the United States, Alibaba will be able to convert its perceived value into actual cash---a lot of cash. (There are predictions that it may be the largest initial public offering in U.S. history.) That will give it the resources to keep expanding and offering new products, including in its mobile business, where it is not as strong yet.

Are we going towards a tech future with few gigantic companies and less start-ups? What is the importance of the partnerships between the big companies (like the latest Amazon-Twitter alliance to buy Amazon products throughTwitter)?

No, I don’t think the future will have fewer startups in it. As I mentioned previously, there are more startups than ever today – just look at the profusion of startup accelerators like Y Combinator and its imitators. I think that’s only going to continue, as long as angel and venture investment funds are so plentiful. (That could change, of course, if there were an economic downturn or if the current “bubble” of very high startup valuations were to “pop.”) But the fact that cloud technology and outsourcing make it so easy to create a new company is not going to change. At the same time, there will continue to be a few very large companies with a lot of power, such as Amazon and Twitter. Occasionally you will see those companies work together to try experiments like AmazonCart, but for the most part I think the biggest technology companies (Google, Apple, Samsung, Microsoft, Amazon, Twitter) will continue as rivals and enemies, competing head-to-head in many markets such as mobile and digital content.

Some analysts said that the numbers of the actual tech economy are similar than to the numbers that where in place when the dot com bubble exploded. Is there actually a fear of to a new bubble episode with those new “social” companies?

Yes, I think there is a legitimate fear that Silicon Valley is entering a new “bubble” period, but I don’t think this bubble looks like the previous one back in 1998-2000. The things that worry me now are problems like labor supply (it’s getting increasingly difficult for workers to find affordable places to live in or around Silicon Valley) and rising inequality between poor and middle-income people and rich Silicon Valley tech workers, which creates a lot of social tension. I wrote an article about this last week.

About Microsoft and Amazon. In spite of the fact that they are not actually based in Silicon Valley, is there a connection between tech companies in Seattle and tech companies in Silicon Valley?

Microsoft and Amazon both have large offices in Silicon Valley and for the most part both companies act exactly the same as if they were based in Silicon Valley. In some ways you can think of Seattle (and Boston and New York and Austin and a few other places around the U.S.) as extensions or satellites of Silicon Valley: they all have innovative, fast-growing technology companies. It’s just that there’s a larger number of companies in Silicon Valley, and the density tends to mean that there’s a lot of exchange of people and ideas between companies there, which helps innovation move even faster.

What are your projections for this year (2014) for the tech sector?

I expect to see continued slow growth. The underlying economy in the United States and around the world is not very strong. Unemployment remains stubbornly high and consumers don’t have a lot of extra money to spend. The atmosphere of extreme partisanship in Washington D.C. means that the U.S. government is pretty dysfunctional and isn’t able to get much done in important areas like tax reform, energy, or climate change legislation. There’s a lot of uncertainty around international situations like Ukraine and Syria. We’ll continue to see Silicon Valley producing minor and major innovations: some type of wearable technology is likely to catch on sooner or later (although I am not a big fan of the current generation of smart watches, fitness monitors, and smart glasses). The “Internet of Things” will become real for many consumers as they buy devices like smart thermostats. But think the smartphone will continue to be the most important computing device in most people’s lives and will increasingly function as the hub for everything else.