Silicon Valley’s Myths: How Palo Alto operates a global black market racket

The ideological debate between communism and capitalism that so defined and shaped the twentieth century was convincingly won by the west when the Soviet Union collapsed towards the end of the twentieth century. Looming over the horizon is yet another threat to our understanding of running the free market though, ironically, the threat this time emanates not from North Korea but from the heart of the United States: Silicon Valley.

Whilst communism shunned market prices, private equity and personal profit, Silicon Valley’s preferred approach to conducting on-line business is to operate a black-market racket sanctioned and supported by US regulators. When Volkswagen flouted the law and deliberately presented misleading data to US regulators they quite rightly and with the full support of the EU, came down hard on the German car manufacturer. When Silicon Valley flouts the law US regulators look the other way. When EU regulators question Silicon Valley malpractice the US threatens a trade war. As Geert Noels, former Head Economist for Petercam (Belgium’s largest asset management firm) stated in a piece in De Standaard what fifteen years ago was called cheating, fraud and malpractice today is labelled “sharing” and “caring” disguised in a funky new app.

Palo Alto’s proximity to Hollywood has allowed it to build blockbuster myths that peddle a noble tale of Silicon Valley – the good guys – battling the establishment to benefit, us, the little guy. In reality they are cheating their way to the top under the noses of regulators who appear to be just as bedazzled and bamboozled by the legend as the ordinary guy browsing his smartphone on the Clapham omnibus. What is really astounding is how many people fall for the story-line without questioning the intention, sincerity or legitimacy of the script-writer. EU Perspectives is not averse to a little bit of fiction – great stories are inspiring but it is important that the regulator, if not the guy on the Clapham omnibus, understands where fiction ends and malpractice begins.

No one can doubt the rate at which the on-line economy is growing. The really remarkable aspect of this new phenomenon is how venture capitalists in Silicon Valley have managed to convince users, regulators and governments alike that what applies to established bricks and mortar business need not apply to them. The mere fact that money  and data is exchanged electronically, as opposed to over the counter or on paper, should not make a difference to how the economy is regulated. Silicon Valley would have us believe otherwise. Time to bust the myth and look at the hard reality of the black market racket that is threatening to destroy our understanding of an open, competitive digital market where all can have a bash at the game on a level playing field.

There are two aspects to the on-line economy that urgently need to be addressed. Firstly, the sector that makes vast profits out of data mining and targeted advertising linked to the behemoths Google and Facebook. This is the so-called “free digital economy”. The “free” here referring to unpaid access not free thinking, free markets or free societies. Secondly, the emergence of on-line platforms such as Uber, Airbnb and Task Rabbit, which the editor of Sharable has likened to Death Stars.

Since these are two separate malpractices it is worth examining them individually. This allows us to disentangle the plot and establish what is going wrong and how European regulators can address these challenges whilst encouraging the emergence of a competitive, open on-line European economy that European, indeed global, businesses and consumers can all benefit from.

Malpractice Nu 1: The Myth that Palo Alto is Above Money: Data mining and targeted advertising

To many the idea that any business could evolve into a multi-billion dollar empire without charging a single cent may sound absurd. Yet, this is exactly how Silicon Valley has become rich and continues to enrich itself everyday. Try explaining to the kids how Zuckerberg is able to give away $ 45 billion without users paying for access to his first baby: Facebook. Venture capitalists in Silicon Valley have benefited enormously from the free digital economy but the wider, emerging, digital economy has been stifled and ossified just as surely as if Marxists had been appointed guardians of our new on-line economy ten years ago.

To be fair on regulators data mining and targeted advertising in the internet era is an entirely new phenomenon. Establishing where the malpractice lies can be hard to discern. There’s a lot of smokes and mirror trickery going on to confuse minds. Taking inspiration from Travis Kalanick, co-founder of Uber who in his About page “.. believes that every problem has a solution. You just have to be creative enough to find it,” euperspectives has  identified the problem and is offering some creative solutions, which he may be interested in reading.

The anti-competitive nature of free digital services: Conquering, retaining and controlling market share

Offering free services forces all new entrants to follow suit thereby handing first movers not just the advantage but a life-time monopoly. Offering free services indefinitely forces all businesses to engage in data mining as a means to generate money whether this suits the purpose of their on-line service or not. A comparison between a fee pyaing site and free site is useful to explain how this works.

European businesses, so the mantra goes, are just not innovative enough to compete with their Silicon Valley counter-parts. Europeans do not take risks in the same way that Americans do. Europeans just don’t get coding like the whizz-kids from Harvard. On face value this would appear to be true. Europeans hardly rank in any of the top twenty on-line digital companies. Their start-ups fail to take flight.

Understanding the difference between European businesses and their Palo Alto counter-parts is a useful way to explain how Silicon Valley’s “free” model is highly effective at creating vast monopolies that block new entrants from having a slice of the cake. The key difference between early European on-line companies providing a service and their US counter-parts in Palo Alto is that it perhaps never occurred to European on-line start-ups to by-pass laws or to peddle data as a long-term business option. When the on-line economy began to become viable around fifteen years ago the initial instinct of European businesses working on-line was to charge a fee, either in the form of a commission or a service charge, in return for on-line access and use. Data mining was rarely touted as a business model and the European Data Protection Directive made the sale of personal data for commercial gain problematic.

In any case data mining was not deemed essential to making money. The potential to attract millions of global users made (and still makes) on-line business a highly interesting proposition. Charging a fee can more than cover any initial start-up costs, day to day running costs as well as offering investors a return on their investment.

Ten to fifteen years ago US investors had other ideas. They decided to offer their service on-line for free. The legality of sharing personal data on-line appeared to be of little concern to US venture capitalists – either because the same legal framework did not exist in the US or because they considered it a trifling matter that was of no great concern to them. This allowed US on-line companies to best their European competitors by not having to compete on price. Having lured users in with free on-line use Silicon Valley now has to maintain the first of the Palo Alto “legendary myths” namely that they are above money whilst making stack loads of the stuff. Needless to say users are more than happy to buy into this idea and resent the notion that they might be charged a monetary fee in return for a service, whilst conveniently ignoring the fact that behind the screen and behind the scene is an army of people working hard to provide a service.

We have reached a state where societies are becoming accustomed to free news, free Wi-Fi, free music, free tutorials, free messaging, free knitting patterns, free self-help manuals, free recipes, free academic articles, free search engines, free television, free books, free magazines ….. To the extent that anyone wishing to provide an on-line service MUST offer free access – whether they have the investment, resources or cash to do so or not. Anyone wishing to compete on-line is forced into a “free-model” straight jacket – any other business model being commercial suicide.

The collapse of quality: A case study

As users gravitate towards free services like moths to a flame the need to deliver quality becomes less important. Take news by way of example. News sites that charge a subscription fee have seen their revenue plummet as readers source sites offering news free of charge. In the absence of raising revenue through subscriptions news sites that offer their news for free are forced into raising revenue through targeted advertising, data mining and sponsored editorials. The Times of London is lucky in that it is part of the wider Murdoch empire which is able to prop the paper up as it sees on-line readers fall away. Other traditional media outlets are not so fortunate and have to follow the Silicon Valley way of doing business. The market for quality news is huge. The money to pay for it sitting in a Palo Alto bank account, which has an over-riding interest in data mining and sponsored editorials not subscription fees. What can be asserted in all confidence is that free news has led to a worrying erosion of free thinking.

Contracts versus User Agreements

When operating a “free” site companies no longer manage “customer contracts”. They manage “user agreements”. This is problematic since the rights and obligations of the service provider and the user become fudged and complicated. In cases where the service provider charges a fee the arrangement between business and customers is set out in the form of a standard contract: we deliver you pay. Any breach can be assessed by long established and well regarded legal principles enshrined in contract law. This leads to market stability and confidence.

Compare this to a user agreements. In cases of dispute a user (unlike a customer) has to engage in complex legal gymnastics to try and hold the provider to account for breach of agreement. A customer only has to prove breach of contract. A user has to untangle unfathomable language where the means of making a profit entails a fast and loose definition of copyright law. Users are asked to give explicit consent without fully grasping what it is they are consenting to. Users have no say in shaping the agreement, they have little or no understanding of how the free digital economy makes a profit and are not offered alternatives if they do not wish to accept user terms. This allows the service provider to change the terms of the agreement from one day to the next with impunity and at will – and they do. Given that they have created an environment where it is all but impossible for a user to turn to a meaningful competitor they have it all pretty much stitched up.

Destroying local economies

For the free digital market to be profitable it needs vast numbers on its side, which is why “going global” is so essential to its mythology. A local on-line service provider charging a service fee to 2000 registered customers is a viable business proposition, bringing benefits to local users and the local economy. A local on-line service provider offering free access to 2000 registered users will fold. There’s no money to be made in mining the data of 2000 users. The venture will be deemed a failure since it has “no traction” and is not “global”. Two thousand registered users is worthless to a company dependant on data mining to make a profit. And so the money pours into Silicon Valley far, far away whilst the local community misses out.

Solutions?

Brussels has been attempting to reign in Silicon valley but it has focused too much effort on the wrong initiatives. To date, efforts have been devoted to revising individual laws – be it data protection, copyright or Google’s approach to showing adverts. This approach is not only time consuming and lengthy it risks being lobbied to death by the slick and vast public relations machine funded by Silicon Valley. Some MEPs were persuaded to table over 3000 amendments at first reading of the proposed Data Protection Regulation and the proposal now lies moribund in Council waiting further instructions from the Silicon Valley lobby machine. Copyright is another non-starter. It is far too technical for most to follow and its technicality lends itself to manipulation and ultimate irrelevance. The competition authorities attempts to reign in Google, though noble, are just a tiny nibble at the Silicon Valley beast. Such is the gymnastics our legislators have to go through in order to curb on-line malpractice.

A far simpler solution would be for competition authorities across the globe to rule that the indefinite use of free on-line services is incompatible with the principles of running an open, fair and competitive market. That way all on-line businesses would be forced to act in unison and not allow one single company to offer free use indefinitely, in order to gain a competitive advantage. Offering free use for a limited period of no more than one month and as part of a promotional campaign would be permissible – but long-term, indefinite free access not. To use an electronic analogy it could act as a re-set button where all companies – existing and future – will have to compete fair and square on price.

It’s been quoted elsewhere on euperspectives and it is worth quoting again. “There’s no such thing as a free lunch.” When first uttered this laconic sentence sounded harsh – the uncaring face of rampant capitalism – but Friedman was not talking about charity or the welfare state or how wealth is distributed. He was talking about business. Friedman’s much quoted sentence succinctly encapsulates that when it comes to doing business money is still the best way in which to establish value and reward the effort put into setting-up, running and maintaining a successful business. Having won the argument against communist ideology that “money” is a useful way to establish value let us not throw this highly useful means away on some nebulous notion that “free” can  establish value. It can only lead to a series of malpractices.

Defining value through money as well as quality on an open market is key to the capitalist notion of rewarding talent, success and hard work.  Euperspectives is not alone in this thinking.  Tim Cook, CEO of Apple, has often expressed hiw own reservations on the implications of offering free services on-line in return for data mining and the impact this will have on our way of life.

Just as water eventually corrodes metal so too long-term exposure to free services will corrode access to a free and open market. Long-term exposure to free services destroys local economies, creates monopolies and forces competitors into a straight-jacket of raising revenue through data mining. If global societies wish to see a dynamic, competitive on-line market economy with a balance of large, medium-sized and micro businesses, global as well as local businesses then it needs to act fast before it becomes all but impossible to break the strangle-hold of the companies offering “free” on-line services.

Malpractice Nu 2: The myth of the caring, sharing, fragrant air-mattress

Every new on-line start-up worth it’s finest algorithm has a founding myth. Typically these tales evolve around a big tech conference, a gap in the market … and hey presto the big idea. For Uber it’s a cold winter’s night in Paris, 2008, following a tech conference and a couple of buddies short on a taxi. For Airbnb it’s a big design conference in San Francisco, no place at the inn and a couple of buddies with a couple of spare air mattress. For Task Rabbit it’s a cold winter’s night in Boston, 2008, and a husband and wife running out of dog food .. you get the, err, big idea. In reality the brilliance of their idea was not finding the need (there already were businesses on-line plugging that need) it was to pitch themselves as peer to peer, sharers and carers as opposed to hard-nosed business men and women.

These huge companies, now referred to within the collaborative consumption movement as Death Stars, began to emerge around ten years ago at a time when i-phones, smart-phones and android technology was about to take-off big time. It was just a matter of time before these platforms were constructed. Happily for them the scaffolding came down just as the more altruistic, well-intentioned entirely separate peer to peer, sharing, collaborative economy was beginning to emerge out of hippie California and elsewhere. The original intention of the collaborative consumption movement was to help empower those people who suddenly found themselves without a job following the collapse of the Lehman Brothers in 2008. It was a time of recession and economic instability. Sharing resources on-line seemed a sensible way to go.

The likes of Uber, Airbnb and Task Rabbit were able to piggy-back a ride on this well intentioned phenomenon and disguise their business transactions as part of the “sharing economy” – and thereby flout the law.  They use the term “peer” rather than “client”, they talk about “sharing” rather than “letting” they talk about “private home” rather than booking, leasing or renting. The press, either in the pay of these companies (remember the traditional media can no longer raise revenue through subscription any more) or by failing to do their job and question the PR blurb of these sites, helped promote the idea of the “sharing” economy – as opposed to just the on-line economy. See this quote form The Telegraph written in September 2012 “They created a company that at its core is based on sharing, just as the movement dubbed ‘collaborative consumption’, or the sharing economy, was developing as a trend (‘When we started no one had heard the term yet,’ Gebbia said. ‘We were just living it’.)”  Even The Times of London has been writing gushing editorials on the benefits of the “sharing economy”.

There is however a distinction between sharing a resource and profiting from a resource. Sharing is helping out. Profiting is business. How societies regulate the two differs and it does matters.

Take the “power drill” by way of example. The original intention of those building the collaborative economy was to put the owner of a “power drill” in touch with another person who may need it just for one small job. Sounds like a good idea – but it leaves a few crucial questions unanswered.

Who is going to pay to set the site up allowing peers to get in touch? Who is going to pay for the continuing functionality of the site so that peers can stay in touch? Even the proverbial garage has a cost. Is the lender of the power drill allowed to charge a small fee for use of the power drill? If they are allowed to charge a fee is the site allowed to charge a commission on the transaction to pay for running costs of the site? Should the fee just cover costs making it a not-for-profit venture – or should it be allowed to make a profit making it a business? Peers will be submitting a lot of personal data should the site sell the user data to help run the site? Who pays for repairs or replacement in case of breakage? Who is liable if the drill causes damage through neglect and bad repair? Who is responsible for insuring the power drill? Should any income generated from a “small fee” remain untaxed? What about any legal responsibilities that the site may have towards their users (or peers)?

What we see is that Uber, Airbnb and Task Rabbit are categorically not into the business of sharing, or peer to peer interaction or collaborating with peers to build a better world. They are a business, disguising themselves as a sharing economy, thereby conveniently being able to disregard regulatory issues relating to insurance, liability, taxation or taking on a any of the responsibilities of managing a business. Nor, are their ideas that remarkable. In 2002 it was possible to book a private family holiday home in Spain on-line. The Agency called itself a business. Not a peer to peer operator. They are the same thing : just labelled differently.

Solutions?

Put simply any on-line site that makes a profit out of their activity needs to compete alongside existing  bricks and mortar businesses by applying the same regulatory requirements as all other businesses do. If you provide a car ride service you are a taxi and need to apply the regulations that apply to that branch of business. If you allow people to rent out their house you need to apply the regulations that apply to this sector. If you want to provide a service which allows carers to help out the elderly then you need to make sure the carer is legitimate and not a crook sponging off the vulnerable.

Up until now the venture capitalists in Silicon Valley have dictated the terms of the on-line market with little or no in-put from users, governments or competition authorities. They have played fast and loose with the law allowing them to spread globally at a phenomenal pace and gain market share. This combination has resulted in European businesses, indeed any other global competitors (including competitors in the US), from being crushed by a Silicon Valley juggernaut big enough to knock the stuffing out of any new company wishing to jump on the band-wagon and make an income out of the emerging on-line market.

How Europe conducts on-line business in a globalised, inter-connected and digital economy is in urgent need of an overhaul if it is to retain the notion that the internal market should be based on fair, open access and a level playing field for all. Failure to do so can and will give the monopolists in Silicon Valley an easy ticket to dominate the on-line market. Peter Thiel, co-founder of Pay Pal writes in The Wall Street Journal “Competition is for Losers” noting that “If you want to create and capture market value look to build a monopoly.” The key question for Europe and other continent is: do we want them to build monopolies and dominate our way of living?  As is often the case, where the EU leads others follow. It is in the interests of many – including the US government – that a few boundaries are pegged in the years to come so that everyone, entrepreneurs, consumers and users can benefit from the huge potential the on-line economy is delivering and not just the few in Palo Alto who are accumulating vast fortunes at the expense of others.

 

 

 

 

 

 

 

1 Comment on Silicon Valley’s Myths: How Palo Alto operates a global black market racket

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