An edited version of this article was published in bathimpact newspaper in March 2014.
Although the city of San Francisco is situated on the San Andreas Fault Line, recent fears are less about potential seismic destruction, and more about impending financial devastation. The astounding economic performance of the Silicon Valley technology industry has given rise to a number of sceptics; as the stock prices of technology start-ups continue to soar, the murmurs that a second internet bubble is coming are growing ever louder.
On the face of it, the statistics seem to be cause for cheer and optimism: Silicon Valley has one of the highest growth rates and income levels in the USA, and it has been credited with having catalysed growth across the California Bay Area. Yet, the astronomic valuation of technology companies that seem to lack any discernible means of revenue has fuelled fears that the industry is floating within a fragile bubble that could burst anytime soon.
In November last year, micro-blogging site Twitter launched its Initial Public Offering, with shares priced at $26; this quickly soared to $45 by the day’s end, valuing the company at $18 Billion. But when Twitter published its first public financial statement, it showed a loss of $511 million for the final quarter of 2013. If the Twitter IPO awakened the cynics, then the astonishing WhatsApp acquisition by Facebook has got them all agog. The fourth-largest ever acquisition in technology history, Facebook has paid $16 Billion to buy Whatsapp, a messaging platform that earns a very modest annual revenue by charging $1 user subscriptions.
Both Twitter and Whatsapp are very much part of a larger trend: for instance, the photo-sharing website Pintrest has been valued at $3.8 Billion despite earning an estimated income of around only $100 million a year, and the photo messaging application Snapchat has been valued at $4 Billion despite having zero revenue currently.
Mergers & acquisitions activity in Silicon Valley is at a record high, and the current trend seems to be for technology entrepreneurs to develop exciting new start-ups that attract the attention and suit the strategic needs of the largest firms, thus ensuring extravagant buy-out deals.
There are other, subtler signs of the Silicon Valley economy overheating too: property prices in and around San Francisco are at an all-time high and residents who work in lower-paying, non-technology jobs are being driven out as they can no longer afford the extortionate cost of living. Class tensions and social alienation are rife, and countless stories of the arrogance, excess and insularity of the new generation technology tycoons abound.
This is not to say that there isn’t substance beneath all the hype: the recent technology boom has been fuelled by a sharp change in internet usage, and all of the above companies have hundreds of millions of users, a number that continues to grow with each passing day. They have significantly changed the way that people behave and interact on the internet, so they do offer considerable strategic growth opportunities for leading technology companies. According to Ernst & Young, the opportunity opened up by rapidly accelerating technology adaption, both by private users and by corporate firms, is a key reason for the frenzied economic activity in this sector.
Nevertheless, there remains the fear that fickle users could abandon these newly-established services in the near future. Youth exodus is already a reality, with 11 million teenagers abandoning their Facebook accounts in the search for newer social media platforms. All of this means that the technology sector is sure to remain the most exciting and dynamic area of the economy, with detractors and supporters alike following every rise and fall in stock prices with the rapt attention.
Latest updates:
Is Silicon Valley the new Wall Street? The Atlantic, July 2014
Money is pouring into tech like its 1999- and that’s not a good thing Wired, September 2014
The Eclectic Eccentric 