Imagine a city. Growing. Teeming with life. The center of the universe for the hottest new technology. Attracting top talent from around the country and the world. A hotbed for entrepreneurs, with over 100 startups vying for supremacy. Investors scrambling to fund this growth and capture some value from the latest technology wave. The home of newly minted millionaires, some who have become household names throughout the nation. The place to be — as artists, musicians and chefs gravitate to the city to cater to the vibrant boomtown.
That city: Detroit. The year: 1924. The epicenter of the new disruptive technology of the day: the automobile.
Not exactly what you expected? No less an authority than ChatGPT describes Detroit as “a city in Michigan that has been struggling economically for many years.” What went wrong? How did this tech hotbed become a symbol for urban decay, for a city in decline?
One hundred years later, could this become the fate of Silicon Valley? Could Palo Alto be the Detroit of the 21st century? To many, this seems preposterous. When asked, ChatGPT states “No, Palo Alto is not the next Detroit. Palo Alto is a city in California that is known for its high-tech industry and its wealth.”
Since the advent of “Silicon Valley” in the 1960s, the region containing Palo Alto has transitioned gracefully from chips to computers to software to digital services. Will it continue as the center of the tech universe, itself the center of the economic universe?
Or could the Valley be in danger from the kind of complacency and stagnation that was Detroit’s undoing? The Bay Area in 2024 and Detroit in 1924 share several things in common:
- An increasingly consolidated market dominated by a handful of mega firms.
- A reduction in competition due to that concentration.
- And little desire on the part of inside stakeholders and the public to moderate the power of the mega firms.
The Rise and Fall of Detroit
With the rise of Henry Ford and the establishment of the Ford Motor Company and its mass production process in 1903, Detroit quickly rose to be the center of the emerging U.S. auto industry. By 1915, over 100 auto companies had entered the market, headquartered in the greater Detroit area. The city of Detroit boomed as a result. Its population grew from 285,000 in 1900 to over one million by1924.
On the auto front, a shakeout occurred. Competition was fierce. Many entrepreneurs closed up shop. Others decided to merge.
By 1924, the Detroit auto industry had settled down into a competition between the “Big Three”: Ford, Chrysler and General Motors. For the next few decades, times were good. They commanded over 90 percent market share in the U.S. between the three of them. Detroit boomed alongside them, reaching a peak population of 1.8 million by the mid-1950s.
However, complacency started to creep in.
Across the oceans, Japanese manufacturers were experimenting with smaller cars and lean production practices, and German manufacturers had emerged from WWII emphasizing quality and style. In the 1970s, multiple recessions reduced household budgets, and expensive gas increased preferences for more efficient cars. Over the next few decades, the Big Three saw a pronounced decline in their dominance.
And with that decline, so came a decline in Detroit. By 1990, Detroit had lost close to 50 percent of its population. Whole city blocks fell into disrepair and were bulldozed. By 2012, over one-third of the land mass of the city was vacant.1 By 2020, its population was under 650,000.
The pattern seen in the Detroit auto industry is not unique. In fact, it is quite common.
It is normal to see the rise of new technologies or business practices that spur innovation, attract entrepreneurs and replace the status quo. It is also normal to see a competitive shakeout as the technology matures and growth eventually ebbs, leaving behind a handful of dominant players who over time grow complacent, sowing the seeds for the next disruption.
Less well recognized, however, is how what economist Joseph Schumpeter called the “gales of creative destruction” are often place-based. From the collapse of New England whaling to the demise of Pittsburgh steel, once-vibrant boom towns are often left in the wake of creative destruction. Much of the industrial Northeast and Midwest is pockmarked by cities that were once the epicenter of technology-driven booms, only to fall into despair as technology and markets moved on.
A Similar Fate for the Bay Area?
Silicon Valley takes its name from its role in pioneering the computing revolution and being the leading center of semiconductor manufacturing. While other cities rose and fell, the Bay Area has had a 50-year-plus run of dominance.
So why doubt such a track record?
First and foremost, we have seen the rise of a small group of Big Tech companies that are capturing outsized gains in the market. If we look at market capitalization, Bay Area companies command a 50 percent market share of the Top 10 global technology companies.2 If not for Seattle’s pair of tech giants, Amazon and Microsoft, the concentration of value in Silicon Valley would be near 75 percent.
Part of the downfall of Detroit was a lack of competition beyond the auto Big Three. Can we say the same about the Bay Area tech Big Three: Apple, Alphabet/Google and Meta/Facebook?3
Weakness = Antidote to Complacency?
One lesson from Detroit is that dominance breeds complacency.
Ironically, any weakness of the Silicon Valley tech Big Three could ultimately be a strength for the Bay Area.
Constructive Threat to the Big 3?
All indicators point to the Valley’s continuing ability to generate new tech ventures that capture the imagination and demonstrate remarkable growth. Unicorns abound.
But are these unicorns a threat to the likes of Apple, Google and Facebook? Or are they simply acquisition opportunities for the Silicon Valley tech Big Three? Hard to say.
Clearly, the primacy of data is creating scale advantages for the biggest tech players. They have more user data to train their algorithms, allowing them to dominate in an increasing number of adjacent industries, such as health care and financial services. They have been active in the merger and acquisition market, and IPOs for tech startups have declined.
The big question is whether these big companies are starting to squash the competitive fervor so central to Silicon Valley’s resilience.
The Seattle Big 2: Prevention of Hubris?
Of course, Apple, Google and Facebook are not alone among the tech giants. Just up the coast lurks the Seattle insurgency led by Amazon and Microsoft.
Together, Amazon and Microsoft suggest that complacency in the Valley is unlikely. While the question remains whether these five big players will strangle the ability of new tech entrepreneurs to rise, the mere existence of this Seattle pair gives hope that Silicon Valley won’t mimic Detroit’s hubris.
Even if the vibrancy of the software startup ecosystem is being threatened by the dominance of Big Tech, the resurgence of the original Silicon Valley tech lords — chip manufacturers such as Nvidia — suggests that the Bay Area will continue to innovate and lead. Aiding this resurgence is an aggressive U.S. industry policy aimed at protecting domestic industry (see the CHIPS Act).
Ducking the Detroit Scenario
Even as we remain optimistic that Silicon Valley can avoid the fate of Detroit, we think it is prudent to de-risk some of those factors that may lead to the Valley’s undoing — factors that breed complacency. Here are three modest proposals to consider.
1. Increase the Housing Supply and Supporting Infrastructure
A key to Silicon Valley’s resilience has been the ability to continually spawn new high growth ventures. This is attributed, in no small part, to the Bay Area being an incredible talent attractor. For decades, coders, engineers and MBAs have clamored to join the Silicon Valley tech ecosystem. But is this guaranteed to continue?
In recent years, the allure of other tech ecosystems in places like Austin, Texas, and Boulder, Colorado, have attracted numerous entrepreneurs and even prompted some Bay Area companies to move headquarters. Why? The Bay Area has become a wildly expensive place to live that has put ownership out of reach for younger and lower income families.
The good news is that there does seem to be more focus squarely on the issue of housing supply, as opposed to more elaborate and uncertain remedies like price controls. There’s plenty of space for development, particularly multi-dwelling units. Comparable metros like Seattle have shown that it is possible to hold down rents and house prices during an economic expansion.
2. Embrace and Adapt Thoughtful Regulation
Over the course of our own careers, tech has gone from oddball niche industry to the dominant force in global economics, largely powered by a few firms. Some form of regulation is inevitable, and not just in the public interest.
Without a substantial tech sector of their own to manage, the EU has been a creative source of ideas for constructive tech regulation, most recently with the General Data Protection Regulation (GDPR) and the proposed Digital Services Act (DSA).
The Valley’s reception of GDPR was relatively negative. But thoughtful, sincere participation in key regulatory areas (vs. categorical opposition) is likely the Valley’s best bet for a durable future where competition remains vigorous.
3. No Brand Lasts Forever
As tech products and the companies that make them expand from a set of utilities into more lifestyle brands, we wonder the extent to which the Valley’s Big Three companies will choose to market their products under a master umbrella versus a portfolio of brands. Nestle, 137-years-old, operates over 2,000 brands.4 In the tech sector, Google has mostly left its Nest brand intact, as did Amazon with novelty retailer Woot. It will be interesting to see, for example, how Amazon handles their acquisition of iRobot (makers of the Roomba robot vacuum cleaner).
How the Valley does on the items above will be a major factor in where young founders with compelling ideas end up, as they consider where to raise families and find the talent they need — even if it’s not yet clear what those talent needs will be. As part of its ecosystem, can there be a robust bilateral flow of brands? Where Big Tech is less a set of giants gobbling up all the clever ideas, but platforms that spawn, support and sometimes spin out novel products and services.
The key, once again, is to avoid complacency that kills innovation.
- 1https://economyleague.org/providing-insight/leadingindicators/2022/07/27/detroitshrinkingcity, accessed on 20 June 2023.
- 2https://companiesmarketcap.com/tech/largest-tech-companies-by-revenue/ (We exclude Tesla from the list since it is better categorized as a transportation or energy company.)
- 3Yes, Amazon’s in Seattle. We’ll come to that.