May 4, 2017 / 7:28 PM / 5 months ago

Cox: Tech monopolies crowding out little guys

A billboard advertisement for the HBO series Silicon Valley is seen at Times Square in New York March 24, 2015. REUTERS/Shannon Stapleton

NEW ORLEANS (Reuters Breakingviews) - Amid a crowd of 20,000 technology enthusiasts jammed into the New Orleans convention center, Matt Rogers stands out. And not just for his sunny demeanor and colorful socks. In many ways, the co-founder of Nest Labs is an object of aspiration for the startup kids, venture capitalists and wannabe moguls attending the Collision conference in the Big Easy hoping to capitalize on the next big thing.

In 2010, the former Apple engineer co-founded Nest, which makes internet-enabled devices for the home like thermostats, alongside Tony Fadell, the man credited with designing the iPod for Steve Jobs. The duo sold the business three years ago to Google for $3.2 billion in cash. Nest now nuzzles inside Alphabet, the holding company Google created to house its many disparate businesses.

Rogers is what passes for celebrity at Collision. He is wealthy enough to have his own foundation doing good works in his community and all around the country. He backs a literary and political magazine, the Boston Review. And he is also funding The Arena, a sort of incubator for up-and-coming politicians in the Democratic Party: ”We’re building a new generation of leaders to run for office – and enter the arena.”

Yet there is a cautionary side to his enviable success that is hard to shake while crisscrossing the hundreds of booths set up by startups at Collision, or when listening to the 350-odd speakers on the many stages of the Ernest N. Morial Convention Center. Not long ago, this cavernous site overlooking the Mississippi River functioned as an evacuation center and emergency shelter after Hurricane Katrina clobbered the city.

For all the talk of disruption among the assembled wunderkinder here, there is a latent concern that the coronation of a handful of technology-industry monopolies will stymie the chances of these upstarts to ever meaningfully break through. Though many of the entrepreneurs pitching their wares and networking over Sazeracs are confident they can become the next Matt Rogers, they fear they will never reach the Olympian status of a Steve Jobs, Sergey Brin, Larry Page, Jeff Bezos, Mark Zuckerberg or Reed Hastings.

That’s because the companies these legendary founders created, and which are often referred to as FAANGs in the stock market – for Facebook, Apple, Amazon, Netflix and Google (now Alphabet) – now sport a combined market capitalization of $2.4 trillion. With ambitions to expand in all reaches of the economy, and the financial scale and business reach to make that happen, they are now so all-encompassing they can effectively squelch any challenge to their dominance.

Nest may be a case in point. Though Google’s venture arm had invested in the firm previously, it clinched its bid for the company while it was in the midst of another fundraising that would have valued Nest at around $2 billion. Within a few months of being acquired, Nest expanded its footprint by acquiring Dropcam, a maker of security cameras, for $555 million.

It wasn’t long before reports emerged in the Silicon Valley press that Nest, once ensconced inside Alphabet, had lost its mojo, was failing to hit its numbers and losing key executives. When Dropcam’s co-founder Greg Duffy split, he publicly regretted selling his baby to Nest and called Fadell a “tyrant bureaucrat.” A year ago, Fadell himself exited.

Nest is still going strong, at least as a brand selling internet-connected kit for the home. But it’s a rounding error in the context of its parent company. Last quarter, for instance, Alphabet reported almost $25 billion of revenue. Its “Other Bets” division, where Nest jockeys with a half-dozen businesses for attention, reported just $244 million of sales, on which it lost $855 million.

Nest may be doing fine, with Fadell gone, and Rogers free to evangelize at conferences like Collision to other aspiring inventors about the benefits of selling out to big owners like Page and Brin. It’s hard to know how, though, or whether, an independent Nest would have more broadly upended the appliances business, moving from thermostats and carbon monoxide detectors to cameras, toasters, blenders and so on. What’s clear is that industry leaders are no longer waiting around to find out. To wit, Whirlpool just bought Yummly, a startup providing personalized recipes and cooking resources.

Indeed, among the hoodies who make up the bulk of Collision attendees, hawking ideas like Rye 51 (“small-batch men’s clothing”) and Wimbify (“find a travelmate, stay free & go local”) big companies prowl the exhibition space and the nighttime networking sessions across the city, picking up business cards and, perchance, plotting to steal baby startups from their entrepreneurial nests. Besides executives from the FAANGs, representatives from other dominant enterprises keen to avoid being disrupted, including General Electric and Wells Fargo, made the rounds.

None of this is particularly concerning while funds keep flowing, giving nascent firms the opportunity to build their companies to scale and repel takeover offers from deep-pocketed rivals. That era may have reached its peak, however. In the first quarter, for instance, venture-capital firms invested $12 billion in 938 deals, down 8 percent in dollar terms from a year earlier, according to Thomson Reuters data.

As that money spigot slows, public markets may become a more alluring alternative. The warm embrace of quasi-monopolies will be harder than ever to avoid. That will make many a millionaire among the Collision-eers. At the same time, it may keep some of them at too safe a distance from greatness.

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