If the Techtopus wage theft suit proves anything, it's that the philosophy that built the Valley is no more

By Sarah Lacy , written on April 25, 2014

From The News Desk

In 2008, everyday folks learned that the top Wall Street banks were simply too big for the government to let them fail. In the Valley there was an overwhelming sense of smugness about our lack of protectionism.

Here the young eat the old.

We'd never ask for a government bail out.

Everyone is subject to disruption.

Indeed what's defined Silicon Valley – and the reason it surpassed Boston as the world's leading innovation and startup hub decades ago – was an almost Eastern philosophy of the constant recirculation of money and talent. Like atoms washing in and out of the body, or a flow of energy that would be described in a California Yoga class, the idea was that this flow of talent and capital was all that mattered – not any one job, or any one company, or even any one technical wave. It was the big living breathing organism of the ecosystem.

The Valley eschewed strictures of the East Coast – Robert Noyce hated unions and so he made his employees at Intel partners in the business. And unlike the East Coast, non-competes were frowned upon. As the Valley grew, so too grew this idea that even a founder wouldn't be in his job forever, and the system was what mattered. If someone wanted to leave you to start a company or join one, you had to let them and trust it would all work out.

But something has happened to this zen, free-market utopia: It worked so well that it spawned handfuls upon handfuls of companies that got truly massive, with huge multiples in their stock prices, and mind-boggling amounts of cash. These companies exerted enormous control over their markets, and they'd seen the decline of once-great tech companies who weren't careful. Even Microsoft – the company that struck fear in the heart of even the boldest entrepreneurs 15 years ago – barely moved in stock price over the last decade.

These companies knew just being big wasn't enough. Just as startups use their own endemic nimbleness to get ahead, these companies decided they needed to use their sheer muscle, institutional heft, and market cap to win.

In the words of Steve Case at last month's PandoMonthly, the "disrupters" became "defenders."

And just as startups will use that speed, nimbleness, and disruptive mindset – even veering into the gray area of the law when need be – so too did these giants of Silicon Valley lose all sense of decorum, respect for talent, legality, and appreciation for what made the Valley unique and successful to begin with.

The most egregious example of this shift is the Tectopus wage fixing scandal, which artificially suppressed tech wages for millions of engineers. It was simply shocking boldness, as Mark Ames has reported in leaked email after leaked email.

Much has been made of the fact that Facebook – not to mention LinkedIn, Twitter and others – refused to join this cartel, ultimately diminishing its impact. But let's not kid ourselves: Facebook didn't join only because of timing. Facebook was the disruptor not the defender. Ten years earlier or decades before that, Google and Apple wouldn't have joined.

The suit was settled this week, and yeah it cost the companies a lot of money. Some $325 million, but that boils down to about $500 per head. Nothing. Just like the "too big to fail" banks. In retrospect, even if they knew this could be the outcome it was a greedy game worth playing. They saved far more than that.

The news of the settlement reminded me of something Farhad Manjoo astutely reported when Samsung was found in violation of patent infringement back in the Summer of 2012.

It’s tempting, after such a sweeping verdict in Apple’s favor, to conclude that Samsung’s decision to mimic the iPhone was a terrible mistake. The firm will now be on the hook for at least $1 billion in damages, and the judge could triple that amount. 

But if you study what’s happened in the mobile industry since 2007, a different moral emerges. It goes like this: Copying works.

...Of the three paths open to tech companies in the wake of the iPhone—ignore Apple, out-innovate Apple, or copy Apple—Samsung’s decision has fared best. Yes, Samsung’s copying was amateurish and panicky, and now it will have to pay for its indiscretions. But the costs of patent infringement will fall far short of what Samsung gained by aping Apple.

Ditto for wage suppression. While the national press has finally grabbed this story with both hands, and we're all expressing shock and outrage, let's be clear: This was a huge victory for the bullies and the defenders in tech, Silicon Valley, and every industry. If this was the price of getting caught it simply wasn't steep enough to not be tried again. And this time, with more care around the paper trail.

If the banks were too big to fail, these companies are simply too rich to be punished. And that's terrifying.

Some fifty years or more into one of the greatest economic experiments in modern history, Silicon Valley is in an all-out fight for its soul between the disrupters who are viewed as the lifeblood of this place and the giant, gaudy, extreme successes of a system that worked too well for companies with hundreds of billions to lose.

It's not just the Tectopus. It's the acquisition strategies. The acquisition math for these Terminator-like public companies like Google and Facebook is dramatically more aggressive than anything we've seen before. Whatsapp is only valued at $19 billion because giving up 10% of Facebook means nothing if it remains one of the most dominant companies on earth. See also $2 billion for Oculus Rift – something that might, one day, in one weird sci-fi version of reality become a new ad platform. See also Google's swallowing whole of the robotics and hardware startup leadership.

It's not illegal, and VCs and entrepreneurs make out like bandits in these wildly-priced deals. But it's the same ethos of controlling what no one ever tried to control in the Valley. What we all prided ourselves on was uncontrollable – the potential for the young to eat the old.

There was one toll of the wage fixing era that didn't get any recompense today, one group of victims that hasn't gotten much attention: The startups who were struggling to compete in that era. As this trial has rolled on I've spoken to several shocked power brokers in the Valley who straddle these two lines of the giants and the tiny up-and-comers. And while many of them were, through investment or board seats or friendships, close to the scene of the wage theft crime, they had no idea the extent of it before these emails came out.

But it made one thing really clear: Why in this era, every big company was outrageously raiding startups just when they'd get a little bit of traction. As one investor phrased it to me, he could never understand why these big companies couldn't just recruit from one another, why were they always raiding talent from startups. We know the answer now: They absolutely couldn't. Not even once or they'd get a livid email from Steve Jobs threatening all out war.

We all know the biggest asset a startup has is its team, and that recruiting and retaining talent is the biggest challenge an entrepreneur faces. It's a cliche at this point in every founder interview. And during that era, they all had the handicap of having to be the only permissible recruiting tool for the big guys. We'll never know the toll from that.

I for one have no sense the giants have learned their lesson. The embarrassment and outrage will fade without anyone's business getting too damaged in the process. Of the four companies that took this case to trial, only Google's stock price is down since Ames' first report in January, by 10 percent, and there's no evidence to suggest that has anything to do with the wage collusion scandal. Apple, Intel, and Adobe are each up 2.7 percent, 6.3 percent, and 6.0 percent respectively.

Compare even the outrage that exists now to the public sentiment around Microsoft during its antitrust investigation. The once-beloved company was vilified and it acted alone in unfairly using a market position to tank a single competitor. This was seven companies – Apple, Adobe, Google, Intel, Pixar, Intuit and LucasFilm – conspiring against potentially a million users.

Until the last few weeks, Pando has been one of the only news outlets even covering this story. When Mark Ames covered the Summary Judgements at the end of March, a full two months after his first report on the case, he was one of just a small handful reporters there. What little outrage the modern business press could muster will be gone by next week.

Silicon Valley has always been about "hacking" the way business is done. When startups with a million dollars or so in capital, some code, a few programmers, and a dog do it, it's cute. When a multi-hundred-billion-dollar giant with endless cash does it, it's potentially horrifying.

[Illustration by Brad Jonas for Pando]