California, Here They Come

Last month, I briefly visited the San Francisco Bay area. I’ve been in the region numerous times during the past few years, and each time the impact of the Internet on it has been more pronounced. Beginning with the drive from the airport up US 101, the billboards let you know you are in the heart of the digital revolution–with more than half promoting some new dotcom service or technology.

San Francisco is, in effect, experiencing its second gold rush. Just as in 1849, the area is being transformed by a new industry rapidly creating wealth, with skyrocketing land prices, rapid development, and even faster-rising optimism for the future. And talent is being brought into the digital gold rush as fast as it can be found. A typical example: I discovered that a cousin of mine who formerly worked for Levi Strauss–a firm spawned by the first gold rush–has now switched to raising capital for Internet start-ups, in sums larger than I can imagine.

Washington, DC, seems pretty far away. Dotcom entrepreneurs appear to care about the churning of the federal bureaucracy about as deeply as the original 49ers probably fretted about Zachary Taylor’s cabinet. Isn’t this gold rush driven by technology, creativity, and venture capital anyway, and not by bureaucracy?

That’s a good sentiment. After all, entrepreneurs should be able to focus on creating wealth, rather than on Washington. Unfortunately, though, it’s more dangerous to ignore today’s bureaucrats than Zachary Taylor’s.

This point was brought home forcefully on April 3, when a federal court found Microsoft liable for antitrust violations. While not unexpected, the decision triggered a days-long free fall of tech stocks. Side-by-side headlines in the Washington Post told the story: “Judge Says Microsoft Broke Antitrust Law” on one side, “Investor Run From High Tech” on the other.

Ironically, the lawsuit which led to the antitrust ruling was conceived by many Silicon Valley firms as a tool against their Redmond, Washington competitor. Although the verdict was what they fervently wished for, their stocks ended up dropping over the next few days along with Microsoft’s.

This has left many observers frankly puzzled. One op-ed writer in the Wall Street Journal claimed the market had it wrong, saying, “Whatever you think about Microsoft’s failure to settle its lawsuit, it couldn’t be bad both for Microsoft and its rivals.”

Wanna bet? However it turns out, the Microsoft case is unlikely to be a one-time excursion by regulators into the affairs of the digital economy. Tasting victory in one part of the industry, antitrust regulators won’t stop there. And given the nature of the Internet economy–lots of products with dominant market shares (albeit for a short time), a large number of shifting and overlapping alliances among firms, and a rather rough style of competition–the regulators will be sure to find lots to attract their interest. While Silicon Valley lobbyists were celebrating victory, no doubt many general counsels were staying up late wondering if their firms are next.

At the same time, many in Silicon Valley are probably wondering whether the whole lawsuit was as unnecessary as it was harmful. Two days after the decision was announced, AOL’s Netscape–Microsoft’s supposedly beaten competitor–unveiled a new version of its browser. That same day, AOL and Gateway introduced a line of “Internet appliances” that provide access to the web without a PC, using the non-Microsoft Linux operating system.

It looks like innovation and competition from Silicon Valley is alive and well. The gold rush that has provided so many benefits to consumers is likely to continue–that is, unless Washington manages to stop