Economist: The new geography of the IT industry, in: The Economist, July 17th 2003 2003.

As the information-technology industry's emphasis is shifting—from innovation to execution—so is its location

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The new geography of the IT industry
As the information-technology industry's emphasis is shifting—from innovation to execution—so is its location ...


Information technology

The new geography of the IT industry

Jul 17th 2003
From The Economist print edition

As the information-technology industry's emphasis is shifting—from innovation to execution—so is its location

CONSIDER three snapshots of the IT industry today. First, look at the centre of the business at the turn of the century—Silicon Valley. Parts of this high-tech region to the south of San Francisco, which were buzzing with activity only three years ago, are coming to resemble an industrial wasteland populated by squirrels, racoons and “for lease” signs. In the city of Santa Clara, where almost half of all office space is vacant, rents run at around $1 per square foot, compared with $6.50 in late 2000. Some larger tenants in the city are even sub-letting space for nothing, just so they can share the service costs.


Ready for the next wave of innovation

Yet American IT firms should not be lulled into thinking that there are areas where they are safe from overseas competition. Other countries will eventually have their own global IT heavyweights. A recent lawsuit over an alleged patent violaton between Cisco and Huawei, a Chinese telecoms-equipment maker, may be a sign of things to come. Although Huawei appears to have taken liberties with Cisco's intellectual property, the Chinese firm could grow into a dangerous low-cost competitor to the once dominant Silicon Valley company.

Is the Valley destined to become the Venice of the information age? Don't bet on it yet. The region has gone through similar cycles before—and adapted successfully. When PCs became commodities in the 1980s and were made more cheaply elsewhere, Valley firms, led by Sun, developed more sophisticated workstations.

These days, the Valley is again moving up the technology stack. Sun is trying to become more of a software firm, by developing software that automates the management of data centres, for example. Oracle wants to become the Microsoft of enterprise software, by offering a complete suite of business programs. And after its successful merger with Compaq, HP looks increasingly like IBM.

The trend towards ever cheaper and more powerful computer systems may also help the region. Google, for instance, is best known as a great online search-engine, but the Valley firm is just as notable for its inventive use of cheap hardware. Its super-efficient infrastructure of thousands of servers allows it to keep introducing new services, most recently Google News, which automatically aggregates news on the web.

John Doerr, a Google board member and a partner at Kleiner, Perkins, Caufield & Byers, the region's foremost venture-capital firm, hopes that a successful Google share flotation will throw open the window for technology listings. It would certainly get things moving again in the Valley. There are other promising start-ups waiting to float, such as, a firm offering web-based CRM services.

Yet the best hope for a comeback is for the Valley to ride what many expect to be the next big wave of innovation after the internet: the convergence of bio-, info- and nano-technologies. Each holds much promise in its own right, but together they could give rise to many new kinds of products. The Valley is well equipped to catch this wave, thanks to its “innovation habitat”, says Doug Henton, president of Collaborative Economics, a local think-tank. It is a habitat that is good at incubating not just IT start-ups. Already, the broader region (which includes Berkeley and other cities on the east side of San Francisco Bay) has the largest concentration of public biotechnology firms in America. According to Ernst & Young, there were 74 in 2001, compared with 48 around Boston and 31 around San Diego.

Yet such a habitat can also be a disadvantage, argues Donald Sull, a professor at Harvard Business School, in a recent paper analysing the rise and fall of the region around Akron, Ohio, where America's tyre industry was once concentrated. Initially, says Mr Sull, tightly knit social and professional networks allow knowledge to flow, which boosts innovation. But as an industry grows up, these networks also become a liability: increasingly set in their ways, they make a cluster less flexible and its firms more vulnerable to competition.

Valley folk insist that such collective inertia could never overcome them. Rather, they like to compare themselves with Yellowstone National Park two years after an immense forest fire. Yes, there are lots of scarred trees. But there are also many fresh green shoots springing from the ashes.