McNealy on the decline of Silicon Valley

Scott Mcnealy, ex-CEO of Sun was quite pessimistic about Silicon valley and future of the tech  economy in general. He said he is asking his kids to learn Mandarin. Here are some of his views:

• I’’m skeptical that the green jobs are going to drive the recovery. So far, the track record’s been terrible. That’s going to be a challenge for the people here who stuck their neck out to go green.
• Then there’s social networking…  I don’t think social networking is the jobs driver.
• It’s all moving to Asia and other places where there are lots of technical engineers who are willing to work at a more reasonable salary because they don’t have to spend $3.5 million on a home and pay half of it to taxes.
• I don’t think there’s start-up activity in real [research and development] and manufacturing. There’s a lot in entertainment, virtual and social networking. But I’m not sure it’s really going to change the quality of life in a positive way for a lot of people.
• It’s not the Valley. It’s the overhead and the overhang, the clouds brought in by Sacramento and Washington, D.C., the regulations, the deficit and the misallocation of resources. It’s all of those things.
• The biggest issues with the Valley are local, state and federal governmental overreach and overregulation. It’s over-pensioned, over-unionized and over the top.
• I started writing about the decline of Silicon Valley in 2008 when people I knew, that we practically born here, started leaving and going back to India and China. Many have amassed fortunes in a couple of years there, when it was unattainable here, despite the fact that they had degrees from top notch American universities and they were in the land of opportunity.

Scott makes very good points here. The manufacturing has left this area long time ago, but the innovation engine is very active in the valley. What I observe in the software start-up sector, I do not see any other place with the energy, creativity, and dynamism as here in the valley. Scott’s style is to provoke with some extreme statements. I remain highly positive on the future of the valley.

The new iPad rival – Xoom

So Apple got a lot of skepticism when the iPad was introduced last year, including the name itself. Then they sold 15 million of them in nine months. Now everyone has to bring a iPad thingie to the market and they come in varieties of shapes, sizes and operating systems. Blackberry has Playbook. HP just introduced TouchPad based on WebOS, the Palm operating system. The latest one and arguably the best one seems to be Motorola Xoom, that might give some competition to the iPad.

To begin with, Xoom is more expensive ($800) than a 32GB iPad. Of course you can get it for $600 with a two-year contract with Verizon. The size and shape are exact replica of an iPad. The big differentiator is the operating system, Honeycomb – Google’s Android 3.0 specially designed for the tablet instead of the phone. At the hardware level, Xoom deploys dual core processor (smoother game animation), a five mega-pixel still camera in the back that can take HD video, a front camera for video chat, stereo speakers, a HDMI jack for easy connection to TV (good for PPT presenters), and a battery life of 10 hours with video play. It is expected to link to Verizon 4G cellular network later.

Honeycomb can be a real iPad competitor. It is more powerful and more complicated. Android has fewer applications compared to the iPad (60,000 of them). But the application cottage industry for Android is growing fast, as it will support tablets of all sizes and shapes and vendors. It has advanced features like speech recognition and GPS navigation.

So we will have to wait and see what the new iPad 2 brings later this year. Xoom’s camera is a big add-on. One thing is clear. The year 2011 will see more intense tablet activity than last year.

A new bubble?

We all remember the Internet bubble back in 1999-2000 era. Start-ups were getting huge valuations. The joke then was – if you are 27 years old and not a millionaire, then you are a failure. All you needed was a sign-board saying “new internet company” and stand on Sand Hill Road. Several cars will stop and within hours, you should have a check worth millions as investment.

This is an exaggeration of course. Jeff Bezos of Amazon even said – we spell profit as “prophet”. Then the bubble burst one day and the debris was huge. Hundreds of B2C and B2B companies went belly up.

Now after a decade, we see a bit of a bubble again. The landscape is somewhat different. There is no rush to an IPO, which was the only way to make the founders and investors very rich. Now there is a secondary market that buys stocks off the founders and early employees (and some investors as well). So we see Zynga planning to raise $500m. Groupon raised a huge amount. Kleiner Perkins which missed out on the hottest social networking companies, by focusing on green technology, decided to make up for lost time. Hence they invested $120m in Twitter and also $35m in Facebook at an astronomical valuation of $52B. It sounded like KP just wanted a check mark on its portfolio by investing in Zynga, Twitter, and Facebook. In the latter two, they have no board seat nor significant influence on the management. Everyone seems to come up with another “discount coupon” type company after the success of Groupon. While there is no technological differentiation, it’s an “early-to-market” advantage in building a brand. Zynga, a virtual gaming company, is valued around $10B, while Twitter is rumored to be values at $4B. Google was offering Groupon $6B as a purchase price.

When president Barack Obama visited the Silicon Valley last week, he had dinner with a power group of 12 leaders. Besides the leaders of Cisco, Yahoo, Apple, Oracle, and Genentech, there were the CEO’s of Facebook, Twitter, Netflix, and Google.

For an enterprise software guy like me, it is hard to understand the valuations of social networking and gaming companies. By building a huge clientele, these companies make money on advertising. However, sustainability is another issue. The original Facebook founders and investors are worth obscene amount of money, even before its IPO next year. The only company likely to go for an IPO this year seems to be Linked-In. With huge investment dollars pouring in, these companies do not feel the pressure of seeking an IPO soon. But we may see another mini-bubble building up. So caution is the keyword.