The Obama Surprise

THE OBAMA SURPRISE by Michael S. Malone

Be careful what you wish for.

No segment of American industry did more than high tech to elect Barack Obama as President of the United States. The 2008 Obama campaign will go down in history as having made better use of digital technology than any before it. From a hugely powerful website to the reproduction of the “Hope” poster on thousands of Facebook pages to the President’s own ‘tweet’ on election night, Silicon Valley played a crucial role in the success of President Obama . . .and Silicon Valley naturally assumed that the new President would do the same in return.

It hasn’t quite turned out that way. . .

The first surprise to many Valleyites is how innately anti-entrepreneurial the new Administration has turned out to be. Candidate Obama looked like a high tech executive – smart, hip, a gadget freak – and he certainly talked pro-entrepreneur. But the reality of the last six months has been very different. One might have predicted that he would use the best tool in his economic arsenal – new company creation and the millions of new jobs those firms in turn create – to fight this recession. But President Obama has instead appeared to be almost exclusively interested in Big Business as the key to economy recovery.

By comparison, almost every move the new Administration has made regarding entrepreneurship seems to be targeting at destroying it in this country. It has left Sarbanes-Oxley intact, added ever-greater burdens on small business owners, called for increasing capital gains taxes, and is now preparing to pile on cap-and-trade, double taxation on offshore earnings, and a host of other new costs. Even Obamacare seems likely to land unfairly on small companies.

Entrepreneurship has been the single most important contributor to the economic health of this country for at least a century now – and if you were going to systematically destroy that vitality, you couldn’t come up with a better strategy than the one Washington has put in place over the last six months. Indeed, you can make the case that the sole contribution the Obama administration has made to entrepreneurship in America to date is to force all of those millions of unemployed people to desperately set up their own businesses in order to survive.

You might imagine that this would be upsetting to all of those Valley tycoons who played such an important role in underwriting, advising and legitimizing Candidate Obama. But you would be wrong.

What I think is most misunderstood by outsiders is that the electronics industry is not monolithic, and that its players do not all share the same interests. And nowhere is this divide greater than between start-up companies and the giant, well-known corporations – even though the latter, just a few years before, were start-ups themselves.

For example, you may think that the competitive challenge that big tech companies fear most is from other big tech companies. You know: Apple v. Microsoft, HP v. Dell, Cisco v. Juniper, MySpace v. Facebook. But in fact, that isn’t the case. Sure, those are dangerous competitors; but far more threatening is that clever new start-up that seems to appear out of nowhere. That’s the threat that wakes up Fortune 500 tech CEOs at 3 a.m. That little start-up not only competes with you, it can render your entire business – even your entire industry – obsolete and you don’t even see it coming. Think desktop publishing and the printing industry, the iPod and the music industry – and just look at the terror that Twitter seems to be creating at Google and Facebook these days.

Once you understand this dynamic, a lot of the paradoxical recent business behavior in high tech suddenly becomes explicable. For example, why did the big tech companies embrace such regulations as Sarbanes and stock options expensing – even though they would cost them billions of dollars with no obvious gain? And why would they support a Presidential candidate who seemed to have little understanding of, or sympathy for, market capitalism and business?

Because it was the best strategy to crush the start-ups.
And for the most part, that strategy has worked. High tech has only seen a handful of new companies go public in the last five years – compared to hundreds per year before that. Less noticed is that this means most hot new start-up companies, instead of enjoying an IPO and becoming rich enough to compete full-on against the big boys, now can only grow to a certain size then offer themselves up to be bought by the giants. What had once been hugely valuable competition has now been reduced to a farm system for acquisitive mature companies. [And a side benefit has been the near-destruction of the venture capital industry, which big business always described as ‘vulture’ capital because it drew away their most talented employees.]

Now you see why the tech world joined the Obama team early on in the campaign. Not only did Senator Obama seem like their kind of guy, but each camp saw in him the President they wanted. The entrepreneurs thought they were getting a fellow entrepreneur, and big business thought they get a confederate in taking out the competition.

No company recognized the advantages to this strategy better than Google. Having just gone public, and seeing competitive threats coming from every direction – not just from established companies and start-ups, but also jealous overseas regulators (i.e., the EU) – it saw in Candidate Obama a potential ally and protector. It’s no coincidence that Senator Obama’s first important Silicon Valley campaign appearance was at Google headquarters, or that Google was a major player at the Democratic Convention. There was even talk that CEO Eric Schmidt would be joining the Obama Administration in some key role.

But that was in November. It’s June now, and while the big companies have largely gotten their wish when it comes to new start-ups – as I’ve said, entrepreneurship is under assault in the U.S. like we have not seen in our lifetimes – the tech giants are now discovering they may have made a devil’s bargain. The Administration’s brute force handling of the Chrysler and GM take-overs, seemingly violating contract law in the process; its mutterings about managing executive bonuses; its creation of industry czars without the need for Congressional approval; and the prospect of endless debt, economic stagnation and runaway inflation waiting in the wings – all have to be making the same CEOs pretty darn nervous these days . . . and asking themselves if they’ve made a terrible mistake.

And that’s only the start. Intel, already getting hammered by a billion dollar-plus fine by the EU, is now facing a similar punishment from the U.S. Justice Department. And poor suck-up Google, which tried to be the President’s BFF, now finds itself facing multiple Federal probes regarding its recruiting policies and its book database settlement – not to mention a Justice Department that appears to be opposing it on net neutrality.

And you’ve got to figure that’s only the beginning. No doubt right now somebody in the White House is looking at the low levels of union membership in high tech and vowing to do something about it. And don’t forget anti-trust. And woe be it to any shareholders or creditors of a big tech company that finds itself in financial trouble as this recession drags on – you saw what happened to Chrysler’s shareholders and creditors.

High tech CEOs are supposed to be the smartest people you’ve ever met. And most of them are. But when it comes to politics and dealing inside the Beltway, experience has taught me that these men and women are fools, dupes and rubes – and too arrogant to realize it. They thought they were electing one of them, and someone pliable enough to help them succeed while at the same time crushing their competition.

It hasn’t worked out that way. President Obama has proven to be not only shrewder than these tech execs thought, but also far more dogmatic and old-fashioned in his world-view than they ever imagined. If, somehow – and almost everything I know about economics argues against it – the Obama economic plan works, these executives will emerge at the head of battered, compromised, but victorious corporations. But if it fails, these same execs deserve a sizable share of the blame. That’s what you call a lose-lose scenario – and they’ve brought it on themselves.