Picking Winners

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From our Swindon Correspondent:

From the Telegraph

The Prime Minister’s chief advisor Dominic Cummings has told civil servants that he is examining ways to help the UK build $1 trillion (£775bn) technology giants.

Mr Cummings emailed employees of the Department of Digital, Culture, Media and Sport (DCMS) this week and told them that he is considering “ways we can build [$1 trillion] tech companies,” according to a report in Business Insider.

Get out the way, lower taxes,
The UK has so far failed to build large, public technology companies at the same scale of American giants such as Apple, Amazon and Google, which have all reached valuations of $1 trillion.
So what? What does it matter if you have some huge giants or a bunch of rich minnows? What’s wrong with 40 companies of the size of ARM holdings ($25bn) instead of one Amazon? I’d wager that the people at ARM earn more per employee than Amazon.

And you can also apply this to 48 other states of the union. It’s only California and Washington State that have trillion dollar companies. Not Nebraska, New Jersey or Texas. And if you want to really drill down, you can’t even say that California produces trillion dollar companies, it’s an area of about 200 square miles near San Jose. Google is about a 15 minute drive from Apple. And this should make people wonder why.

The reason is mostly about network effects and history. People who made a lot of money setting up companies around silicon (like Intel) invested in the companies that made PCs and servers (like Sun Microsystems) and they invested in companies like Google. Either directly or via venture capitalist firms. And the companies form around the investors. And throughout history this clustering has occurred, from car companies in Detroit, to shoe makers in Northamptonshire, to the perfumes industry in Grasse. Maybe the remote work revolution will shift it, but I doubt it’ll shift from San Jose to Wolverhampton. Maybe more work goes to Sacramento or Bakersfield.
A no-deal Brexit could allow the Government to give state aid to British technology businesses, helping them grow through incentives as well as taxpayer funding.
Yes, it would allow that, It’s also a really bad idea, at a whole different level than propping up Rover or developing Concorde. Because, well, it wasn’t that hard back in the late 90s to start a search engine, or build a basic social network or setting up an internet retailer. I know people who worked in companies doing just that. They aren’t now, because software scales very easily. One small change to a website can be applied for almost nothing to millions of people, you get a small number of huge winners. The odds of picking the Brin/Page idea is almost zero. Hell, they offered it to their rivals for a few million and none of them bit. Does anyone think a bunch of lawyers, journalists or civil servants is going to pick the right one?

Mr Cummings is believed to have been a vocal advocate of the Government’s recent $500m investment into struggling satellite business OneWeb.

This is why you don’t get government types investing money. OneWeb is a dog with fleas. It hasn’t even raised all the capital to finish the network, while everyone is watching SpaceX launching 50+ satellites every few weeks and starting beta testing.
 
Rob Kniaz, a venture capitalist who has backed businesses such as Deliveroo and Darktrace, welcomed Mr Cummings’ proposal.

“If it means breaking EU laws to build these winners then so be it,” he said. “The future of the country will be defined by having some of these world-leading companies start here so I’m pleased to see someone near the top looking at how to remove friction along the way.”

Mr Kniaz is now big enough that he can jump through the hurdles for funding no doubt, but the government throwing billions at picking wins robs entrepreneurs.

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Spike
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Spike

Of course. “What does it matter if you have huge giants or rich minnows?” And again, how is a person who only won a popularity contest, or carried the winner’s sign in one, to make the decision? He can’t, any more than Donald Trump can know the USA needs its manufacturing jobs back or Joe Biden can know miners should “learn to code.”

Spike
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Spike

PS – Networking is real, locating in Silicon Valley not only to poach competitors’ employees but so everyone has a better social life. DEC, however, pursued economy by locating in a woolen mill 15 miles outside the Boston Route 128 fellowship, and eventually became anxious to sprinkle manufacturing plants nationwide despite logistics being a bit tougher. People will work things out.

Esteban
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Esteban

Please tell me I read this wrong, they don’t really have a “Department of Digital, Culture, Media and Sport”. They aren’t p*ssing away taxpayers money on that.

Bloke in North Dorset
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Bloke in North Dorset

Used to be known as the ministry of fun.

The “digital” side is quite separate and has some good technical people. Whether they should be there or not is a different story.

Bloke in North Dorset
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Bloke in North Dorset

I’d rather we had 1,000 £1bn companies scattered around the country.

Bloke on M4
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Bloke on M4

I think it’s a more resilient model. Like there’s loads of pharma, engineering, software and specialist manufacturing companies around Swindon. You’ve never heard of them. I hadn’t until someone asked me to do some work for them. People making medicines, false hips, parking meters, banking software.

It means it doesn’t matter that much that Honda is going. Or what happens with Intel.

TD
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TD

Politicians consider picking winners and losers to be part of their job description. Winners are expected to pay back for being so selected. Losers didn’t offer enough.

john77
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john77

Sounds horribly like Wilson’s “bright” idea 50 years ago. I can remember my then-boss telling me that Tony Benn managed to choose possibly the only North-Sea-Oil equipment manufacturer to fail and go bankrupt during the North Sea bonanza to back with government money.

Boganboy
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Boganboy

You’re reminding me of Churchill arranging for the British government to invest in the Anglo-Persian Oil Company to make sure that the navy had access to oil under British government control. While I’d argue that this meant that Britain had an expeditionary force ready to invade Iraq immediately war broke out with the Ottomans, the war itself appears to have resulted from a Turkish attack on the Russians. Of course it’s claimed that if the navy had intercepted the Goeben and the Breslau, the parties that wanted to keep their heads down and their mouths shut during WW1 would have… Read more »

Bongo
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Bongo

I remember the Tom Sowell line about how hard it would be to set up a system to create wealth. You would have to understand how it’s created in the first place. The best a government can do is observe some people are giving wealth creation a crack, and that some will be good at it, and to help them ‘government should get out of their way’.

TD
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TD

However, you have to have enough people vote to elect such a government. Right now the official view seems to be how do you stop such people from creating wealth?

Spike
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Spike

Dittoes! There are no votes for a gov’t that just “gets out of the way.” You can’t even point to it as an accomplishment. And no one cares enough to give massive campaign contributions for more of it. Minarchism is a casualty of “democracy,” in which we’re told we can vote for desired outcomes.

Trump, like Truman, is running against a “Do-nothing Congress” and dabbling in price controls and questionable new regulation, though his platform and most of his record is opposite.

rhoda klapp
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rhoda klapp

Anybody remember MITI? The Japanese ministry set up to push developments inm various areas of technology Japan was perceived to be behind in. Mainframe computers was one, and airliners.

MITI was, I recall, eventually done away with. Japan is still nowhere in mainframes (what?) and in airliners. AND Japan is doing Ok without them.

Quentin Vole
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Quentin Vole

Fujitsu got into mainframes, but they are (of course) a much diminished (though still highly profitable) sector of IT. Japan builds significant chunks of Boeing airliners, but that’s another industry that is now struggling.

rhoda klapp
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rhoda klapp

Fujitsu preceded the MITI initiative, but didn’t they just make plug-compatible IBM=like machines? Didn’t they buy Amdahl? This all from memory, so subject to error.

Plenty of countries get to build bits of Boeings. But not design them.

Quentin Vole
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Quentin Vole

I think that’s right about Fujitsu, they also bought ICL, but that was largely for the service operation. Mitsubishi have their own regional jet, a bit like Embraer.

Ian Baxter
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Ian Baxter

Was that regional jet not bought from Bombardier in Canada?

Quentin Vole
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Quentin Vole

Mitsi bought the Bombardier division that manufactures regional jets because development work on their own RJ wasn’t going too well.

thefat tomato
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thefat tomato

Tend to agree with the notion that thousands of Billion dollar companies is more resilient.
But then surely that is about ;
1)increasing the number of companies that can get listed
2)increasing the number of investors that can invest directly in said companies
The main reason tech companies have reached trillion dollar valuations is that they have perpetual quasi-intellectual property through trade secrets and effectively perpetual intellectual property through copyright.

Spike
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Spike

The question ought not to be which capital structure (big fish or little fish) is better; but how would policymakers arrive at the right answer? Surely not with unbiased analysis, as their world is resolving competing pressures from vested interests.

Gov’t currently investigates and threatens to break up companies that have gotten huge thru control of ideas – though it’s not unheard of to have gov’t on both sides of a struggle.

Bloke on M4
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Bloke on M4

“The main reason tech companies have reached trillion dollar valuations is that they have perpetual quasi-intellectual property through trade secrets and effectively perpetual intellectual property through copyright.” That’s not true. Google have their search engine as secret, so you can have that one, but Apple don’t have much that’s special in terms of copyright, patents or trade secrets, nor do Amazon. And perpetual? I remember when IBM had 60+% of the mainframe (which meant all business computing) market share. When nearly all personal devices ran Windows (Android, based on Linux is now bigger), using Altavista for search, when people were… Read more »

Spike
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Spike

That’s true. But it’s been true before. The real reason for Apple’s size is its nimbleness. We will see whether, before sales start to slump for the iPhone, Apple makes itself the dominant force in the next gigantic new industry built around a product we had never thought about.

TD
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TD

“…in the next gigantic new industry built around a product we had never thought about.”

And therein lies the crux of all the growing hostility by many big government types toward the tech industry. You just never know what they’ll come up with next without formal review and permission.

All that time and venture capital money wasted when Obama or Bernie Sanders already knew what was needed.

thefat tomato
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thefat tomato

I agree that Apple is overpriced and Android phones are excellent. Also agree that there are network effects, as you imply with proliferation of social network services, which don’t seem to gain traction, but maybe one will break through like facebook displaced myspace. But mostly I see that displacement as a generation shift, myspace generation, then the facebook generation, then the instragram generation, then the tiktok generation. And I am not a software engineer, but still pretty sure that NOT everybody can look up the source code for any of the Trillion Dollar Tech companies, can you send me a… Read more »

Spike
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Spike

I have no basis to believe Apple is overpriced, especially superior to the many people who have invested their own money in it.

Also disagree that the new technology waves are generational. The “MySpace generation” is mostly still alive, and still like to stay in touch with people, and they went somewhere. Their exodus caused the demise of MySpace; they are not orphans of it.

Bloke on M4
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Bloke on M4

It’s still the case that the iPhone is better than a £250 Android phone (and I should add, so is a £600 Android phone than a £250 Android phone). It’s just that the differences are so small now. Cheap phones used to have crap cameras, not so good battery life and feel slower. The expensive ones were definitely better. But it’s all marginal now. A Moto G8 Plus will get you 2 days battery with casual use, they have zero lag and this is what the camera is like https://www.youtube.com/watch?v=ipkU2EcBcy4 This is why I think a lot of having the… Read more »

Spike
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Spike

I mistakenly meant Apple the stock not Apple the phone above.

Mine’s a Samsung J7 ($80), just as miserly with the battery and the camera isn’t as good as my real camera but good enough to never want to carry a real camera. I like it so much that I bought a twin, a Walmart refurb for $39.

Quite right that no one is paying/should pay for novelty anymore; emphasizes my point that Apple’s strength is to segue to dominate an entirely different product next.

Bloke on M4
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Bloke on M4

“And I am not a software engineer, but still pretty sure that NOT everybody can look up the source code for any of the Trillion Dollar Tech companies, can you send me a link for the source code for Apple IOS, Apple OS, Microsoft etc. because I can send you the link for the IBM main frames designs when IBM had 60% market share.” I didn’t say you could just download it, I said there’s nothing particularly special about it. Like you can download Android as source and modify it and have your own phone OS. If you want to… Read more »

Charles
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Charles

If Dominic Cummings or Boris Johnson want to play at being venture capitalists, I’m perfectly happy for them to do so as long as it’s not with my taxes. If they were that good at it, and keen to try, why aren’t they billionaires themselves?