Has Facebook ruined Silicon Valley or just changed it?

Regardless of whether some investors thought it was a damp squib instead of a moon-shot, the Facebook (s fb) IPO was a landmark event in Silicon Valley terms — a multibillion-dollar share issue by a company that has become a global behemoth virtually overnight. While that may have given thousands of entrepreneurs and investors big ideas about the future, there are those who argue Facebook’s success has also done something else: namely, changed Silicon Valley culture for the worse. One of the most recent critics to advance this theory is Bill Davidow, a venture-capital veteran who says the social network has altered the values that tech entrepreneurs used to hold dear.
Davidow, who was trained as an electrical engineer, is a partner emeritus at Mohr Davidow Ventures, one of the oldest VC firms in the Valley with about $2-billion in investment funds under management. The author of several books such as Overconnected: The Promise and Threat of the Internet, he also has a long history in the technology sector — including early roles at Hewlett-Packard (s hpq), General Electric (s ge) and Intel Corp. (s intc) Mohr Davidow, which focuses on IT, life sciences and clean energy, has invested in companies such as Brocade Networks, 23andme and Rocket Fuel.

A business based on the exploitation of users?

In a piece he wrote for The Atlantic magazine, Davidow talks about how Silicon Valley culture has changed as result of companies such as Facebook and Google, and in particular how he sees the focus of many companies changing when it comes to the consumer. In the past, he says, large companies like Intel and HP had large customers, and they had to serve them well or risk losing them. Newer Silicon Valley companies are different, he says:

[T]he valley is no longer as concerned about serving the customer, and even sees great opportunity in exploitation. We are beginning to act like the bankers who sold subprime mortgages to naïve consumers.

As giants like Google and Apple (s aapl) and Amazon (s amzn) and Facebook battle for supremacy, Davidow says, their main weapon is the ability to lock web users into their ecosystems and then exploit the data provided by consumers, along with the other elements of this unbalanced relationship. He doesn’t mention it, but a great example of what I think Davidow means is the way that Facebook routinely seems to change the terms of its offerings primarily for its own benefit — including the way it recently made facebook.com email addresses the default for all users without telling anyone.

Would older Silicon Valley companies have treated their customers this way? It’s hard to imagine how — but then, their businesses were very different, in a time before social media took over the world. Davidow argues that this kind of behavior is almost required in today’s environment, since everyone is after the same goal: accumulating as large a user base as possible, so that it can be monetized in some way. If Google can’t generate what it needs with Google+, then Facebook wins — and if Facebook can’t make inroads into mobile, then Apple wins. As Davidow puts it:

When corporate leaders pursue wealth in the winner-take-all Internet environment, companies dance on the edge of acceptable behavior. If they don’t take it to the limit, a competitor will… and when you engage in these activities you get a different set of Valley values: the values of customer exploitation.

If you are not paying then you are the product

The fundamental shift behind what Davidow is describing is that consumers are not really Facebook’s customers — as more than one person has pointed out, they are actually the product that is being sold. Since users don’t actually pay cash for the services they get, they have to pay for them in some other way, and in most cases it’s with the information they provide by using the network. So Facebook devotes huge amounts of its time and resources to figuring out how to get users to share more, and that’s what Davidow sees as exploitation.
Facebook isn’t the only company the veteran VC accuses of doing this: he also mentions how Zynga (s znga) founder Mark Pincus has confessed to doing “every horrible thing in the book” to get revenues, and bragged about designing “compulsion loops” into products to keep customers engaged. And he slams Apple for building a walled-garden ecosystem that gives it the power to deprive customers of choice — a power he says it exercises aggressively — and Google for having a culture that “condones shamelessly violating consumer privacy.”
Are Davidow’s criticisms just a lament from the old guard about the rise of new firms with different values, or does he have a point about the world that Facebook and Google and Apple have created? Probably a bit of both. But it’s worth considering whether the benefits we get from free services are worth the trade-offs we make in order to get them, and what kinds of incentives the success of Facebook and others are creating for the companies that follow them.
Post and thumbnail images courtesy of Flickr user Mark Strozier