Silicon Valley Watcher - Former FT journalist Tom Foremski reporting from the intersection of technology and media

Silicon Valley Innovators Warned About Hyperscale Tech Companies

Posted by Tom Foremski - February 17, 2017

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We are in an era of “Hyperscale companies” such as Amazon, Facebook, Google, Microsoft and Apple that limit opportunities for startups warns Sam Altman, head of Y Combinator,  Silicon Valley’s influential investment group, accelerator and educator. 

The warning was part of a long 2017 YC Annual Letter:

Altman wrote: “We’re now in the era of hyperscale technology companies…
Companies like Amazon, Facebook, Google, Apple, and Microsoft have powerful advantages.”

“I expect that they will continue to do a lot of things well, have significant data and computation advantages, be able to attract a large percentage of the most talented engineers, and aggressively buy companies that get off to promising starts."

This situation “is unlikely to reverse without antitrust action.” 

His warning is carefully worded because Altman knows that advocating for government intervention is unpopular in Silicon Valley. He points to opportunities for startups where these hyperscale companies “are naturally weaker.”

The majority of startup founders and investors he says,  do not fully understand hyperscale’s “powerful advantage.”

Foremski’s Take: [I’m a big fan of Sam Altman, the 31-year old head of Y Combinator group after moderating his presentation at the excellent Startup Voodoo conference in St Louis.]

It’s good to see someone as influential as Sam Altman raising this issue because it is a topic I’ve been writing about for nearly three years:  Scale versus innovation: The peril to Silicon Valley’s future | ZDNet.

We see massive late stage VC deals where the race to scale fastest and become the largest is the primary goal over any consideration of other values.  

It’s because in digital economies the first company to scale has the potential to push nearly everyone else into the margins very quickly.

In traditional markets a company would expand by establishing offices or stores in new regions and countries — a slow multi-year process that gives competitors time to respond. But in digital markets a well-funded competitor can quickly scale to a dominant global position in weeks. 

Hyperscale AI wins…

Scale matters in the very hot world of AI and machine learning. Hyperscale companies have access to massive amounts of computation and massive data sets to educate their AI. 

David Galbraith, a systems architect notes the disparity in a recent piece: AI tl;dr – Medium

Given the hardware, employee and data costs, the forefront of AI is in large corporations rather than startups and universities.

He expects opportunities for startups in the form of agile partnerships between large corporations but the timeframe is narrow. Galbraith notes that the large Internet platforms

“have been earlier to open up software tools and labs, largely in order to acquire scarce talent and insights into use cases that could indicate where to build or acquire data assets."


Innovation derailed or delayed?

Fewer AI startups will mean less innovation in a very important area that Y Combinator has identified as revolutionary.  Altman said Y Combinator’s OpenAI project will reveal significant progress in 2017 “for the benefit of humanity.”  

Scale is not a very interesting story but it’s how you win in digital markets. Silicon Valley is where startups from elsewhere will come to scale their companies — it won’t be the birthplace of original ideas as it was in the past. 

Scale is not illegal and that also applies to “hyperscale” companies. Altman’s chosen remedy of antitrust action implies these giant tech companies have all crossed some legal lines. Government action of any kind especially with the Trump administration is highly unlikely and would be incredibly lengthy in execution.

Startups will have to learn to live in this new era of hyperscale technology companies. They will have to rein in their ambitions and investors will need to understand why and keep funding. 

There’s still a lot of opportunities ahead. Sam Altman reminds us we are in the early years of “the most significant technology revolution in human history.”  And there are massive benefits to humanity ahead of us.

“It’s an exciting time to do what we do.”  

2017 YC Annual Letter

Scale versus innovation: The peril to Silicon Valley's future | ZDNet

 AI tl;dr – Medium

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