When Judge Richard Leon this week permitted AT&T and Time Warner to merge, he accepted that they were only “chasing the taillights” of Netflix and Amazon.
The result is a rush to consolidate. Comcast has already been emboldened to bid for 21st Century Fox, setting up a takeover battle with Disney. Barclays predicts that in five years’ time there may be only three media-telecoms conglomerates vying with a handful of tech-media giants.
The concentration might not hurt consumers immediately. The judge considered it plausible that AT&T customers would pay less for a better service. But over time, the whole bet is exploiting greater power. Investors in Netflix, for example, whose already highly valued shares have risen 150 per cent in 12 months, are counting on the company being able to eventually jack up prices to pay for rampaging content costs, which stand today at about $10bn a year.
Worrying about the whales is natural, but spare a thought for the minnows. You can tell a lot about the health of an ecosystem by dissecting the small fry, and they are already being hit by consolidation in various ways.
Venture capital, private equity and sovereign wealth money continues to pour into US technology, but it is not flowing into every part of the market at the same rate. In the first quarter of this year, there were 727 “seed stage” companies raising funds — typically a couple of million dollars to hire engineers and rent computing power — according to data from PitchBook and the National Venture Capital Association. That is the lowest number since 2011 and half the level of three years ago. The decline in dollars is much less pronounced: in common with the rest of tech investing, a smaller number of companies is snagging a greater share of funds.
That number of start-ups may still seem plenty, but the Silicon Valley model needs to discard a lot of duds in its ruthless search for winners. With such a dramatic decline, the chances of challengers graduating to the next stage and eventually taking on the incumbents is inevitably reduced.
In different ways, this has drawn attention and concern from some of the most serious investors in Silicon Valley. Roelof Botha, partner at Sequoia, has asked how any start-up can compete for talent when Google (itself once a start-up backed by Sequoia) is willing to spend more than $100m in bonuses for a single engineer.
Bill Gurley, of Benchmark Capital, has identified a worrying concentration of investors in slightly larger “Series A” companies — a “reoligopolisation”, he calls it — with only a handful of blue-chip VC firms prepared to devote the time and attention that younger companies require.
Meanwhile, the biggest unicorns such as Uber and WeWork can draw from the bottomless pit that is SoftBank’s Vision Fund.
Some context comes from Fred Wilson, co-founder of Union Square Ventures, who has suggested that the oddity is not now, but the 2012-2016 period when early employees of Facebook, flush from the 2012 initial public offering, rushed into angel investing. Fewer big IPOs today means less money is recycled but a new set of angels should emerge when Uber and others finally go public.
This may all prove another blip in a remarkably durable dotcom boom. But it seems as though the soaraway successes of the public tech giants and biggest private companies is masking problems lower down the food chain.
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