The Economic Geography of Neal Stephenson - Part 1

I'm getting my PhD in economic geography for 3 reasons: (1) I'm terrified of the real world and decided to stay in school forever, (2) that one scene from West Wing where they talk about maps and (3) Neal Stephenson. Stephenson is generally considered to be a sci-fi author. This is not particularly true, at least half of his books aren't so much science fiction as they are fiction about science, but you'll find his books shelved in the Sci-Fi section of bookstores.But the majority of his works, both his fiction and essays, can also be understood as economic fiction. His books' stories and plots examine the deep connections between changes in the economy, changes in technology, and changes in society. In this series, I'm going to go through examples of this the Collected Works of Neal Stephenson. In this post, I'm talking about The Big U, "Mother Earth...Mother Board", and Snow Crash. In the next post,  I'll discuss The Diamond Age and Cryptonomicon, before moving on the Baroque Cycle in the third post.

The Big U (1984)

This is Stephenson's first book, and it shows. There's actually no connection between this book — a parody of big universities involving hacking mainframes, nuclear waste, Rats of Unusual Size, and anarchy — and economic geography. But, the main character was a geography professor. I can't say there are many books featuring geographers who engage in gun battles with cultists in the middle of university student centers (authors, this is a problem. Fix it). Stephenson, by the way, got his degree in geography, though it is said he chose geography over physics because there was less fighting over the geography department's mainframe time.

Mother Earth, Mother Board (1996)

 This is an epic piece of long form journalism. Some consider it one of the best magazine articles ever. I consider it one of the best essays about economic geography ever written (not that this is a particularly competitive category.) It deals with topics as diverse as colonialism, commodity chains, and the physical manifestation of the internet. Stephenson follows the construction of one particular submarine cable that stretches from the east coast of the US, to Europe, around Africa, and then across the Indian Ocean to Japan.

What I love about this essay is how it avoids fetishizing the technology. It would be far to easy to only concentrate on what a technological marvel this cable is. But Stephenson doesn't do that. Instead he shows the complex network of workers, companies, technologies, and governments that surround the process of laying a 14,000 mile cable. From glass-walled board rooms in London to decaying government buildings in Cario to ex-pat bars on Lan Tso Island  to villages that make manhole covers in the jungles of Thailand. This isn't a story about a cable, but a web of social and economic relations that bring the cable into existence and put it exactly where it needs to go. This is the essence of modern economic geography.

But more than that, Stephenson shows the connections between today's submarine cables and the original telegraph cables laid by Lord Kelvin. These are not simply a case of linear technological development, but rather an example of the relationship between science, technology and colonialism. The development of the original telegraph lines wasn't just about finding the right kind of copper to send electrons down, it was about finding the right kind of rubber and  gutta-percha (a kind of sap) to wrap that copper in to protect it from the oceans and the right islands that the cables can land on and get their signals amplified. The British harvested this gutta-percha from their colonies in Malaysia, after transplanting the rubber trees from Brazil, and repeating stations were set up on the various islands the British controlled throughout the Pacific and Indian oceans. Without the empire, these wires could not span the globe to connect the empire.  One only needs to look at Guam to see that this is still important today.

I think this is a great example of modern economic geography is because it does more than just talk about where on earth the cables are (not to say that isn't a very interesting pursuit). It shows that these cables, these long, thin strands of ultra-pure glass that allow us to communicate at nearly the speed of light, don't exist in isolation. Rather, it's the outcome of processes that not only span the globe, they span class relations and government and corporate regimens. Cables not only have a physical geography, they also have a political, historical and economic geography. The technology can't be understood without understanding the social and economic contexts that produced it, and we now can't understand these contexts without reference to this technology.

Snow Crash (1992)

This book put Stephenson on the map, and ironically doomed him to always be known as a sci-fi author. Snow Crash was critical in the development of the cyber punk mythos and aesthetic. I won't try to summarize the plot, but only note that Stephenson pretty much predicted Second Life, though he maybe underestimated the importance of cat pictures and furries on the internet.

Snow Crash is a great example of combining the "distance is dead" hypothesis that was so popular in the 1990s and early 2000s and Thomas Fridman's The World is Flat obsession with globalization and free trade and brining it to its logical conclusion. The idea that captivated a lot of people was that the interent would be the end of geography. Now that we can communicate instantly, why does it matter where we work or where we live. Technology, combined with free trade and free migration, be the end of the city or the nation. Countries will specialize in what they do best, regardless of their physical geography.  ere's a quote from Snow Crash that that sums it up nicely:

When it gets down to it — taking trade balances here ‚ once we've brain-drained out technology into other countries, once things have event out, they're making cars in Bolivia and microwave ovens in Tadzhikistan and selling them here — once our edge in natural resources has been made irrelevant by giant Hong King ships and dirigibles that can ship North Dakota all the way to New Zealand for a nickel — once the Invisible Hand has taken all those historical inequities and smeared them out into a broad global layer of what a Pakistani brickmaker would consider prosperity — y'know what? There are for things that we do better than anyone else:

• Music
• Movies
• Microcode (software)
• High-speed pizza delivery

Snow Crash takes place in a post-nation-state world, brought about by global trade spread by technological development. The movement of economic activity online, combined with encryption and untraceable digital currency (a prominent point of his 1999 book, Cryptonomicon), decimated nations' tax base, shrinking them to near non-existence. In place of the state, Franchise-Organized Quasi-National Entities (FOQNUEs) arise. These are essentially gated communities on steroids, communities with their own private police forces, security systems, and application processes. Along side the FOQUNEs are franchies, many owned and operated by the Mafia© or the Crips©. After all, when the government started to shrink, they also decided that it wasn't their business to tell people what drugs that could or could not use, or what monopolies could or could not be abused. Private organizations now take care of all of that.

Snow Crash's universe is a pretty good, if silly, example of Roll Out and Roll Back Neoliberalism. Neoliberalism is a pretty popular word nowadays, it refers to a political strategy and regime aimed at reducing perceived barriers to trade and business. This takes the form of trying to shrink the role of the state by eliminating non-core activities (like social welfare and education) and privatizing what remains. The idea is that the private sector, which is directly responsible to market demands, can provide these services much cheeper than governments, which are responsible to voters and political blocs. Of course, this doesn't work out in practice, as many people can tell you. Roll Out neoliberalism happens after an economic crisis like a currency devaluation, someone comes in (usually the IMF or World Bank) and agrees to bail out a country in exchange for structural reforms like the removal of tariffs or labor protections. Thus, the neo-liberal system is rolled out on a population that isn't in a position to resist it. After the bailout, the role and functions of government are slowly chiselled away, parts of it are privatized and the government has less and less control over the economy, giving actors in the private sector even more power to enact even more neoliberal reforms.

There's a great quote midway through the book that illustrates this change of mentality

They say that in D.C., all the museums and the monuments have been concessioned out and turned into a tourist park that now generated about 10% of the Government's revenues. The Feds could run the concession themselves and probably keep more of the groos, but that's not the point. It's a philosophical thing. A back-to-basics thing. Government should govern. It's not the entertainment industry, is it? Leave entertaining to Industry weirdos — people who majored in tap dancing.

It's not hard to imagine this occurring in the Snow Crash Universe. The increasing use of digital currency (which is discussed both in Cryptonomicon along with short stories like The Great Simolian Capar) undermines the dollar and decimates the tax base. For what ever reason, it's not politically possible to enact a value added tax. To make up the difference, the government prints too much money and hyper inflation ensues. In response, the government decides that it needs to fundamentally change itself, getting back to its core functions (in the book, this core function is producing massively inefficient computer code). Everything else, the highways, the national parks, are sold off for hard cash and law and order is turned over to private investors. What used to be free of change, like driving on a road or having police show up to solve a crime, now requires a fee or payment. This is what Naomi Klein talked about in her book The Shock Doctrine: temporary economic, social, or environmental crises are used to justify neoliberal reforms.

That thing they said woud happen just happened

I don't want this to turn into a RIM blog, the world already has enough disaster blogs. But, RIM just announced that they'll lay off 2,000 workers, out of a total workforce of 19,000. There is no word on what jobs are being eliminated — developer or lawyer — or where the lost jobs will be (have been?) located, but considering that the bulk of RIM's workforce is in Ontario, it is not a large leap to guess that many engineers and developers in Waterloo will get the axe. The question immediately turns to how these layoffs will affect the city of Waterloo. As I've said before, Waterloo isn't completely dependent on RIM in the way that Armonk is dependent on IBM,  Redmond with Microsoft, or getting away from high tech, as Bentonville is with Walmart. It's not a one horse town, but it is a town that had a really big horse that pulled a lot of....economic development plows (I'm starting to regret this metaphor).

From my perspective, the concern isn't that if RIM declines, Waterloo  becomes a new economy version of Hamilton, Ontario, a city who's primary industry (in Hamilton, that was the steel industry) left for greener pastures. Waterloo has a great deal of resilience, in both it's high tech and traditional industries. The main concern is making sure that the talented people who are laid off are able to stay in the region, by either getting new, local jobs or starting their own company. Waterloo's talent pool is deep, but talented people can swim to where ever they want. Most of the time, they don't because moving is pretty painful. But a lost job presents an opportunity to try out another city.

So, with that in mind, here are a few crazy ideas to try to keep the most talented people in the region, in the region.

• RIM should donate several thousand dollars for every employee laid off to Communitech, the local economic development agency. Communitech is going to be crucial for both re-skilling (it's a terrible word, but it's the only word that works) for entrepreneurship, or, if the stories about working at RIM are true, de-program them in the hopes of successful reintegration to society.  This isn't a cure all, but OCRI in Ottawa did see some success during Nortel's collapse. The key is to remember that no everyone wants to build the next RIM. Some people just want to run a consulting firm that will pay a decent salary without sucking up all their time.
• Given RIM's difficulty in attracting app developers, it might not be a bad idea to try to convince laid off programmers or developers to become full or part time app developers. No one knows the ins and outs of the blackberry environment better than someone who has been diving in it for years. One would hope that RIM has been conducting market research that shows potential niche applications that have a sizeable potential market. Of course, selling $1 or $2 apps will not equal a RIM salary, but app production provides a nice way to bide your time and hack while living off what is hopefully a very big severance check.
• The idea of a Grave Dancer Fund is interesting, but I'm not sure I think it'll work. Then again, I'm a terrible investor, all my money is tied up in a 1.5% savings account because I think CDs are too risky an investment. The idea here is to create a venture fund that specifically targets people laid off from RIM: get in on a ground floor that's so low there's magma seeping in. However, these layoffs are happening soon, in the next 2 months soon. Is that really time for people to get over the shock of losing their jobs, find a product, start prototyping it, and do all the other things startups need to do? It has the potential to work, but it also has the potential to subsidize some very long post-job vacations.

Skype, Silver Lake, and fragile ecosystems

It looks like some evil things were done. Well, not that evil, but maybe some people who maybe deserved some money didn't get some money. Long story short, instead of paying employees with actual money — money that could be used to buy things — Skype granted them the option to buy the company's stocks. Stock options, if you will. Most startups have more potential than actual money. Stock options allow them to convert some of that future potential, the potential that they will eventually go public or be bought for hundreds of millions of dollars, for work today.  The company essentially gets to pay a worker less today and in exchange that worker gets the option to own a small fraction of the company, which they can in turn possibly sell for lots and lots of money, and become rich and buy mansions on warm, sandy beaches. Stock options are an essential part of the startup ecosystem. High-tech, growth-oriented startups don't exist in a vacuum. They depend on a veritable ecosystem or environment of other actors, institutions, norms and rule that help new firms get founded and existing firms grow. When one part of that ecosystem gets out of balance, it can destroy an entire eco-system.

What appears to have happened at Skype is that buried deep, deep, deep within the employees' contracts was a clause allowing the company to buy back those stocks, on demand, at their original price. Just before Microsoft finished acquiring the company, the company activated this clause, stripping many of their employees of millions of dollars worth of stock options. The details are not entirely clear at the moment, but it appears that this strategy was orchestrated by Silver Lake, a private equity company that had bought 65% of Skype for 1.9 billion dollars back in 2009 and has now just sold for 9 billion. This strategy means that Silver Lake's investment wasn't diluted by employee's stock options.

When these buyouts happen, employees maybe make a lot of money. Maybe some of these people quit their jobs to start their own company, financed through their stock earnings (Paypal got its start this way, so did Skype). Or maybe they use that money to become angel investors, investing in very early stage companies to help them get ready for growth. This helps perpetuate an entrepreneurial ecosystem. Successes produce more successes; the lucky ones become mentors and investors for new generations of entrepreneurs. When something like this whole Skype thing occur, it damages the ecosystem. I would imagine that things like this would make it much harder for small firms to attract the best people with stock options. There will be fewer angels and fewer entrepreneurial mentors.

Something very similar happened in Ottawa back in 2001 (Note, this discussion is coming from a chapter that I wrote in a forthcoming volume of Advances in the Study of Entrepreneurship, Innovation, and Economic Development, so you know, run down to your local library and camp out there till it comes out). Ottawa of course used to be the center of Canada's tech boom. Not only did large firms proposer there, but so too did smaller, entrepreneurial ones. Their growth was fed by the presence of a well-oiled network of entrepreneurial angels. Angel investors financed the early growth of the firm, and venture capitalists (some from Ottawa, even more from outside Ottawa) came in to catalyze their growth even further.

When the dot com crisis happened, a lot of these small, venture financed firms nose-dived in a hurry. Many venture capitalists quickly engineered the fire sale of these companies, and thanks to the structure of the deal they kept most of the money. The original entrepreneurs and the early stage angel investors either lost money or at the very best broke even. This has devastated Ottawa's entrepreneurial ecosystem and a decade later it still has yet to recover. Angels either lost money or their investments are still tied up in stalling companies. Entrepreneurs who were expecting a a big payout to either help them start a new firm or invest in others came away with nothing.

Here's what one angel investor in Ottawa told me:

The angel community in town, the word I could use to describe it is tired. There’s a lot of angels that made lots of investments over the last 10 or 15 years, not a lot of it is paid back yet. A lot of those investments still look really good but they’re still investments, not returns. So there’s a lot of people waiting on the sidelines now saying ‘I’ve put a lot of money into this and I’m going to wait until I get some return before I jump back into the pool.’ (Interview O125)

Three things happened in Ottawa. One, current angels lost their money and pulled back on future investments. Two, a new generation of angels were effectively nipped in the bud and never really developed. Three, and most importantly, the new generation of entrepreneurs lost trust in venture capitalists. I can't even count how many times I heard the phrase "vulture capitalist." They refuse to even consider talking to venture capitalists. In turn, this slows their growth substantially and reduces the chances that they'll be acquired, which in turn means that even fewer of them will be able to act as angels and investors for future entrepreneurs.

All of this is to say that entrepreneurial ecosystems are very fragile. Acts like using an obscure clause to claw back stock options at one company can reverberate for years. Now do I think that this one act will destroy the amazing ecosystem that is the Silicon Valley entrepreneurial scene? No. But I do think that for the next few years, employees will be less willing to accept stock options and demand more pay. This hurts the growth potential of very small firms, and may start a cycle the turns into something bigger.

The takeaway from this is that it's not just about the entrepreneurs. When talking about how to foster entrepreneurship and firm formation on a region, we also need to think about the employees who will sacrifice pay and stability to work at a startup. We need to think about the angels who provide them with early stage capital, and the venture capitalists who help them take it to the next level. These actors and more act in a complex economic and social network. This network is far easier to disrupt than it is to build.

The future of RIM and the future of Waterloo

Research in Motion, the maker of the venerable BlackBerry cellphone has had a hard time as of late. Another disappointing quarter has left their shares at a 5 year low, and speculation about their future has already started, with rumors of buyouts and declines swirling around. This is a continuation of their annus horribilis which has already seen the lack-luster launch of the Playbook which was supposed to revitalize the company's cutting-edge image, but didn't. But this post isn't about RIM's market opportunities or new strategies. I don't have a clue about this; In full disclosure I'm writing this on a Mac Mini, with an iPad (*sigh, iPad 1) and iPhone 4 charging next to me. What I do want to think about is what a declining RIM means for the future of entrepreneurship the Kitchener-Waterloo region. Startup North got the ball rolling on this topic yesterday. They argue that while RIM has pumped maybe 100 million dollars into Canada's entrepreneurial economy over the past several years, through acquisitions and and venture investments, Google has done the same amount in only the past 12 months. Furthermore, most of RIM's acquisitions have been located in Toronto, not Waterloo. In terms of pure dollars and connections with startups, RIM has very little happening in Waterloo. Though its headquarters is located there at it employs thousands of developers and engineers locally, to a lot of entrepreneurs' it's essentially a blackhole that sucks up all the talent. There are very few, if any, spinoffs from RIM. One of the local startups that is in anyway associated with the BlackBerry ecosystem is Kik, who made a pretty damn popular instant messaging system for the Blackberry. But, they're now they're being sued by RIM. While Kik now supports iOS and Android, they've left the BlackBerry behind. If anyone knows about other spinoffs from RIM, I'm all ears.

(I should add that my PhD dissertation focuses on the local social and cultural factors that underpin high-tech entrepreneurship in Canada. As part of this research, I've interviewed dozens of entrepreneurs in Waterloo, with a specific focus on their relationship to RIM)

I wouldn't say that RIM is hurting local startups. Many of the entrepreneurs I've talked to have said that they often see RIM senior execs at Communitech (the local economic development group), and that they give out advice and are generally nice people. I mean, this is Canada after all. RIM also helps startups indirectly as well. A lot of the entrepreneurs I talked to — from bleeding edge microchip designers to graphic designers working out of their basements — said that just being associated with RIM by being located in the same city is an advantage. I would argue that much more than the University of Waterloo, RIM has been the main reason why Waterloo is now synonymous with high-tech.

If RIM continues its decline and becomes a mere Nokia or Motorola, Waterloo's image will be tarnished. If RIM can no longer take on the cream of UW's co-op crop, Waterloo's imagine will decline and fewer of the world's best computer scientists will come to the city. Other startups like SandVine and Desire2Learn show that Waterloo is more than just RIMtowne, and the continued presence of Google and Microsoft in the region prove that the city is and will be one of the hubs of raw computing talent in Canada, if not the world. But, a declining RIM and the continued rise of startups in Vancouver, Toronto and Montreal might sap talent from the region.

However, back over at StartupNorth, there was the thought that maybe RIM's coming layoffs will be a boon for entrepreneurship in the region. This is what happened in Ottawa. As Nortel died its slow death, the laid-off engineers and developers started their own businesses, creating a renaissance of entrepreneurship in the city. That's true, but it's also not. It's true that even as Nortel slid into nothingness, entrepreneurship grew in the city (see figure)

But, the bulk of these firms were little IT consulting shops set up not by entrepreneurial world killers who wanted to take on Cisco, but by older engineers who didn't want to move. They had houses with mortgages (and this was not a fantastic time for selling your house), they had kids in schools and husbands and wives with local jobs. Leaving Ottawa just wasn't an option for some people. And Ottawa is a pretty great place to be an IT consultant. Some of them went straight back to consulting or contracting for Nortel, and over time many of them starting working with the federal government.

But many of these firms are very successful, they're not the kinds of firms that lend themselves to regional economic development or growth. They don't make products, so their revenues only grow with their billable hours. They don't hire many people, and they're not great platforms for new entrepreneurs to hone their skills. Rather, by and large they are lifestyle firms that generate a good income for the owner, and maybe a few other employees. Not that there's anything wrong with this, only that this isn't entrepreneurship in the way that many people imagine. Afterall, these weren't died in the wool entrepreneurs, these were workers at a very large company who were suddenly laid off. They want a nice comfortable life, they're not necessarily willing do 18 hour days or 100 hour weeks any more.

Waterloo is less of a great place to be an IT consultant. Sure, if RIM lays off people, it'll need to bring on contractors, but there are few other big players in the region that need large amounts of IT outsourcing done. Certainly, there's no federal government presence like in Ottawa. There is just not a whole lot of room in the local economy for a lot of small IT shops.

So, what will happen if RIM continues its decline, leading to large layoffs of highly skilled developers and engineers? The majority will find other jobs locally, no doubt of that. Google, Microsoft and the rest would love to scoop up that talent for their mobile divisions. Some of the younger and unattached ones will leave for greener pastures: Toronto, Vancouver, Montreal, San Francisco or Boston. This will be the biggest loss for the community. But those who do stay will may create their own startups. But the vast, vast majority of these will be lifestyle firms with very little growth potential. I will be very surprised if out of, say, a 500-person layoff from RIM, if even one truly innovative startup will result.