Is the average taxpayer subsidizing those wonderfully, successful Silicon Valley companies much too much?


GPS Satellite

GPS Satellite

The typical Silicon Valley company has attached itself to the coattails of taxpayers or older established companies, all in the name of disruptive technologies.  Without these tax incentives, would these companies be so valuable, or, worst, ever get off the ground?

Let’s look at Uber and AirBnB.  Both companies rely heavily on geolocation.  Geolocation comes predominantly from the GPS signals from orbiting satellites and, secondarily, from the wireless radio towers. What are the costs related to GPS?  The DoD, originally tasked to place these satellites, spent over $12 billion.  There are 24 satellites orbiting the Earth at the distance of 11,000 miles. Mount Everest, as a comparison, only measures over 5 miles tall.  And these satellites lie on fixed orbital paths. With the $12 billion as the original investment, the U.S. government spends over US$500 million annually to maintain those birds. The annual GPS maintenance costs charged to Uber ($66 billion valuation 2016) or AirBnB ($30 billion valuation 2016) are zero.  Meanwhile, the average taxpayer foots that annual bill.

Let us be more accurate.  The GPS signal is just part of the process for geolocation.  To get better accuracy, one needs the telecom radio towers transmissions. The average radio tower costs anywhere from $250K to almost a $1 million (depending on capacity).  Sprint, a smaller carrier, operates over 70,000 towers without which smart cell phones would not function.  By taking the median cost for a tower times the total numbers, Sprint has invested over $3.5 billion.

What the costs to Uber and AirBnB?  Again, zero. The carriers allow these companies to access the geo-positional data through APIs. The software companies overlay that data over their own digital maps and use the data derived from both GPS and towers to pinpoint positions.  What seems peculiar to the average analyst is how AirBnB and Uber can be valued as high or even higher than the companies that invested in satellites and towers, which require substantially more employees and engineers to manage than software apps.

Let us not stop here: Tesla.  Tesla/Solar City also derives additional tax subsidies to the tune of over $4.9 billion dollars.  The results are interesting: Tesla $70k electric cars are priced beyond the average consumer, whose taxes fueled Musk’s companies. Meanwhile, Tusk’s personal wealth increased to over $10 billion through these two solar and car companies.  How? every car he sells has tax incentives to the tune of $7.5k federal and state related credits (California) each.  And when the federal subsidy ends, then California will kick in more subsidies.  (Wonder why California taxes are so high? Ask Musk.) His Nevada lithium manufacturing facilities also obtained huge state and local subsidies.

We should also bring net neutrality in this conversation.  The fact of the matter net neutrality suggests that any Internet company pays the same to access the internet as any individual.  It means that any company can send billions of emails without incurring additional costs.  Another way of looking at it in terms of a company mailing envelopes through the post office.  Traditional companies spend so many cents per each envelope it mails through the post office; the more mail, the higher the bills.  Not so for technology companies sending out emails or other transmissions through TCP/IP protocols. Yet those emails must be transmitted through traditional fiber optic cables costing billions. Sea-Me-We III, a submarine cable originating in Asia and ending in Europe, cost over $1.5 billion to build. Across the Atlantic, the submarine cable costs over $600 million.  And maintenance is anywhere from $25k to $50k a day.  The average cost to an Internet company? Pennies, if at all.

We all hear about the great, disruptive technologies from these companies. And the wealth that these founders have accrued.  In fact, the Google co-founder, Sergey, has enough money to buy out half of his local town, Los Altos, California.  All these technology companies have surged the average cost for housing in California to over $500k.  And, still, the average taxpayer doesn’t benefit.

Another point of view is to see the true economic costs what happens when subsidies die or infrastructure investments are demanded. In the case of Hong Kong, the government ceased providing tax subsidies this year for electric cars. The result—no electric car sales. Another example is telecom infrastructure.  Google complained about the lack of fiber optic development in the U.S. by telecom carriers. Google thought it could do better than Verizon’s 170,000 employees (Google has over 40,000).  So it decided to deploy terrestrial fiber, appropriately named, Google Fiber, in a Kansas town. The result? Yes, the fiber was fast and speedy. But it stopped deploying beyond two to three towns in Kansas. (Imagine if Google were in charge in deploying fiber optic networks nationwide, if none existed, what would have happened.) When renamed Alphabet, Google has decided to sell off that fiber optic network. It, therefore, demonstrated that it was more profitable to run its business with net neutrality. Even recently, the Chinese military has refused to share the GPS signaling to DiDi (the “Uber” industries) in China to implement self-driving cars.  Without GPS, those cars will be aimless. (We can safely assume that the Chinese military has a budget that it wishes not to share with the private sector.)  Does this mean that DiDi has to launch its own satellites (each satellite costs about US$50 million without including launching costs)?  Will the satellites change DiDi valuation since it must invest substantial capex, diminishing its margins?

These events confirm one thing: net neutrality, tax subsidies, and incentives have all supported much of Silicon Valley’s economic success at the expense of taxpayers, not by some crazy, disruptive technologies where few benefit economically.  And then see why these companies have huge valuations per employee.: https://jrzarco2001.wordpress.com/2016/09/25/does-technology-wealth-trickle-down-to-others/

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About Juan Ramón Zarco, SVVGP 胡安•雷蒙•扎尔科

Juan Ramon Zarco, 胡安•雷蒙•扎尔科, Silicon Valley Ventures Growth Partners llp, Hygieia Healthcare Technologies Company, AllRest Technologies LLC, Crimson Growth Partners LLP, jrzarco2001@yahoo.com, is an experienced as CxO, General Counsel and Secretary to public and private companies with global operations. Established track record of producing practical, revenue-focused solutions. As Counselor and Secretary, demonstrating vision, integrity, and sound business judgment, to CxOs. Managed complex, strategic transactions, M&A, contracts support, PE Financing, IPO, SEC compliance, Corporate/HR governance, IP licensing, Budgeting, Staff, outside counsel management, International market access strategies, Domestic & foreign government relations and advocacy. Creative in designing and implementing market access strategies. Practices law beyond conventional model with low-overhead and project-based fees. Effective at managing departments, formulating marketing strategies, balancing budgets, and implementing cost-saving measures. Extensive in-house and private practice experience, advising clients on commercial, corporate, international business, and technology law and policy. http://www.docstoc.com/video/89135472/make-your-business-an-international-presence; http://www.youtube.com/watch?v=fx5gijf3yoc For Sprint, he managed iDen international development in Southeast Asia, Middle East, and Africa, and contractual issues with Verizon. In Private Equity, he worked with Pegasus in vetting international investment deals and interim President for portfolio companies, such as Data Foundation, a data storage company, handling marketing, strategy, fund raising, and accounting. Before Pegasus, Mr. Zarco, as CLO and V.P. of Corporate Development, played a principal role in the structuring, international expansions for 2 telecom companies, U.S. Cable Group and Viatel, Inc. in financing and M&A deals exceeding $200 million. Mr. Zarco earned a J.D. from NYU Law School, M.B.A. from Cornell, and B.A. from Williams College; is fluent in Spanish, Portuguese, French, and German, with working knowledge of Russian, Arabic and Japanese.
This entry was posted in Capital and Management, Management and Capital, Strategy, Technology, Valuation. Bookmark the permalink.

3 Responses to Is the average taxpayer subsidizing those wonderfully, successful Silicon Valley companies much too much?

  1. BradK says:

    This is an incredible article but I’m left with a few questions:
    1) Are you implying that we should do away with netn and tax subsidies and incentives?
    2) That there is zero economic benefit to the public that is using SV tech? (I could see zero economic GAIN.)

    Or are you simply pointing out the connection between these things and the need to recognize the additional factors involved in attaining ‘disruptive techs’?

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