Silicon Valley’s Long History of Government Codependence
The revelations that U.S. technology giants may be assisting the National Security Agency seem to contradict Silicon Valley’s image as a bastion of libertarian thinking.
But such cooperation would be nothing new: A century ago, the federal government signed a lucrative defense contract with Silicon Valley’s original technology company.
That was Federal Telegraph Co., founded in 1909 in Palo Alto, California. Before 1913, the company had worked on a wireless system that it hoped would compete with wired network of Western Union, which once wielded the sort of industry power later associated with AT&T Inc. (T) Federal Telegraph established a network that included stations in Phoenix; Kansas City, Missouri; and Chicago.
Unfortunately, the West Coast’s mild weather had given Federal Telegraph’s management false optimism about its ability to expand its network east from San Francisco, Los Angeles and San Diego. The summer of 1912 brought disaster, as users experienced dropped connections because of thunderstorms and accompanying static in the Midwest. The resulting exodus of customers forced the company to seek other opportunities.
The most promising was supplying the government. In 1913, Federal Telegraph received a contract to build transmission equipment for the U.S. Navy’s Panama Canal Zone wireless station. Since its victory over Spain in the 1898 Spanish-American War, the U.S. government had sought a way to safeguard its overseas possessions. Just before the outbreak of World War I, Congress authorized the creation of a chain of wireless stations, including the Canal Zone, Hawaii, Puerto Rico and the Philippines. Each station would become another source of revenue for the young telecommunications company.
Federal Telegraph began by seeking a private-sector customer base. Yet only when it became an industrial extension of U.S. foreign policy did Federal Telegraph grow into a million-dollar enterprise with a workforce of 300. By the 1920s, the State Department was supporting Federal Telegraph’s $13 million contract to supply telecommunications equipment to the Chinese government.
In a pattern that continues today, the federal government helped American companies as they pursued a major share of commercial opportunities in the Far East.
The government’s diplomatic efforts on behalf of Federal Telegraph failed, however. Subsequently, the company was acquired by International Telephone & Telegraph (ITT) and moved to New Jersey in the 1930s.
Government support of Silicon Valley soon spread to industries beyond telecommunications. Defense contracts spurred the growth of the instrument-maker Hewlett-Packard Co. (HPQ) not long after its founding in 1939. Semiconductors followed a similar pattern in the late 1950s. Fairchild Semiconductor -- some of whose managers later founded Intel Corp. (INTC) -- depended on defense contracts for most of its revenue during the first five years of its existence. The government provided significant work (and resources) to these companies before their commercial business took off.
The same was true for the region as a whole. As markets developed for computers and work stations, Internet applications and video games, and venture capital became more available, Silicon Valley shifted to a model that relied less on government.
During the northern California region’s formative years, the federal government was what Martin Kenney, a professor at the University of California, Davis, calls a “price insensitive lead customer.” In that role, it helped incubate Federal Telegraph, Hewlett-Packard, and Fairchild Semiconductor, which, in turn, led to later generations of companies -- including Apple Inc., Google Inc. and Facebook Inc. -- that were far less reliant on government contracts.
Nonetheless, if the allegations of the NSA whistle-blower Edward Snowden are correct, the 21st-century technology giants have proved that they, too, are entwined with government.
(Stephen B. Adams is an associate professor of management at the Franklin P. Perdue School of Business at Salisbury University.)
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