Silicon Valley Still IT Epicenter

By Deb Perelman  |  Posted 2007-08-24

Silicon Valley Still IT Epicenter

If you want to know how Silicon Valley manages to remain, after 16 years, the center of U.S. IT innovation and production, Roger Kay will take you first to Morocco.

"Many years ago, when I was traveling, I went to the central market in Marrakech looking for a drum," Kay, president of analyst company Endpoint Technologies Associates, told eWEEK. "At the edge of the market, there were some people selling a drum or two, but [the drums] werent that great, and the tables were filled with many other items. If you went further into the center of the souk, you could find 12 master drum makers selling in the same area, and there you had the best drums for great prices."

What it comes down to, Kay said, is the economics of a central marketplace. "If you want the best price and the best quality, you have to go where everyone is doing the same thing."

This, in short, is why Kay believes that even in an age when work is increasingly decentralized using wireless and remote communication technology, the Silicon Valley region of California is still where the technology magic happens.

It is also why, despite some ebb and flow in its IT job market share over the last 16 years, the Bay area has remained the national leader in IT employment. This was the focus of an Economic Letter released Aug. 3 by the Federal Reserve Bank of San Francisco, which looked at the evolution of IT employment trends and how they have affected the regions long dominance in this area.

Reviewing regional shares of the nations IT employment from 1990 to 2006 over five metropolitan regions, the report covered developments in the late 90s that led to the dot-com boom, the recession in 2001 and 2002, and a retrenchment and subsequent recovery in IT investment.

The Bay area remained the leader among metropolitan areas throughout these booms and busts, although market shares of other top IT centers have shifted. While Los Angeles has maintained its second-place ranking, its share of the nations IT employment has fallen. This has been the case in the Boston area as well, which has seen some of its IT employment base erode.

Most recently, the Boston area ceded its third-place ranking to the Washington, D.C., area, which has grown rapidly from its government contracting roots.

"In our own research as well, a lot of people were surprised when Virginia surpassed Colorado as a technology employment hot spot," Matthew Kazmierczak, an analyst at the Washington-based American Electronics Association, told eWEEK.

Read here about how the IT turnover rate signals a strong market.

Kazmierczak was referring to the AEAs annual CyberStates report, from which the Federal Reserve paper drew much of its research. "The D.C. area used to be just infrastructure for the government, but it has grown up beyond that to software as services," he said.

Seattle remained in fifth place, but its share showed a steady rise over the 16-year period.

In contrast, the Bay areas share of the nations IT employment has traveled a bumpier road, hovering around 8 percent through most of the 1990s before spiking to just above 9 percent in 2000, at the tail end of the IT boom. In the years since, its share has leveled off to 7 percent.

That said, analysts dont see Silicon Valleys smaller piece of the nations IT employment as a sign of the imminent demise of the tech epicenter.

"That slippage seems to be from the 2000-to-2001 height," said Kazmierczak. "In that period, things were gangbuster, and [venture capitalists] were spending crazy amounts —something like $67 billion, compared to $12 billion between 2002 and 2006.

"There were jobs, but they were not sustainable jobs; things were built with backing but little merit. We really didnt need a store that delivered nothing but pet food by FedEx. Its true that IT has slipped from the period before the downturn, but only a little, and its fairly flat now."

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A closer look at what has transformed the IT sector can shed light on the regional shifts in IT employment in the same period. While the industry was once associated with developing faster processors and PC production, it has evolved into a software and SAAS (software as a service) environment.

"Vendors in the enterprise are shifting more and more to software-based offerings, basically using the PC as the server or the storage device to sell value-added services and software. This trend has crossed the entire industry," said Charles King, an analyst with Pund-IT.

IT manufacturing also has become commoditized and globalized, shifting overseas to Asia and other locations where labor is inexpensive. This development has been reflected in the rising share of IT service jobs in the United States. Nearly three-quarters of Bay area IT jobs —and almost half nationwide —were in manufacturing in 1995.

In 2006, the Bay area was nearly balanced in its split of IT manufacturing and service jobs, while in the rest of the United States, IT has swung entirely in favor of services.

Areas that were more manufacturing-oriented, such as Los Angeles and Boston, saw their shares of the nations IT jobs slip, while those more services-oriented areas, such as Washington and Seattle, enjoyed sustained growth.

This shift benefited the Bay area as well. The regions growth in jobs providing Internet-related services such as Web portals and data processing gives it an edge over the rest of the country.

However, capitalizing on the manufacturing-to-services shift is not all that has kept Silicon Valley on top. The adaptability of technology also has played a role. Historically, other industries that became commoditized and then shifted offshore, such as automobiles in Detroit or manufacturing in Pittsburgh, did not come back from their downturns.

"IT is a product set that is much more adaptable to change than steel and automobiles," Pund-ITs King said. "You can only do so much with old-world steel stock. Computer and ancillary devices can be adapted to change as the demand does."

Also keeping the Bay area on top is its trifecta of a nearby urban area that is a magnet for young professionals, excellent universities spilling bright minds into the work force and the attention of venture capitalists.

"You need a combination of two things: money and talent. [You need] the money coming from the VC community—which is able to fund projects and see the vision of where these projects are going —and you need a ready supply base of labor. Most of these places have both," said Kazmierczak.

"If you have an inadequate supply of one, you need more than enough of the other," he said. "Some places have done a great job. Seattle has specialized in software and software as services, and they continue to grow from that. Austin [Texas] has a concentration of universities. Los Angeles has large amounts of labor, and its a huge city, but it doesnt have the concentration of people working together in the same field."

California itself has remained a friendly place for business to develop, with its legal arms open to entrepreneurs and the free exchange of ideas.

"You have to look at where the value has been generated," Kay said. "Californias legal environment is ideal for entrepreneurs; there are no noncompete laws. Plus, [there is] this idea of a central marketplace … Once a place is known as the center of development, all of the pros will want to be there," Kay said.

Yet, like all world-class regions, the Bay area has kept itself relevant by never getting too stuck in one mind-set or model of success. "Silicon Valley has stayed vibrant by continually reinventing itself," Kay said.

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