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Silicon Valley Is Already Dead

Waterloo's tech boom went bust, revealing the rise of the intangible economy.
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The School of Architecture at the University of Waterloo is located in Cambridge, Ontario, next to the Grand River. (Photo: Jamesandra/Wikimedia Commons)

The School of Architecture at the University of Waterloo is located in Cambridge, Ontario, next to the Grand River. (Photo: Jamesandra/Wikimedia Commons)

Coming out of the collapse of the steel industry in the early 1980s, Pittsburgh turned to software. The Chicago Tribune journalist Richard Longworth reporting in 1985:

"Pittsburgh is two economies side by side," said Jay Aldridge, director of Penn's Southwest Alliance, one of the nonprofit alliances of business and government that is overseeing the shift. "There's the traditional 19th Century economy that's in steep decline, and there's the 20th Century economy that's in steep incline.

"We see Pittsburgh as basically a center for the exporting of knowledge," Aldridge said.

"It's Silicon Valley for chips, it's Boston for electronics and it's going to be Pittsburgh for software," predicted Dr. Angel Jordan, provost of Carnegie-Mellon, the intellectual pivot of this turnaround.

With the full benefit of hindsight, Silicon Valley hasn't been about chips for two decades. As for electronics, Japan dominated. Pittsburgh and software? Insert laugh track. That 21st-century economy never materialized.

Jordan's economic analogy is awkward. The production of silicon chips and electronics is part of the 20th-century economy that was and is in steep decline. Literally, to be the next Silicon Valley is to be the next Detroit. There's no renaissance in hardware.

Speaking of the next Silicon Valley as the next Detroit, take a gander at Waterloo, Ontario:

Waterloo was never the most obvious tech hub. A tight-knit city of 120,000 (350,000 if you lump in nearby Kitchener, which most people do), it was founded by 19th-century Mennonites, and was known primarily for decades as a middle-class manufacturing town that was often overshadowed by Toronto, its cosmopolitan neighbor 50 miles to the east.

That changed in 1984, when Mike Lazaridis and Douglas Fregan, two engineering students at the University of Waterloo, started a company to develop a wireless data transmission device. That company, Research in Motion (RIM), would spend the next few decades changing the way the world communicated. Its first big customers, which included Wall Street banks and government agencies, loved what the BlackBerry promised to give them—secure connectivity and around-the-clock e-mail access, which resulted in increased productivity and fewer crossed signals. More and more customers signed on, and by 2005 or so, the BlackBerry was synonymous with serious business. RIM sold a million devices a year, then a million in a month, then ten million in a quarter. ...

... Much of RIM’s early success, locals tell you, can be traced to the University of Waterloo, a school that has become the Stanford of Canada due to its massive engineering department and record of placing “co-ops,” or paid interns, at huge tech companies. From RIM’s early days, the school provided the company with a steady stream of engineering talent. (RIM hired so many co-ops, the story goes, that it became jokingly referred to as the “University of RIM.”) In return for their labor, the students got four-month stipends, and—perhaps more alluring at the time—their own BlackBerrys with free, unlimited data plans.

“There were two groups of people in the world who had unlimited data plans in 2007: Wall Street bankers and University of Waterloo students,” says Ted Livingston, a former BlackBerry co-op who is now CEO of Kik, a mobile messaging start-up.

In return for the company’s generosity, Waterloo was fiercely loyal to RIM. Nobody in town carried Nokia or Motorola phones—to do so would be “like driving a Honda in Detroit,” says David Yach, RIM’s former chief technology officer—and the releases of new BlackBerry devices were greeted with regional fanfare. Even in recent years, a tech blogger who criticized BlackBerry could expect to hear from more than a few Ontario die-hards, who would remind him that every company has bumps in the road and that, yes, BlackBerry would be back.

The production of a BlackBerry device is no different than that of a Detroit automobile, or a Silicon Valley chip. If somewhere else could do it better, Waterloo was screwed. Apple iPhone. Waterloo was screwed. But Waterloo didn't die like Pittsburgh did. Why? The University of Waterloo.

Late in the decade of the 2000s, talent did not flee Waterloo as it did in 1980s Pittsburgh. Yet RIM is today's U.S. Steel. Tech would come to Waterloo not in search of scarce workers. Tech would come to Waterloo to benefit from the real boom of the intangible economy:

On July 31, the U.S. Bureau of Economic Analysis will rewrite history on a grand scale by restating the size and composition of the gross domestic product, all the way back to the first year it was recorded, 1929. The biggest change will be the reclassification—nay, the elevation—of research and development. R&D will no longer be treated as a mere expense, like the electricity bill or food for the company cafeteria. It will be categorized on the government’s books as an investment, akin to constructing a factory or digging a mine. In another victory for intellectual property, original works of art such as films, music, and books will be treated for the first time as long-lived assets.

It’s a great idea, if late. The BEA has the 20th century economy down cold. It can tell you about personal income trends in Anchorage, Alaska, or America’s annual output of rubber products and plastics. Now the agency is putting more attention on R&D—the lifeblood of the 21st century economy—by moving it from an experimental “satellite” account into the heart of measured GDP.

The U.S. Bureau of Economic Analysis endeavors to capture the intangible economy. When labor makes widgets, the economic output is tangible. When labor makes knowledge, the economic output is intangible. When RIM struggled to sell widgets, the University of Waterloo continued to make knowledge. For the most part, the regional economy never skipped a beat. Go figure.