Silicon Valley Leaves the Light On

Internet companies can, in theory, locate anywhere that telephone and power lines reach. So why did so many consolidate in Silicon Valley?

Unfortunately, trend-following played a role — too big of a role — and now it’s time to pay the piper, who also happens to be the local utility.

Rolling blackouts serve as a dramatic wake-up call on the issue of electricity consumption and cost, but the high cost of power is not what will hurt e-commerce and other Internet companies in the long run. Other costs will.

Competitors in Texas or New Jersey, anywhere outside the sphere of cool that hovers atop Silicon Valley, are slowly but surely gaining a price advantage.

Recipe for Disaster

The odd thing about electricity is that it’s often forgotten when listing the key ingredients for running a successful Web business. However, hosting companies think about it all the time, always exploring new options for backup power so that they never go dark. They need a constant, heavy-duty supply.

While e-commerce companies can use far-flung server farms located in less costly regions, the decision to congregate in one expensive location is coming back to haunt.

Don’t think the energy crunch just applies to California. So far yes, but many observers in other high-tech hotbeds are holding their breath — and the switch.

Massachusetts, for example, deregulated its utilities hard on the heels of the Golden State’s move to do so. As a result, the state may be poised to follow California’s footsteps down the path of higher prices, if not outright shortages of supply.

Don’t Go West

The bottom line is that the power drain was all easily avoidable. In fact, turning away from the flock and striking out into new territory sooner would have paid additional dividends for high-tech companies.

That labor shortage we’ve heard so much about in recent years? It’s artificial in some ways because all of the companies that need workers are searching the same Silicon Valley haystack for the same needle of a worker while other haystacks around the country — some packed with potential — go unexplored.

Money Matters

There may have even been financial benefits to striking out on one’s own. The conventional wisdom was that Silicon Valley, Boston, New York’s Silicon Alley, the Research Triangle and Washington, D.C. — to name a few — were the places to be because that was where the money was.

But there are investors who don’t follow the pack either. Some of them are still actively searching for investments in second-tier cities and in placesthat need an economic shot in the arm.

Places like Pittsburgh, Pennsylvania and small town Ohio, where the steel belt has rusted considerably. Places like Massachusetts, where shoe and clothing factories have long since stopped running.

And guess what? Many of these cities have old, abandoned factories that offer everything a dot-com needs: Plenty of juice and proximity to other infrastructure, such as telephone switch stations and major highways.

They’ve got rents a fraction of those in the hotbeds, too.

Cooler Heads

But to take advantage of the open door of opportunity, dot-coms will have to tear themselves away from the ideals of cool.

Having a non-Silicon Valley address on your letterhead may be a red flag to some, but that will be nothing compared to the sting that comes with overpaying for basic necessities. Those costs that will have to be passed on to shareholders and/or customers sooner or later.

Some employees will balk, you say? True. In the market fervor of 1999 and part of 2000, that was a good excuse for staying put.

But things are changing, in case you haven’t noticed. About 40,000 Internet employees are out of work, with more joining the pink slip party every day. Those workers who considered the idea of moving out of Northern California for a new job uncool just 10 months ago might be warming considerably to the idea.

Wake-Up Call

Sometimes it takes a cold splash of water to get people to realize the most basic facts.

Nothing is more basic than this truth: Without enough electricity, the entire digital economy collapses. If electricity costs are high enough, your competitors will, eventually, eat your lunch.

The dot-com shakeout has changed a lot of things about digital culture. Suddenly, cash burn rates and longevity are more important to new employees than foosball tables and free Mountain Dew.

Envy Over

That leaves one major attitude adjustment to go. There’s already talk that Intel will build a new chip plant elsewhere. Finally, everyone outside of a hot spot can now comfortably get over any location envy.

When the exodus really hits Silicon Valley, those who committed to paying through the nose will have no one to blame but themselves.

What do you think? Let’s talk about it.