The Silicon Valley Conspiracy or Why Big Business Always Eventually Breaks the Law If Left Unchecked

Plot Device

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From the front cover of the May 5th edition of Bloomberg Business Week magazine....

It seems that Apple, Google, and the other titans of Silicon Valley had a gentlemen's agreement between them in which none of them would competitively hire each other's talented employees out from under them. Their goal was to keep wages suppressed and overall HR costs down. And it worked. It has also been asserted that it led to the stifling of creativity.

Some might say "The market will take care of itself. Let businessmen do whatever thy want." But in this instance, "the market" of marketable skills was being manipulated, and wage competition between talented programmers hamstrung. And if it's true that creativity itself was dampened, what does that say about the US's ability --both now and in the future-- to compete in the global marketplace?



http://www.businessweek.com/article...he-silicon-valley-antitrust-hiring-conspiracy


Apple, Google, and the Hubris of Silicon Valley's Hiring Conspiracy

by Paul M. Barrett and Brad Stone -- May 01, 2014

... It was March 2007, and [Steve] Jobs had received an e-mail from Eric Schmidt, then Google’s chief executive officer and a board member at Apple. Schmidt wanted to let Jobs know that Google would terminate “within the hour” a recruiter who’d dared to contact an Apple employee in violation of a “do not call” policy between the companies. Schmidt abjectly apologized, adding: “Should this ever happen again please let me know immediately and we will handle. Thanks!! Eric.”

Jobs forwarded Schmidt’s groveling e-mail to an Apple subordinate. His cover note said, in its entirety, “:)”.

This telling material—and there’s oh, so much more of it—comes from the voluminous court record in the recently settled Silicon Valley hiring antitrust case. On April 24, Apple, Google, Intel, and Adobe Systems ran up the white flag in a class-action lawsuit filed on behalf of more than 64,000 programmers and engineers who accused the companies of conspiring not to raid one another’s workforces in the interest of stifling competition and suppressing wages.

The tech aristocrats, who from 2005 through 2009 secretly forged a series of no-recruit agreements, suspected what they were doing wasn’t quite kosher. Schmidt at one point instructed a junior executive to disseminate the pacts “verbally,” because, he explained, “I don’t want to create a paper trail over which we can be sued later.” But why did they think they could get away with it? And now that they’ve been exposed, what does the episode tell us about the nature of a corporate culture built on the labor of a relatively well-paid but evidently exploited cohort of digitally talented serfs?...
And if you're wondering how much money was involved in this out of court settlement ... it was mere pennies, $324 million. Another slap-on-the-wrist judgment from the American justice system.
 
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robjvargas

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Not much to add to this. Collusion is a corruption of the free market every single time it's employed.

And I doubt this suit caught all of it.
 

Filigree

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Not to downplay it, but my family was stuck in this mess from 1993 to 2007 (Intel). The allegations are true, part of the case has already been settled, and part of it is still happening.

What isn't terribly shocking is that such deals are commonplace in other industries. I've lost track of the non-compete clauses from former employers, barring me from working for competitors for set periods after my own contracts are up.
 

Plot Device

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Not to downplay it, but my family was stuck in this mess from 1993 to 2007 (Intel). The allegations are true, part of the case has already been settled, and part of it is still happening.

What isn't terribly shocking is that such deals are commonplace in other industries. I've lost track of the non-compete clauses from former employers, barring me from working for competitors for set periods after my own contracts are up.


It's not the same thing for an employee to knowingly sign a no-compete contract. This was bring done on the sly without the knowledge of any of the employees --not directly at least. This wasn't out in the open. And that's the point.
 

ShaunHorton

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The main goal of any company is to make money for the people running it. The more money the better, and if they can cut corners and keep things under the table to make even more money, most of them are more than happy to do it without a care for the other people that might be hurt by it.

Of course, there are always exceptions, but generally speaking, companies are run by greed. The bigger the company the greedier they get. Right up to the people who make more money every year than they could realistically spend in their lifetimes.

It's also rather sad that once they have that much money they can afford illegal practices, because it costs them less money to pay the fines than it would to conduct their business on the up and up.
 

raburrell

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Not much to add to this. Collusion is a corruption of the free market every single time it's employed.

And I doubt this suit caught all of it.

Seems like more of a feature than a bug.

But yes, sucky.
 

kuwisdelu

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It's not the same thing for an employee to knowingly sign a no-compete contract. This was bring done on the sly without the knowledge of any of the employees --not directly at least. This wasn't out in the open. And that's the point.

To be fair, it was pretty much an open secret. Anyone who follows tech has known about this for years.

This is the first time I've heard about it framed in terms of keeping salaries down, though, considering most of the people who would be poached probably already have a good salary.

My understanding is this would still do nothing to prevent an employee quitting and seeking employment elsewhere, or being the one to approach another employer. It was to prevent cold-call poaching.
 
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Dommo

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The tech companies involved should have gotten raked over the coals a lot worse than they did.

The real solution would have been to pay the engineers/programmers what the market rate was. That could have been 2 or 3x the salaries everyone was getting. If they'd have done that, then the poaching would have stopped because eventually the companies involved would reach an equilibrium where they couldn't outbid each other.

This is how a capitalistic labor market is supposed to work. Instead what we got were companies making untold billions, and colluding to force wages down.
 

kuwisdelu

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The real solution would have been to pay the engineers/programmers what the market rate was. That could have been 2 or 3x the salaries everyone was getting.

Do we have evidence that this was the case? I can't find any.

I've heard about this multiple times over the years, and this is the first time I've heard such a dire financial spin put on it. My impression was always that it was less about money and more about retaining talent against surprise departures, not about screwing employees.

Were employees not free to seek better offers on their own?

If the pay was so bad compared to the "market rate", why didn't they leave of their own accord?
 

robjvargas

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Were employees not free to seek better offers on their own?

If the pay was so bad compared to the "market rate", why didn't they leave of their own accord?

The pay rate was badly suppressed, but it was still quite good. Programmers are NOT being paid pauper's wages, if you get my drift.

Employees were free to seek it out, but Adobe saw Google as a current employer, then they'd inform the applicant that the position was filled or some such.
 

kuwisdelu

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The pay rate was badly suppressed, but it was still quite good. Programmers are NOT being paid pauper's wages, if you get my drift.

Oh, I know that. These are hopefully my future employers after all.

And knowing this didn't make them any less desirable to me.

There are tons of other things I judge them over before this.
 

Dommo

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Let me put it this way.

When you have tech companies pulling in $100+ million dollars in profit, with very few (compared to other conventional industries) employees and very low capital outlay (again compared to other industries), employees ARE the valuable commodity.

Let me compare industries. Let's take a good old fashion conventional industrial type company. US Steel for example.

Number of employees: 42,000
Revenue: $17.34 Billion
$/Employee: $403,255

Now let's compare to Apple

# of Employees: 80,000
Revenue: $170.91 Billion
$/employee: $2,136,375

In other words, if you just made the assumption that the employees generated an equivalent amount of revenue individually the average joe at Apple generates 5x the revenue of US steel. Secondly, Apple doesn't really have "workers" in the sense of what US steel has. The majority of the workers at apple drive the development of their products much more directly and have a larger impact on the bottom line of their profitability. The majority of the US steel workers are just cogs in the production line, and could be replaced easily. Knowledge workers like the guys at Google and Intel aren't the same.

It's like that all the way across the tech sector. Think about it, you've got companies like what's app, that has 55 employees and was recently bought for $19 billion dollars. You can't tell me that the employees aren't a valuable commodity in that company, especially since that company doesn't need to have billions of dollars in capital investments (e.g. big factories, ships, mines, etc.) to produce value.

That's why the poaching and salary collusion is such a big deal. These employees are extremely valuable and their knowledge and skills generate disproportionately huge amounts of revenues for the companies that they work for. In the tech industry, the knowledge and skill of the employees, is basically tied directly to the products.

The reason employees didn't take off on their own accord was because of the informal agreement the companies had. The companies didn't want to have to compete for labor, so to prevent that from happening they also colluded on pay. If you're secretly preventing poaching, why wouldn't you and your competitors also negotiate similar pay bands to make jumping ship unappealing?

It all goes together.
 

kuwisdelu

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That's why the poaching and salary collusion is such a big deal. These employees are extremely valuable and their knowledge and skills generate disproportionately huge amounts of revenues for the companies that they work for. In the tech industry, the knowledge and skill of the employees, is basically tied directly to the products.

I know that.

The reason employees didn't take off on their own accord was because of the informal agreement the companies had.

It doesn't make sense that an non-poaching agreement would prevent an employee from seeking employment elsewhere of his own accord.

The companies didn't want to have to compete for labor, so to prevent that from happening they also colluded on pay. If you're secretly preventing poaching, why wouldn't you and your competitors also negotiate similar pay bands to make jumping ship unappealing?

The point of poaching is that it's also done in secret.

I'm suggesting the agreement was more to prevent unexpected loss of talent than to screw employees out of a fair salary. That's still anti-competitive, sure, but I'm skeptical there was some true "market rate" that is disproportionately greater than what employees were being paid.