I’m not going to talk about Elon Musk and Twitter in this case.
Okay, just a little bit: Elon and Twitter are headlines today, but it’s not the most important story in the tech business.*
The story that really matters for tech and business is this: The giant consumer companies that have been driving the tech business for years aren’t going away, but their rocket ship days look like they’re coming to an end. And Wall Street investors who wanted that ride are dumping, which means those companies and their employees have to learn to live with less.
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We’ve watched this play for most of the year as tech stocks fell, but it came into focus this week as Alphabet, Meta, and Amazon all saw their stocks rammed, and the sector as a whole $400 billion in value lost.
All tech guys have different reasons for worrying investors, but I’d argue that they all have the same underlying problem: They’re mature companies that are no longer going to wow Wall Street with crazy growth in their core business, and none of them are looks like they have new giant companies coming down the pike. Alphabet, for example, just posted 6 percent revenue growth — its weakest quarter in a decade.
So now at Big Tech, what you see is what you get. Just like Coca-Cola or Walgreens, no one expects Coke sales to explode through the roof anymore, no matter how good the new version of Coke Zero is.
The big boys are still trying to convince investors otherwise, of course. That’s a core part of the story of the Metaverse/VR/AR glasses/glasses that Meta, Apple and Microsoft are all playing with – that there’s going to be a new revolution in computing that’s going to generate a lot of economic activity, and they will also in the center of it.
Maybe! But these things are very expensive and very speculative, and in the meantime these companies are all focused on extorting additional revenue and profits from their existing businesses. For Apple and Amazon, that’s increasingly focused on converting their digital properties into advertising businesses. At Meta, it’s an attempt to turn its aging Facebook and Instagram properties into TikTok clones. And at Alphabet, where 60 percent of its revenue still comes from the same search ad business it started 22 years ago, it’s been an attempt to differentiate YouTube — which itself is almost two decades old.
These are anything but new concerns. People have been wondering for 15 years when Apple would create another world-changing product on the scale of the iPhone (answer: never).
But they’ve been easy to ignore for many years — particularly since the Great Recession of 2008, when the US government cut lending rates to or near zero and left them there until recently — which, no coincidentally, was when tech stocks took off started to fall. When money is essentially free, investors look for more speculative bets, which increases the value of the companies they’re betting on, which convinces more investors to gamble and do the same thing again.
Now everyone is getting sobering, which is why super imaginative stuff like crypto is off the table. And why big tech companies that are really big and really profitable aren’t going away, but their valuations are falling. A rough way to measure investor enthusiasm is the ratio, which compares a company’s stock price to the value of its earnings. Meta, for example, had a price-to-earnings ratio of 32.75 at the end of 2020; now it’s down to 9.434. Alphabet fell from 34.32 to 19.14 over the same period. (Amazon has ultimately remained the same, however, even after its recent slump.)
And I would argue that there is other evidence to tell you these formerly dynamic companies have hit a brick wall. For example, almost all of the men who founded and ran the big tech companies have ceded top positions to professional managers. It’s more fun doing other things.
I’m not inclined to be optimistic, but we can definitely turn the glass half full if we want: Yes, Facebook, which hired more than 19,000 people last year — a 28 percent increase — now says it does will keep the number of employees constant for at least the next 15 months. It does this through a combination of very limited hiring, replacing staff who go alone, and shoving others out the door.
But theoretically, all those wannabe Facebook employees who don’t get hired there could end up… somewhere more interesting. One of the inspiring ideas beyond the Web3 craze of recent years was that the big tech companies had become so big and powerful that it was impossible to create anything new without their permission. Now they’re still big and powerful, but maybe not as appealing to the kind of person who wants to make something new. That’s not a bad idea.
* It’s an interesting story, and maybe amusing, and maybe scary, and I’d recommend starting with Nilay Patel if you want a stimulating read about what’s next.