That makes cost cutting the most obvious way to boost profits, an uncomfortable option for an industry that hasn’t seen a major austerity phase in 20 years. After investors expressed their dissatisfaction with the lack of cost control demonstrated by technology companies in the third quarter, it seems that management teams have changed their minds. Over the past two weeks, Meta Platforms Inc., Facebook’s parent company, and Amazon Inc. have begun laying off staff, with plans for around 10,000 job cuts each in various departments. Earlier this week, a major investor in Alphabet Inc. wrote to that company asking for significant cost reductions as well. (Elon Musk cut about half of Twitter Inc.’s workforce after its takeover, but that’s another story.)
Investors are particularly angered by what might be called the “science projects” that many big tech companies have pursued, gobbling up billions in capital without bringing in much revenue. Examples of this include Amazon’s spending on side projects like Alexa, which is said to represent more than $5 billion in annual losses, and Alphabet’s investments in its self-driving vehicles unit, which has racked up $20 billion in losses so far. At Meta, Mark Zuckerberg has staked the future of the entire company on developing new virtual and augmented reality products, renaming the company to distance its identity from its core social media business. Meta’s Reality Labs unit has lost nearly $10 billion so far in 2022. Zuckerberg apologized for raising investments too much, too soon after announcing the job cuts. To be fair, in the late 2010s, when interest rates and inflation were low and tech stocks were commanding higher valuations, these moonshot-style investments made more sense. Investors valued technology companies more for their growth than for their profitability. At one point, Alphabet’s standalone division was thought to be worth $175 billion, suggesting that these large-scale nonessential divisions incubated within larger corporations could pay off. Profit margins in core businesses were generally flat or expanding at a time of strong revenue growth, suggesting nearly limitless resources to pursue any ideas that could potentially one day become as big and profitable as Google Search, YouTube, Facebook, Instagram or Amazon Web Services.
A few years later, the world has changed. Interest rates are no longer at zero. Major markets have matured and in some cases are feeling the effects of slower economic growth. Profit margins came under pressure between the combination of slowing growth and rising costs. The investor is based on the fact that these companies are now more concerned with profitability and returning money to shareholders rather than excessive bets on the future.
And perhaps most importantly, after these companies have collectively spent tens of billions of dollars a year on science-based projects, they don’t have much to show for in terms of revenue-generating activity. It’s unclear now if the companies that have grown into massive conglomerates are nimble enough to create something from scratch. That might be a job best left to more focused startups and smaller companies, with investor bases more willing to take that kind of risk.
Even though these companies technically have the resources to spend endlessly on endeavors that may never bear fruit, it’s not very macroeconomically efficient in an era of high inflation and demand. of tech workers is still strong. Meta, Amazon, and Alphabet are basically hoarding engineers at a time when banks, insurance companies, and government also need engineers.
Conversely, appeasing investors by ending these money-losing divisions could also be the spark Silicon Valley needs for its next wave of innovation. Although it’s difficult to quantify, it seems that the well has dried up a bit lately; It’s been a while since a startup on the scale of Uber Technologies Inc. or Airbnb Inc. emerged. Big tech’s labor hoarding may be partly to blame.
In any case, investors no longer care about these non-essential activities. Businesses have, at best, a patchy track record of proving they’re worth it, and the rest of the economy remains hungry for tech talent. It’s time to admit defeat and move on.
More other writers at Bloomberg Opinion:
Mass layoffs in big tech are a mistake of the old guard: Stephen Mihm
Big Tech’s apology for big layoffs rings hollow: Parmy Olson
Tech’s Terrible Week Told in 10 Graphics: Tim Culpan
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Conor Sen is a Bloomberg Opinion columnist. He is the founder of Peachtree Creek Investments and may have an interest in the areas he writes about.
More stories like this are available at bloomberg.com/opinion