Big Tech's Moment of Reckoning is Here

Across 72 companies, 35,000 workers have been laid off in the past few weeks alone, and that’s just the tip of the iceberg. According to layoffs.fyi, 2022 has seen 1,34,164 jobs gutted across 834 tech companies. Needless to say, it’s not a great time to be working in tech. If you look at most of the big companies, they’ll point to one major factor for the gutting - the economic situation.

Without a doubt, the state of the economy should concern us. JP Morgan is just one of the many leading institutions that have predicted a “mild recession” for 2023, which according to Forbes stems from “the prediction that the Federal Reserve will continue to raise interest rates by a further 100 basis points through March 2023.” However, the state of the economy isn’t the only reason for the massive gutting in the tech industry. There are two other small factors and one very large one at play.

First, the smaller factors. One reason companies have given is the end of the boom following the end of the COVID-19 pandemic. When lockdowns first kicked in, our entire world went online. It resulted in a massive boom in the demand for not just tech products, but also talent. Without investing in office space or perks, companies were able to easily hire talent to cater to the demand. It allowed companies not only to massively expand existing teams but also invest in increasingly risky projects like the Metaverse. But a return to work meant a sudden weight on expenditure - from offices to equipment, and the many perks tech companies have been known for. However cutting back on the perks clearly didn’t suffice, so now it's time for workers to face the axe. Furthermore, risky projects are clearly no longer something investors want, which is why they have been tightening the purses of these tech companies.?

Another big reason is the slowdown in ad spending, which is an extremely vital source of revenue. There are two parts to this, the first is the broader economic situation that’s led to higher interest rates, putting cheap money off the table. Secondly, Apple’s privacy changes (App Tracking Transparency) have left a huge dent in the way ad tracking works. According to one report, that singular change was responsible for a 40% drop in Return on Investment leading to a 25% drop in ad spending.?

However, there’s one huge factor that seems to have been lost amidst the chaos - the plateauing of big tech. In the words of Recode’s Senior Correspondent Peter Kafka, “those companies (Google, Amazon, Meta) aren’t growing at the same rate anymore. Many of them are pretty old now — or their main product is pretty old.” Of course, that alone isn’t a reason for the layoffs, but it’s a huge factor that’s drastically shaping the way big tech operates, and its bottom line.?And that does directly impact layoffs.

The Start of the End?

For two decades now, big tech has been allowed to run rampant not just in the US, but globally. From Meta to Google, and Apple to Uber, tech companies have been growing exponentially, entering new markets and debuting new products almost yearly. That kind of growth was always going to be unsustainable, but they did it anyway. We’ve seen the warning signs for years. First, with Facebook’s Cambridge Analytica scandal. Then the 2016 US Presidential Elections. Uber’s Greyball scandal and Google’s Project Maven are just some of the many, many examples of overreach by tech companies that weren’t punished. Of course, there was blowback, but that was largely from users and employees, not legislators. What that did was give these companies the green light to keep pushing the boundaries, not just in terms of technology, but also legally, morally, and ethically. It has led to the rise of some truly outlandish projects, and rash upgrades to their existing products.?

To understand this, let’s look at Meta. On one hand, Facebook is still the company’s cash cow, as it has been for well over a decade. But Facebook isn’t the dominant social media network anymore. The platform is facing a stiff challenge from the likes of TikTok, to which Meta has responded by drastically changing the way Instagram operates. The changes haven’t been well-received, but that hasn’t deterred the company from keeping up the fight. Meanwhile, Facebook largely remains on the back burner, losing users. No matter what Meta does, Facebook just won’t be “cool” anymore. And the platform isn’t seeing the kind of investments Instagram is. Meta is now pouring millions not just into Instagram, but also its Metaverse, hoping to jump ahead of rivals on the “next big thing”.?

It brings me back to what Kafka said, the biggest tech companies are now mature. In his words, “Big Tech is less dynamic than it used to be. These Big Tech companies were disruptors, and now they’re kind of the big, established giants. And from a Wall Street perspective, that is less appealing.” Meta, Google, Amazon, and even Apple have reached a point where their flagship products can’t drive massive user growth because there’s nowhere else to go. Even if Meta was inclined to invest in Facebook, there’s little else it can do to give the platform a makeover or offer a unique new feature that would bring millions to the platform. Users have moved on from Facebook, just like MySpace before it.?

For Meta it’s Facebook, for Apple it’s the iPhone. For years now there have been jokes about how the new iPhone is the exact same as the old one. Jokes aside, it’s quite true. And it’s having a tangible effect on Apple’s sales. More and more people are putting off upgrading yearly, forcing Apple to slowly increase its reliance on services and ads. The iPhone still remains the dominant moneymaker for Apple, but the numbers don’t lie. Apple reportedly scaled back production of its iPhone 14 and iPhone 14 Max, just months after launching the new devices. Of course, a big reason for the increased upgrade cycle is the economy. With inflation creeping up, buying the newest iPhone just isn’t that big of a priority. However, another key factor is that technology has plateaued. As Sareena Dayaram wrote for CNET, “Today's phones are getting more nice-to-have refinements rather than the awe-inspiring innovation seen just three or four years ago…Smartphone innovation has stagnated, and this is not a knock against the consumer electronics companies or the tech giants that design them. Maybe we've reached peak smartphone, and this is as far as it needs to go.” That exact reason is why we are seeing projects like foldable phones. It’s a Hail Mary from the likes of Samsung and Huawei to keep customers interested, and upgrading.?

Moving Away From Big Tech

What the above two examples indicate is that big tech has reached a peak. There are really few options for them when it comes to upgrading their flagship products. But now, they also don’t have the money to throw at risky projects. Investors aren’t too keen on letting big tech run rampant, especially now with the eyes of legislators firmly on the companies. That’s become a boon for start-ups. Some workers can re-skill and up-skill, but for a majority of those laid off, the tech industry is their only choice. So they’ll naturally look for gigs at smaller firms, something that has happened in the past. It’s common for tech workers to build companies during downturns. Hewlett-Packard, Microsoft, Uber and Airbnb all started during recessions and went on to be wildly successful, reported Tara Deschamps of Global News.?

However, there’s reason to be cautious. Starting up is relatively easy in the tech world, but not so under the current situation. For one, investors are likely to be extremely cautious, and definitely not as free-flowing with their money as before. It’s not just due to the economic situation but also stems from the fact that legislators have their eye on tech. No one wants to invest in a start-up, only for it to be busted or handicapped by the government a year later. Funding is going to be hard to come by, which is definitely going to force some to close shop.?

Another factor to consider is competition. For years, Meta, Google, Amazon, Microsoft and others have been able to easily swallow up start-ups, or price them out of business entirely, thereby cutting down on the competition. From Siri to Waze, and WhatsApp to Shazam, all of the most popular features we know and love today were all born as startups outside of Silicon Valley. Amazon and Meta are the poster child for this behaviour. Bezos and Zuckerberg’s anti-competitive practices have long stymied innovation not just in Silicon Valley, but globally. However, with limited funding at their disposal, that may no longer be the case. Big tech will no longer be able to easily swallow up or spit out competitors who might bring actual innovation back to the table. There’s only one solution to the plateauing of big tech, and that’s allowing innovation to thrive outside their restrictions. This may be that chance. However, the onus will be on governments to ensure that these startups truly have that chance.

Should that be the case, it’s possible we may see genuine innovation again. TikTok did it free from the constraints of Silicon Valley, and it’s causing Meta to sweat. That’s great for the economy. Likewise, Apple’s being forced to open its App Store and payments gateway, which will no doubt end up giving way to more seamless and efficient technologies and systems. Rather than throw money on moonshot projects like the Metaverse, big tech will be forced to rethink its key products. That’s because for one Wall Street wants to see growth and see it in the short-term, not long term. And for another, consumers are clearly less inclined to throw money at moonshot projects that may not be viable in a few years. Remember Google Glass anyone? Even for employees, moving away from big tech has more upsides. Without questionable practices and policies, employees can do what they do best - innovate.?

It’s highly unlikely Silicon Valley companies will change their behaviour or practices anytime soon, and for most of them, the layoffs will seem like mere bumps in the road. But if history is anything to go by, it’s clear that they are no longer the cool kids. An interesting analogy would be to consider big tech like the American car industry. Think of Meta as Ford if you will. For decades, no one thought Ford could be beaten, but all that changed with the arrival of Tesla. No one really considers Ford to be a cool place to work these days, which is why Tesla still holds a special place despite Elon Musk's controversial leadership. Everyone wants to work at Telsa, Rivian, and other start-ups, and that's something that we will see with the tech industry at large. Big Tech is clearly in need of a Tesla, and there’s no doubt there is one out there. The only question is who??

Sources: Layoffs.fyi,?Siladiyat Ray (Forbes),?John Koetsier (Forbes),?Amanda Lewellyn (Vox),?Sareena Dayaram (CNET),?Tara Deschamps (Global News)