Technological companies live a litmus test

An earthquake is shaking the foundations of the technology industry. Between layoffs, hiring freezes and diversification strategies to find new sources of income, some big technology companies that the market believed would never stop growing are experiencing an acid test to return to the golden path.

The giants succumb to market uncertainty. In early November of last year, the tech industry witnessed something that a couple of years ago would have been almost impossible to believe. Meta, formerly Facebook, carried out one of the biggest layoffs in its history. “We grew too fast. We assumed the boom times would continue,” Mark Zuckerberg, the company’s founder and CEO, said in a video leaked to CNBC. “I take full responsibility for this decision. Ultimately, it is my decision and it has been one of the most difficult I have had to make in the 18 years that I have been running the company.”

This firm, for many years, seemed to be invulnerable in the market, because even when it had political problems, it continued to grow and increase its income. You only need to see what happened in June 2021, when Facebook reached, for the first time in its existence, a value of more than a trillion dollars, joining Apple, Microsoft, Amazon and Alphabet, the parent company of Google.

Technological companies live a litmus test

But that’s when gravity kicked in. Facebook began to lose popularity among the younger generation and saw the number of users who used it on a daily basis fall for the first time. At the same time, Facebook’s parent company Meta Networks was warning of slow revenue growth amid competition from rivals such as TikTok and YouTube.

“One of the specific problems that Meta has is that if you’re young, you don’t use the old Facebook app, and now you’re probably on TikTok, its big competitor. The company needs to find something that attracts young people, and that is what is expected with Meta”, affirms Radamés Camargo, director of Analysis and Relations with the Media at The CIU. In recent years, Facebook has reiterated, on several occasions, that it was going to continue investing, in the future, in the development of hardware, software and augmented reality and virtual reality content for the metaverse, spending billions of dollars a year in this project, whose materialization was going to take him between five and 10 years.

However, this bet has not landed yet and reality has reached Mark Zuckerberg’s company.

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DOMINO EFFECT

During the pandemic, when it looked like the economy was heading into a recession and working from home would be the new normal, investors scrambled to put their resources into all things tech. In this period, the shares of technology companies that were highly relevant to our daily lives, such as Zoom, Netflix or Amazon, experienced enormous growth, despite the crisis; trend that they would otherwise have taken several years to experience to that degree. The attempt to permeate the markets accelerated and, with it, the spending and hiring of these companies.

But, as Isaac Newton says, “what goes up must come down.” In 2022, investor pressure on the technology sector on Wall Street and its growth possibilities became noticeable. Most tech firms have made big layoffs, stopped hiring, and warned that they may not grow in the next few years.

Just last October, after trying to evade his commitment to buy Twitter, Elon Musk acquired the company for $4.4 billion. Right after doing so, he fired half the staff, claiming that Twitter’s staff was too large and placed too much emphasis on content moderation, platform security, product development and marketing. In addition, the Tesla owner added that Twitter was losing $4 million every day, so he would be willing to implement any measure that would help the platform achieve profitability. Before starting the layoffs, Musk told investors in a memo that he had a “very bad feeling” about the economy.

“They’re not sure about their growth prospects, so they’re going to stop spending so much; and one way to do that is to hire fewer people or fire them. [Musk] it needs cash, and even if it hadn’t bought the company, Twitter would have fired people for the same reasons other companies did,” says Camargo.

Twitter demands layoffs
Photo: Reuters.

However, neither Twitter nor Facebook have been the only ones to say goodbye to thousands of their employees. Amazon, the electronic commerce giant, valued at 900,000 million dollars until last year, expects to add up to 20,000 layoffs between last year and the coming months. Stripe cut 14% of its workforce, Intel 20%, investment app Robinhood laid off nearly a quarter of its workers, Lyft shed 13% of its workforce, Snap let go of a fifth of its staff, while Apple and Amazon announced a freeze on their hiring.

In addition to the layoffs, Facebook and these other companies are trying to find ways to cut other expenses that seem to hit right at the heart of what it means to be employed in the tech sector. Being in this industry meant not only super-high wages, but also free food, transportation to and from the office, gyms and game rooms, benefits that are also disappearing.

“This does not mean that these companies are going to die in a month or a year. They continue to generate billions of dollars in revenue. But, simply, these firms that have been in the market for more than a decade are no longer growing at the same rate as before,” says Camargo.

GROW FAST OR DIE SLOW

But if these companies are huge monsters with massive valuations, why do they have to keep growing? The answer is simple: large companies are forced to respond to their shareholders in the stock market, and they are eager to obtain large returns as quickly as possible.

But as a study by McKinsey & Company points out, sustaining growth is really hard. The research, which looked at the life cycles of some 3,000 software and online services companies around the world, found that “success is fleeting.” About 85% of the super companies were unable to maintain their growth rates and, once lost, less than a quarter were able to recover them. The firms that recovered their historical growth rate had market capitalizations 53% lower than those that maintained the immense growth throughout the process.

As if that were not enough, the Federal Trade Commission (FTC) wants to prevent big tech from getting even bigger. The FTC is trying to block Meta’s acquisition of Unlimited, the company behind the virtual reality game Supernatural, as well as Microsoft’s acquisition of Activision Blizzard, a deal that would be even bigger than Twitter’s acquisition. from Musk.

meta europe advertising
Photo: Reuters.

Although each company’s circumstances are unique, the McKinsey & Company study found that tech giants’ successful strategies include expanding their offerings into new geographies or channels, a new product market, or transforming offerings into a plataform. “Successful signatures dominate the transition from one act to the next. Difficulties include transitioning at the wrong time and selecting the wrong strategy,” the report explains.

Right now, Big Tech is trying to diversify its business to give investors relief. A clear example is Netflix, which is now entering the video game industry and introducing an advertising-based plan. Or Twitter, exploring a subscription model. Or Meta, exploiting the shopping and short video functions, both on Facebook and Instagram.

“Diversification is sometimes the only way for a company to grow, or the only way to survive when sales and profitability of the core product are declining. Even so, it will not be easy for them to make profitable in the short term these new models that they are testing. They will have to overcome not only the challenges of adoption by users, but also those of regulators”, says Camargo, who is a witness to the litmus test that technology giants live.

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Technological companies live a litmus test