The era of endless prosperity in tech is over

‘I don’t think you want a management structure that’s just managers managing managers, managing managers, managing managers, managing the people who are doing the work,’ Meta CEO Mark Zuckerberg recently said at a company all-hands.

He might not have been talking about his company, but you could apply his words to the entire technology ecosystem, which after nearly a decade of unprecedented boom is afflicted by the disease of wealth. It’s grown fat, rich and bloated.

During the pandemic, the total headcount for Silicon Valley was on the way up. Yet the economic downturn, slowing growth, the end of cheap money and an increasingly bellicose investment community are making Silicon Valley now pause and undertake layoffs – a word we have not heard in these parts since the 2008 financial crisis.

An economic downturn is an excellent opportunity for tech companies to clean house and trim the fat

Some estimate that technology companies have cut over 225,000 jobs since the start of 2022. Meta, Amazon, Microsoft, and Google have cut 51,000 positions. In a larger scheme of things, 225,000 cuts aren’t much. The tech industry still employs about nine million people in the US alone.

But sometimes layoffs aren’t just layoffs. They’re a rude reminder of tough times ahead for a sector that is (quickly) coming down from historic and unprecedented highs.

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Microsoft CEO Satya Nadella put it best in April 2020 when he proclaimed: ‘We’ve seen two years’ worth of digital transformation in two months.’ He was talking about the wholesale and almost overnight dependence and dominance of all-sort technologies in our daily lives. Whether it was working remotely, buying online, delivery services, telehealth or living our lives entirely through screens, the future arrived in a hurry. The result was unprecedented growth – in size and scope.

Microsoft’s chief was merely articulating what every single technology CEO was experiencing. ‘I’ve been on more sales calls with more CEOs in the last two months than at any time in my career,’ Salesforce chief Marc Benioff boasted. He was excited about the prospects of his company as ‘organizations and governments around the world have a digital transformation imperative like never before and many are accelerating their plans for digital first, work from anywhere environment.’

The growth was momentous. Meta, Microsoft, Google, Amazon, and Apple went on to create an elite new club: the trillion-dollar behemoths. And it wasn’t just the big boys: Uber, DoorDash, Square (née The Block), Shopify, and PayPal all benefited from the pandemic-catalysed demand. Private upstarts such as Stripe also became supersized and almost overnight achieved a valuation of the equivalent of £81 billion.

To keep up with demand, the companies went on a hiring binge. Technology giants became people hoarders, as Paul Kedrosky, a veteran technology analyst and investor, called them. Historic low unemployment and intense competition for talent between large companies led to flawed thinking: let’s hire first and figure out what to do with people later.

The over-hiring of talent has led to wage inflation, which had a ripple effect across the entire ecosystem. Startups had to raise more capital from investors to pay better wages to talent, which had to be pried loose from big companies with oversized packages. Higher costs meant more need for venture capital, leading to bigger funds and more venture investors. Real estate markets boomed, and so did the regional economy of Silicon Valley.

When the pandemic hit, a lot of businesses got pulled forward, meaning companies spent like crazy to grow and capitalize. Everyone felt happy about the hiring binge. Free-flowing revenues, a stock market rewarding tech giants with trillion-dollar valuations, capital easier to find than a decent espresso in San Francisco.

Silicon Valley Insiders giddily quipped: it is like the Roaring Twenties again. The greatest strength and weakness of Silicon Valley is that it is willingly oblivious to history: no one wanted to remember that the Roaring Twenties didn’t end so well.

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The tech industry’s lack of moderation is often followed by a reality check.

The rampant hiring binge shows that the industry that preaches ideas like using data and automation for careful business planning and growth needs to practice that thinking. Being ‘real-time’, ‘agile’ and ‘data-informed’ are supposed to be the hallmarks of the new age. Sadly, the companies are still using the same playbook as all the other companies before them: hire, hire and overhire in the boom times. Layers of management are as much a part of the data-informed 21st-century tech industry as they were of the industrial era.

Spotify is an excellent example of a company that went on a hiring spree without much thought. The company had 3,651 employees at the end of 2002 and now has 9,200 after slashing 600 jobs. In 2020, it had annual revenues of $9 billion (£7.3 billion), and analysts estimate $12.8 billion (£10.4 billion) in revenue for 2022. While revenue grew by roughly 43 percent, its employee count almost tripled. Sure, Spotify expanded into new markets such as podcasting, but why does a company whose main job is to stream music (and podcasts) need almost 10,000 employees?

Spotify isn’t the only one. The tech players had no hiring discipline. Emperors who preach data and productivity gains have no clothes. And there isn’t a better example of that than Salesforce.

Salesforce CEO Benioff is fond of pointing out how companies can use his systems to be more productive and efficient. Yet he finds his company bloated with employees that he himself labeled subpar. ‘We don’t have the same level of performance and productivity that we had in 2020 before the pandemic. We do not,’ Benioff recently said. ‘When we look at some percentage of the employees, especially some of the folks that are new employees, are just not as productive.’

Salesforce’s employee count went from 35,000 at the end of 2019 to 73,500 at the end of 2022 — a 110 percent increase. That raises the question: what took them so long to realize this? Or why does Google need nearly 200,000 employees or Microsoft close to 225,000?

The answer is that most of these companies are highly inefficient. The reason for that is because historically they were so profitable and fast-growing that it didn’t matter. They could cover the costs without a thought. As Warren Buffet once said, you only find out who’s swimming naked when the tide goes out. Well, the tide just went out on tech.

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The big question on everyone’s mind is — is the tech sector in trouble? A simple answer is no. Even in tough times, a company like Google, with annual revenues north of the equivalent of £163 billion, doesn’t have to lay off people. But an economic downturn is an excellent opportunity for them to clean house and trim the fat. They need to do this because they need to ensure that their stock prices stay buoyant – happy investors are good investors.

For the next tier of companies, there needs to be more than just being big. Salesforce CEO Benioff has to contend with activist shareholders who want more accountability and profits. Smaller companies are living with the threat of private-equity buyers.

What’s happening is that we are at the end of an era of endless prosperity in tech. It started in the mid-2000s with the rise of the social internet, led by Twitter and Facebook. The rise of the iPhone, Android, and cloud computing acted as growth catalysts. These converging mega-trends reinforced each other and created an unprecedented opportunity. Over the last decade and a half, the US technology sector created not one but five companies worth a trillion dollars or more. They not only took share from the tech giants of the past, but also spread their tentacles into every aspect of our lives.

In short, technology has succeeded even more than the insiders imagined it would. Just to give you some context: at the end of 2010, which is how I define the first year of the confluence of mobile, social, and cloud computing, the FAANG companies (Facebook, Apple, Amazon, Netflix, and Google) collectively had revenues of $196 billion (£160 billion). At the end of 2022, the total revenues of these five giants was an estimated $1.5 trillion (£1.22 trillion).

That kind of growth, however, has its limits. After the pandemic, we have a sector looking at a more rational growth phase, especially as the economy slows down.

I am unabashedly bullish on technology and science, and whatever was new a few years ago is now part of our lives. The rise of augmented intelligence, new forms of information consumption, digital biology, and climate technologies will rev up another growth cycle. Don’t take my word for it: ‘I think the next phase – if you say mobile and cloud was the last paradigm – is going to be AI,’ Microsoft’s Nadella recently told CNBC India. And that’s kind of going to happen in the next, I would say, two or three years. It will be more like I took it back to 2007-2008, which is when cloud and mobile became big. I think we are in that phase when it comes to AI.’ Microsoft just invested the equivalent of £8 billion in the red-hot AI company, OpenAI.

That is good news – it means opportunities for new stars to take center stage. And, hopefully, another cycle of hypergrowth. Until then, Silicon Valley has to deal with being merely normal – and careful with their budgets.

A version of this article originally appeared in The Spectator’s world edition.