Big tech has a productivity problem that has been masked by the pandemic shock. In the five years leading up to 2020, Apple’s (US:APPL) operating profit margin slipped from 27.3 percent to 23.8 percent. Meta’s (US:META) fell from 45.2 percent to 38 percent while Alphabet’s (US:GOOGL) fell from 25.8 percent to 22.5 percent.
At first glance, this seems surprising. All these companies have near monopolies in their markets and have recently been taken to court over monopolistic behaviors. Apple has around half the US smart phone market and this dominance enables it to extract 30 percent fees from all App Store purchases. Meanwhile, Google and Facebook, which dominate search and social media, have an average revenue per user that is more than double that of Snap and Twitter.
This market dominance should translate into expanding profits. However, the issue facing these companies is, oddly enough, scalability. To expand, these companies need to hire software engineers and sales people. The engineers build the new products and the sales find people to buy them. Until there is a big artificial intelligence (AI) breakthrough, neither of these functions can be automated.
To grow, Big Tech needs to hire more people. Since 2018, Amazon has increased its workforce by 148 percent to 1.6mn. Meta has more than doubled its headcount to 71,870. Meanwhile, Google’s has grown its 58 percent to 156,000 and Microsoft’s (US:MFST) has increased 38 percent to 181,000.
The strange thing is that for companies where everything usually grows exponentially, revenue per employee – which remains much higher in tech than almost every other industry – actually fell between 2018 and 2020. Amazon’s fell 17 percent from $360,000 per employee to $297,000. At Facebook, it fell from $1.57mn to $1.47mn, Google dropped from $1.39mn to $1.35mn and Apple dropped from $2.01mn to $1.86mn. Microsoft was the only one that managed to improve this metric, growing it 4 percent to $877,000.
Competition for high-quality employees might be a reason for this drop in productivity. Low interest rates mean that venture capital firms have been able to flood lossmaking tech start-ups with cash. This cash has enabled them to hire high-quality coders and sales people that otherwise would have ended up at the largest tech businesses. Even if they are making a loss, new start-ups have been happy to pay big bucks.
This is changing. Rising interest rates are making venture capital firms more discerning about who they hand money to, and rising costs of financing will push lossmaking start-ups out of the market. This is good for the wealthy big tech businesses. At the end of March, Apple, Microsoft, Google, Amazon (US:AMZN) and Facebook had a combined $542bn of cash.
The irony is that the companies that want to digitize the world have been the ones finding it hardest to boost their own productivity. Automated call centers and robotic arms in manufacturing are easy to design. Programs that can write other programs are orders of magnitude more difficult to create.
AI will be of material use one day. Until then, Mark Zuckerberg will be happy the demand for those fleshy things that sit behind computers is falling among his company’s smaller peers. Better employees means better productivity.
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