US tech sector’s former big spenders shift focus from flashy projects to core businesses

The US tech giants that built the digital economy and generated trillions of dollars of wealth in the process are suddenly taking a less costly and less innovative approach to innovation.

A surge in interest rates last year ended an era of cheap capital, clobbered valuations and dammed the flood of money that the pandemic brought to Big Tech. C-suites have been shuffled. Forward-looking features, such as Amazon.com Inc.’s Alexa voice service, are getting less investment, while more wildly speculative projects – say, the metaverse – are proving to be money pits. For all their talk of innovation, companies such as Amazon AMZN-Q, Alphabet Inc. GOOG-NE, Meta Platforms Inc. META-Q and even Apple Inc. remain deeply dependent on the same core business lines of a decade ago.

Cost-cutting is now the norm – more than 175,000 people have lost their jobs in the sector worldwide since the downturn began in late 2021. These days, less is more for Big Tech’s erstwhile big spenders.

“They want to show investors that they’re being responsible,” said Margaret O’Mara, a history professor at the University of Washington and the author of The Code: Silicon Valley and the Remaking of America. She points to the “crazy Christmas parties” of the 1980s personal-computer boom as a parallel: Sooner or later, the market will plateau. Today’s restraint, she said, comes after years of “a baseline where maybe there was a little bit too much exuberant spending.”

Maybe the new era for Big Tech began when Google founders Larry Page and Sergey Brin stepped down as executives from parent company Alphabet in late 2019, just as reports of a strange flu began to emerge from China. Or perhaps it began a couple of years later, when Jeff Bezos handed the reins of Amazon to his cloud chief Andy Jassy.

Or months later, when, shortly after a whistleblower shared documents that raised questions about the mental-health consequences of using Facebook, Mark Zuckerberg rebranded the company as Meta with vague promises to refocus on an augmented-reality “metaverse”?

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While the new ranks of corporate leaders may be “less flashy,” Prof. O’Mara said, their companies have come to recognize that “they’re not startups any more.” And macroeconomic effects have played an enormous role in this new mindset. After spending much of the pandemic immersed in digital life, people are now out in the real world again, slowing the growth of e-commerce.

“Money is being shifted back from buying goods to buying ordinary services,” said Werner Antweiler, who chairs the strategy and business economics division of the University of British Columbia’s business school. “People are going back to the movie theaters and restaurants.”

Just 14 months ago, on the heels of the Omicron wave, revenue at the world’s biggest tech companies was surging and staff pay was skyrocketing. But now money is drying up, and six-figure salaries have been replaced by four- and five-figure layoff targets.

That includes 18,000 people from Amazon, 11,000 from Meta, 10,000 from Microsoft Corp. MSFT-Q and an untold number of jobs lost at Twitter Inc. since Elon Musk began retooling the company. The tracking website layoffs.fyi says more than 37,000 jobs have already been lost across the sector just since the start of this year.

The value of the world’s biggest tech companies by market cap fell a collective US$4-trillion in the first 10 months of last year, according to Bank of America Global Research. With inflation and interest rates gnawing at consumers’ disposable income, advertisers have cut spending, too.

In its most recent quarterly financials, for the period ending Sept. 30, Alphabet’s Google-centric, advertising-dependent main business line saw revenue rise only 2.4 percent year-over-year, compared with 66-percent growth a year earlier. In the same quarter of 2022, Meta’s ad revenue fell 3.7 percent, after 33-percent growth between 2020 and 2021.

Even Amazon saw both product and service sales fall last year. The new and old executives running the likes of Amazon and Alphabet – and founders such as Meta’s Mr. Zuckerberg and Shopify Inc.’s SHOP-T Tobi Lutke – are now trying to wring more value from their budgets. As revenue slows, among the first expenses being trimmed are human beings.

For Jeffrey Pfeffer, an organizational behavior professor at Stanford University’s Graduate School of Business, in the heart of Silicon Valley, that human cost may be largely unnecessary.

“If you look at a lot of the companies that are making cuts – Amazon or Meta or a lot of these companies – it’s not that they are losing money, or that they’re in any kind of financial danger if they didn’t lay people off,” Prof. Pfeffer said in an interview. “It’s just that they’re trying to maintain their margins and their profits. And they are doing this, of course, at the expense of employees.”

Prof. Pfeffer has argued that many of the large waves of layoffs are instead the result of “social contagion,” with tech companies racing to copy each other’s decisions as discussions of fiscal prudence become top of mind after years of spending. These cuts, he said, could be more damaging than helpful.

“Oftentimes layoffs inhibit customer service and inhibit the innovation and product and service development that is necessary to build successful enterprises,” he said.

Those who’ve kept their jobs, or who’ve managed to secure new ones, are now under significant pressure to demonstrate their productivity and skill. Those who’ve lost their jobs, however, could bring their knowledge and talent to other sectors – perhaps boosting the fortunes of those sectors along the way.

“This could be a driving force for a reshuffling of the market – for this talent to get a feel for different industries,” said Lily Mok, a vice-president and analyst with Gartner Research who studies work forces.

There may be no greater example of Big Tech cutting to the bone than at Twitter. Since Mr. Musk took the company private for US$44-billion in October, he has sought to retool the famously unprofitable social media service in drastic ways. One of his first moves was to cut half of its almost 7,500 employees – vaporizing virtually the entire Canadian office while cutting some engineering teams to the bone.

The move prompted resignations and was followed by smaller layoff rounds. mr. Musk’s response to the public outcry was to request fealty from his staff: They had to be “extremely hardcore” and display “exceptional performance.”

Although the engineers of Big Tech that commanded six-figure salaries, sometimes approaching the half-million range, were widely understood to possess both talent and a strong work ethic, Mr. Musk’s “hardcore” missive set a bar for dedication and performance in a sector that now needs to convince the market it’s doing good with its money.

The push to boost productivity is becoming more commonplace. After shares of the e-commerce platform Shopify plunged almost 80 percent from their early-pandemic highs, for instance, executives declared at the start of 2023 that meetings could no longer be held with more than two people.

“Meetings are a bug,” chief operating officer Kaz Nejatian wrote on Twitter. “Let’s give people back their maker time. Companies are for builders. Not managers.”

And yet, for the biggest companies of all, building new things isn’t really working out. Tech businesses once hailed for their constant innovation are still dependent on revenue lines developed in the MySpace era.

Apple’s key revenue driver, 16 years after the release of the iPhone, is still the iPhone. Alphabet’s experimental new “other bet” business lines, which have long been controversial for their cash burning, saw revenue fall last quarter, and the company has begun making cuts to unprofitable side projects such as its life-sciences division Verily.

Even the revenue from augmented reality at Meta – the metaverse business line upon which the company’s rebrand was built – fell by almost half in the third quarter of 2022. And despite Mr. Bezos’s well-documented obsession with Amazon’s voice assistant, Alexa, that team saw some of the biggest cuts of Mr. Jassy’s first major round of corporate layoffs in November.

“In some ways, they’ve been less innovative than they’ve been given credit from the beginning,” Prof. O’Mara said. “Where does the real innovation happen? It usually happens in academic labs, in smaller-scale organizations that are more nimble – and also not married to an existing business model and revenue stream.”