Is this the beginning of the end for Big Tech?
Big Tech (Alphabet, Amazon, Apple, Meta and Microsoft) are experiencing a period of great difficulty: here's why
Made up of unlimited growth of users, constant increase in profits and record increases in the value of stock market capitalizations, the parable of Big Tech (Apple, Microsoft, Alphabet, Amazon and Meta), as we have known it in the last ten years, it abruptly stopped in this 2022 for a series of reasons that a recent article in the Economist explored and made clear.
Decline for Big Tech?
As the authoritative British weekly writes, the fortunes of Silicon Valley, whose technological giants were used to a growth rate five times higher than that of US GDP for the entire last decade, seem to have run out this year .
2002 was actually a difficult year for all listed companies, with the S&P 500 index down by more than a fifth since January. But for digital companies it was a real collapse in market value, with the Nasdaq index falling by more than a third and the five California giants leaving 3 trillion dollars of capitalization on the ground.
Particularly suffering was Meta, the Facebook parent company, which lost two-thirds of its market value and whose quotation today, equal to about 300 billion dollars, is so far from the peaks of the past as to now even make it doubtful. his inclusion in the club of the Bigs.
The Causes of the End of Exceptionalism Tech
According to the Economist , there are various causes behind this dramatic decline, the first of which is the now completed maturation of digital markets.
Advertising had been a vital source of revenue for Big Tech as advertisers shifted their investments from old media like newspapers and television to the online world. Now, however, that this transition has completely consummated, with two-thirds of total advertising spending in America concentrated in digital, the various platforms are now subject to changes in market cycles just like their analogue sisters.
This is why Meta experienced its first negative quarter in terms of revenues in July of this year, followed by a second crash in the following quarter.
Competition is competition
For over a decade, Big Tech has been synonymous with market concentration: Google had the monopoly of online searches, Facebook the primacy among social media and so on.
For some time now, however, these monopoly positions have been undermined by the entry into the market of new successful competitors.
This is undoubtedly the case of Tik Tok, whose tumultuous advent caused the first ever decrease in the number of Facebook users. The competition also takes place between the Big Techs themselves in fields such as cloud services where there has been a heated battle between Amazon and Google.
As for an audience champion like Netflix, it now has to contend with competition not only from Disney and Warner Bros, but also from Apple and Amazon with their unlimited content. This is why the queen of streaming has lost 50% of its market value this year.
A penalizing macroeconomic picture
Factors that have to do with the general economic situation also affect this unfortunate decline of Big Tech. To combat galloping inflation, the Federal Reserve raised its interest rates from 0.25% in January to the current 4.5%.
All this makes life more difficult for all economic players and not just those in the digital field. But for the latter, the suffering was greater as a world of high interest rates affects investor expectations and therefore a factor that has contributed for years to keeping market prices high.
What happened in the venture capital industry appears significant, where the value of new investments decreased by 42% in the first eleven months of 2022 compared to the same period of the previous year, in a fall even more disastrous than that recorded in the financial crisis of 2007-2009.
The semiconductor node
The performance of the chip industry also played a role in the Big Tech crisis.
Despite the increase in supply recorded in the last two years, demand has experienced a drastic decline due to the decline in sales of PCs and smartphones. Further difficulties have arisen due to the collapse of the cryptoverse, which has led to a reduction in demand for the advanced processors made by companies such as Nvidia and Amd.
Added to these elements are geopolitical uncertainties. As is known, America has introduced heavy export restrictions on semiconductors to China, causing many problems for what is in fact the world's largest buyer of chips.
China then got involved with the draconian zero Covid policy, which led to the imposition of stringent lockdowns in factories. This is why Apple has decided to transfer part of its production from China to countries such as India and Vietnam. But this late move hasn't helped to reverse the course of a company which, despite outperforming other Big Techs, has nonetheless lost a quarter of its market value in the last twelve months.
Gloomy scenarios on the horizon
The combination of these factors promises a future marked by uncertainties and painful choices for Big Tech.
The road taken for now by the companies is that of cost containment, which almost always translates into a cut in jobs. The site Layoffs.fyi estimates a job loss in 2022 equal to 150,000 units. In an indicative sign of the difficulties faced, Amazon told the phalanx of graduates due to join the company in May 2022 that they will have to wait until the end of 2023.
In short, if for more than a decade the sun always seemed to shine in Silicon Valley, the year that is about to open will be characterized by a thick fog.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/big-tech-declino/ on Sat, 31 Dec 2022 06:58:24 +0000.