A speculative bubble, wrote Nobel laureate Robert Shiller in irrational Exuberancehis landmark book on human foolishness, is “a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors, who, despite doubts about the real value of an investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement”.
Observers of the tech industry are wearily familiar with this kind of irrationality. Throughout 2020 and 2021, as Covid-19 wreaked economic havoc on countries throughout the western world, the tech industry remained strangely untouched by what was happening on the ground. While the rest of us cowered in lockdown, the pandemic made tech bosses and owners insanely richer. Their companies grew faster and became even more profitable while other industries languished. Apple had so much extra cash that it spent $90bn (£74bn) – nearly the gross domestic product of Kenya – buying its own shares. Amazon laid out $50bn in 2021 on warehouses, hiring tens of thousands of employees, ordering fleets of electric vehicles and building cloud computing centers. And so on.
So while the pandemic had put many conventional companies on life support, it looked as though it had consolidated the dominance of Alphabet (neé Google), Amazon, Facebook, Microsoft and Apple, making them the new masters of our networked universe.
And then something happened. On 19 November 2021 the Nasdaq stock market index (which is heavily influenced by tech companies) stood at an all-time high of 16,057, then suddenly went into rapid decline. As I write, it stands at 12,369. And so the question became: was this just what economists euphemistically call a “market correction” or an indicator that this particular speculative bubble had really burst?
The answer, if the quarterly figures released last week by the tech giants are anything to go by, is that it looks as though the bubble has at least been punctured. The numbers, according to an analysis by Luke Gbedemah and Sebastian Hervas-Jones of Tortoise Media, suggest that a split is emerging between the companies that can “sustain an economic downturn and those that might be facing existential decline”. The figures indicate that, for the first time in the history of the industry, the combined real revenue growth rate of the companies was negative rather than positive and real revenues overall were less than the year before.
Alphabet’s revenues, for example, were up by 13% but its profits fell by 14%. Apple’s revenues increased by a whisker but profits were down by more than 10%. Amazon’s revenues were up by 7% but profits fell by a whopping 60.6%. Meta – that is, Facebook – had a terrible quarter, with revenues slightly down but profits dropping by 36%. Just about the only bright spot was Microsoft: its revenues were up by nearly a fifth, but even then profits just inched up by 2%.
In interpreting these numbers, the usual caveats apply: these are just one quarter’s results (though Meta has now had two dreadful ones); global supply chain problems and pulling out of Russia may have had a disproportionate impact on Apple; and Amazon’s results may reflect the impact of its huge investment in Rivian, the electric vehicle manufacturer, from which it has ordered 100,000 vehicles.
But overall, one has the feeling that these giant money-printing machines are moving into territory that is unfamiliar to them – territory where, instead of having endless resources for expansion and experimentation, margins will be squeezed, costs and perks cut, workers fired and efficiencies found. Suddenly, Alphabet’s chief executive is calling for staff “to be more entrepreneurial, working with greater urgency, sharper focus and more hunger than we’ve shown on sunnier days”. Similar sanctimonious exhortations are doubtless being issued by his counterparts at the other giants.
Two further thoughts stand out. The first is that the period of what one might call “tech exceptionalism” – the era when these companies and their cheerleaders were lauded for being different from normal, boring corporations – may be drawing to a close. From now on, they’re just corporations – like BT or Unilever.
The second is the extent to which we have all underestimated Microsoft simply because it fumbled the smartphone opportunity. Instead, it focused on providing the basic computational infrastructure of the organizational world. The NHS, for example, has something like 750,000 PCs, all of them running Microsoft operating systems and software. Ditto for the UK government, large corporations, university administrations and small and medium-size enterprises in the western world. And it now has a successful cloud computing business. It’s not glamorous or exciting but it’s a rock-solid, enduring business. If you bought shares in it 30 years ago, you’d have the basis for a pretty good pension now. And it’ll still be around when Facebook is just a bad memory.
What I’ve been reading
The Maintenance Race on the Works in Progress website is a riveting account by Stewart Brand of the first round-the-world solo yacht race.
Algorithm and blues
Kyle Chayka’s interesting new yorker essay The Age of Algorithmic Anxiety explores the subtle pressures of surveillance capitalism.
Instagram Is Dead is an angry blogpost by talented photographer Om Malik about how Meta has destroyed a platform he valued.