The big tech world is in crisis

By Christophe Carugati | EURACTIV.com

18-11-2022

"With slower growth, less cash and increasing regulatory costs, the tech industry has no choice but to cut its massive expenses." [Shutterstock / Koshiro K]

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A year ago, shares in Meta Platforms, Inc., owner of Facebook, Instagram and WhatsApp, were trading at almost $350. Now, they are valued at less than $115. While this resulted in thousands of layoffs, could there be a silver lining asks Christophe Carugati.

Christophe Carugati is an affiliate fellow at Bruegel.

For those who believed that the multi-billion-dollar tech giants are too big to fail, this seems unthinkable. It is devasting for talented workers at all levels of seniority who must find new jobs. So, what's gone wrong, and what will happen next?

In 2020, the real world stopped living. The COVID-19 pandemic forced people to shift their work and social lives from offline to online. For big tech, this was a big boost. The major big tech companies reached the highest levels of market capitalisation in tech history and hired and invested significantly.

The pandemic has not ended, but most lockdown and social distancing measures have. Most people have readjusted back from the virtual to the real world, leaving big tech companies exposed as they overestimated the growth of online activities.

They assumed wrongly that people would move into the virtual world and stay there, but this has not been the case. The International Monetary Fund, for instance, found that online spending rose from 10.3% before the pandemic in 2019 to 14.9% in 2020 during the pandemic but then decreased to 12.2% in 2021 after the lifting of restrictions. Big tech has thus been forced to adjust its growth expectations.

But the return to normal is not the only bad news from the perspective of Meta and other companies. Like the rest of the economy, big tech has felt the effect of a succession of shocks. Galloping inflation, rising energy prices and disrupted global supply chains have been sad news for households, especially those with the lowest incomes, and businesses, which in some cases, have had no choice but to shut up shop.

Tech companies also suffer. They face increasing costs and lower demand in their primary business operations, such as advertising for Meta, which lost 4% of its revenue in the last quarter. And central banks have raised interest rates, hitting the tech industry, which had come to rely on colossal amounts of low-cost money.

Regulation is another significant shock. In Europe and elsewhere, legislators are starting to regulate the tech industry. The main reasons are to temper the impressive market power of some digital giants and to tackle the social harms occurring online, from hate speech to trade in counterfeit goods.

The goal is to tame the "digital Wild West", as Thierry Breton, the Frenchman in charge of the European Union internal market, put it. This will cost the tech industry, which will have to change its business operations, including the lucrative data practices relied on by most advertising-funded business models, such as Meta's.

With slower growth, less cash and increasing regulatory costs, the tech industry has no choice but to cut its massive expenses and its costs are heavy. For instance, this year, Meta has invested nearly $10 billion in its vision for the ‘Metaverse’ – a digital world that mixes virtual and genuine interactions. And Meta is planning to continue to invest this amount each year, an initiative that has been described by investors as "super-sized and terrifying".

It is time for the big tech world to "break things and move fast", as Meta CEO Zuckerberg likes to say. The tech industry should consider the shocks as an opportunity rather than a cost and should move quickly to offer users a better online experience that is more diverse and less toxic. And the regulations are here to help rather than block them from achieving these goals.

Regulations aiming to open digital markets to competition by tacking the anti-competitive practices of some tech giants will allow businesses to enter digital markets and for consumers to have greater choices online.

This means more innovation and the emergence of new products and services, including from big tech. Investments should not be seen as terrifying but necessary to innovate and capture new markets quickly.

Meanwhile, regulations that ensure people do not suffer from harmful and illegal content will be an opportunity to create a healthier and trustier online environment. This would translate into greater online trust and more consumption of tech products and services, from which big tech can ultimately benefit.

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