A decade in the shade?

Here’s what you need to know this week:

• Affairs of state: A decade in the shade – have big tech’s fortunes finally changed?

State-by-state:

• Google’s YouTube is embracing “TikTokification”
• Apple is pushing for chip sovereignty
• Microsoft’s Activision Blizzard deal is facing scrutiny
• Amazon’s Prime price is rising in Europe
• Meta’s staff are not optimistic
• Tencent is making a hardware play

The tech states’ decade in the sun has come to an end. All five of the US-based companies announced their quarterly results last week, in one of the most significant earnings calls in the history of big tech. The numbers show a split is emerging between the tech states that can sustain an economic downturn and those that might be facing existential decline. 

What’s happening? This quarter, for the first time in their history, the combined real revenue growth rate of the FAANG companies – including Meta, Amazon, Apple, Netflix and Alphabet – was negative rather than positive. Real revenue was less than the year before.

So what did they report, and what does it mean?

Google. Alphabet – Google’s parent company – is weathering the storm of “economic headwinds” that CEO Sundar Pichai said would require the company “to be more entrepreneurial, working with greater urgency, sharper focus, and more hunger than we’ve shown on sunnier days”.

By the numbers:

• Revenue rose 13 per cent
• Profit fell by 14 per cent
• Shares rose by around 4 per cent

Post pandemic. The pandemic boom is over. Alphabet has not even approached the levels of growth it saw in 2021 after excess demand for online goods surged. It posted 13 per cent growth in 2022, compared with 62 per cent in the same period last year.

YouTube vs. TikTok. Google Search remained a dependable source of revenue, growing by 13.5 per cent, which is a sign that advertising spend is still enough to sustain its business. Advertising on YouTube was weaker than expected and grew by only 5 per cent. One explanation is that TikTok, which YouTube Shorts is aiming to rival (more below), grew its incomes in the US by 184 per cent this year, eating into revenues from YouTube as more advertisers allocate their spend to the Chinese video sharing platform. 

Google Cloud in third place. Alphabet’s Google Cloud services continued to grow – though the company actually lost money in this segment as it fights to remain competitive with Amazon’s AWS and Microsoft’s Azure. In all, Alphabet’s net income fell 14 per cent compared to growth of 166 per cent in the same period last year – a pretty stark contrast. Alphabet’s stock price has adjusted around the sunny optimism of the past two years though.

Apple. The company is also navigating what Chief Financial Officer, Luca Maestri, called “a challenging operating environment”, which has seen a weak dollar, the closure of Apple’s market in Russia and global component shortages for smartphones. 

By the numbers. 

• Revenue rose 1.8 per cent
• Profit fell by 10.5 per cent
• Shares rose by 3 per cent

Supply chain sluggishness. Consumer spending also buoyed Apple during the pandemic and in the early phase of the recovery from lockdown, but supply issues have curbed Apple’s performance this year. The global supply chain for electronic devices is still in chaos, driven mostly by Covid-related closures, backlogs, and industry-wide shortages of silicon. iPhone revenues grew modestly, but iPad and Mac sales fell by 2 and 10 per cent respectively. Apple’s services division – which includes Music, TV+ and Arcade – grew strongly, by 12 per cent.

Microsoft. CEO Satya Nadella told investors in predictably dry terms that Microsoft would “manage through this period with intense focus on prioritisation and executional excellence”. Although his company missed estimates, it did see rising revenues.

By the numbers. 

• Revenue rose by 18 per cent
• Profit rose by 2 per cent
• Shares rose by 5 per cent

Blame the game, not the player. Nadella also stressed that Microsoft has “best-of category products and best-of-suite solutions” saying that supply chain issues, shortfall on foreign exchange rates and a slowdown in advertising were responsible for Microsoft missing analyst expectations. Microsoft’s Azure cloud service did perform well, growing by 40 per cent, and so did LinkedIn revenues, by 26 per cent. Xbox was a deadweight on its earnings, falling by 6 per cent.

Amazon. The retail giant has not escaped the shadow of a bloated cost-base which grew massively through overhiring and overbuilding during the pandemic. It faced $4 billion in additional costs so far this year from excess facility costs and excess workforce. Andy Jassy has said that Amazon is “making progress” on controlling some costs, “despite continued inflationary pressures in fuel, energy and transportation costs”.

By the numbers. 

• Revenue rose by 7 per cent
• Profit fell by 60.6 per cent
• Shares rose by 10 per cent

AWS saves the day. Amazon is boosting the price of Prime membership to cope with costs, and lost billions on its investment in Rivian – the electric vehicle manufacturer. The saving grace of its performance this year is Amazon Web Services, without which the company would have run a $2.4 billion operating loss. AWS is still the world’s largest cloud service provider at almost a third of the market, ahead of Microsoft’s Azure and Google Cloud. It is floating the sinking ship of Amazon’s online shopping business as recession sets in.

Meta. The Federal Trade Commission is in the midst of a lawsuit against Meta. The world’s biggest celebrities are criticising its flagship video app – Instagram – for blindly copying TikTok, and its VR division, Reality Labs, is haemorrhaging cash. Meta’s earning call was the worst amongst the tech states and a real sign of decline.

By the numbers. 

• Revenue fell by 1 per cent 
• Profit fell by 36 per cent
• Shares fell by 7 per cent

A failing state? Mark Zuckerberg’s empire had to admit defeat for the first time in its history, posting a negative revenue figure for the quarter, having lost $2.8 billion. Meta’s apps are being hollowed out by competition from TikTok – Beyoncé, the social-media-shy star, joined last week. Zuckerberg has been vocal about downsizing the lofty hiring ambitions that Meta set out during the pandemic and has said that some employees might “decide that this place isn’t for you” as the company plans to “prioritise more ruthlessly”.  Zuckerberg said that the “metaverse” opportunity on which he has gambled Meta’s future – if that wasn’t already clear from the name – “will unlock hundreds of billions of dollars, if not, trillions over time”, but analysts remain sceptical.

Why this story? The chart at the top of this piece is striking. It shows a fundamental change in the way that technology stocks are valued, and that the promise of exponential value on which many of the tech states traded for the past decade has been broken by inflation, conflict and an unprecedented decline in the globalised economic system. The coming recession may not last a decade, but it could shake our confidence in the suitability of technology as a solution to humanity’s problems, and change the way we see some of the world’s most powerful technology companies. 

The “TikTokification” of everything continues. YouTube added a function to its creator suite which allows users to snip their longer videos into Shorts – Google’s equivalent of the TikTok video and Instagram Reel – meaning that more and more content is pumped into the YouTube Shorts recommendation system based on users uploading long videos. As described above, YouTube is building a range of features that might help them battle back against TikTok’s massive growth and popularity. 

Apple’s silicon sovereignty is now complete. For years, Apple has relied on Intel – the chip manufacturer – for its devices. Apple has now transitioned fully to its own first-party chips, meaning that all the subcomponents are sourced with less reliance on outside suppliers. This matters because it may increase Apple’s resilience against global supply chain issues and the changing price points of major suppliers like Intel. Intel has also been experiencing quality assurance issues since the beginning of the Covid-19 pandemic.

Microsoft’s $69 billion Activision takeover faces a competition probe in the UK. The UK competition watchdog opened an investigation into Microsoft’s proposed acquisition of video game publisher Activision Blizzard, on the grounds that – if successful – the acquisition will harm competition “through higher prices, lower quality or reduced choice.” The UK isn’t alone. Antitrust enforcers from the US to Australia are gearing up to review the deal. If they do end up approving it, it will mean that one of the world’s largest technology companies owns one of the world’s largest video game companies.

Amazon Prime is getting more expensive. In Europe, the cost of Prime is increasing in line with prices in the US, where subscribers now pay $20 more per year for Prime delivery, Prime Video plus a range of other service options. Amazon’s massive Lord of the Rings: The Rings of Power looms on the horizon. Airing on 2 September, the production will cost more than $1 billion, and may shape the fortunes of Amazon’s video streaming business – its price tag for viewers just went up.

Meta’s employees are more upset than ever before. Analysis from within the company, from an internal employee survey platform, revealed that just 39 per cent of the respondents are optimistic about Meta’s future. This is an historic low for Zuckerberg’s tech state. Only 42 per cent said that they had “confidence in leadership” which is also a criticism that Zuck can’t pin on anyone but himself. Meta recently reigned in its aggressive hiring plans to cope with “fierce headwinds” in the wider economy, cutting plans to hire engineers by 30 per cent this year. One wonders if they would have struggled to hire them even without an economic downturn.

Tencent is making a foray into hardware. The Chinese giant’s bread and butter is gaming and video platforms embedded in its massive WeChat super-app. This week, Tencent announced that it would be making its first venture in the hardware industry, partnering with Logitech – an international computer and device manufacturer – to produce a “cloud gaming handheld” device. The project will involve collaboration with Xbox, Microsoft’s gaming division and Nvidia GeForce NOW, which is also involved in cloud gaming development. There has been no news yet of government scrutiny of the collaboration. 

Thanks for reading,

Luke Gbedemah
@LukeGbedemah