This is Work in Progress, a newsletter from Derek Thompson about work, technology and how to solve some of America’s biggest problems. Sign up here to get it every week.
The tech industry seems to be in a recession. Although overall unemployment is still very low, nearly all major tech companies, including Amazon, Meta, Snap, Stripe, Coinbase, Twitter, Robinhood and Intel, have announced double-digit layoffs in recent months. The market valuations of many of these companies have fallen more than 50% over the past year.
Watch this wave of mass layoffs at big tech companies, as well as the grim chaos unfolding on Twitter over the past few weeks and the dramatic and continuing implosion of crypto, the big question that concerns me is: why is all of this happening at the same time?
The simple, and perhaps simplified, answer to this question is: it’s the interest rates, stupid.
The period following the Great Recession was defined by a weak economy with weak aggregate demand and low interest rates. This created the perfect conditions for an era of endless money that venture capitalists, seeking high rates of return, poured into low marginal cost software companies. As smartphone penetration grew in the United States and around the world, the app revolution took off. Social media and consumer technology companies have become some of the richest and fastest growing in the world. Hollywood has moved to streaming, content has gone digital, and the service economy has gone through smartphones.
Then came the surge of post-pandemic inflation. Rising interest rates meant the end of easy money. The millennium consumer subsidy — my term for VCs splitting the bill with consumers to grow their businesses — has ended. As the cost of risk has risen, venture capital funding has fallen, and companies have had to cut costs, raise prices, or both. Meanwhile, the market narrative has shifted from growth to earnings, and tech company valuations have plummeted.
The explanation of inflation is quite technical. I have another story which is a little harder to prove. It looks like this: The tech industry is experiencing a midlife crisis.
After using its metaphorical youth to experiment with social media and consumer technology through limitless investments, endless optimizations, and A/B testing, many tech executives and investors today feel they have essentially solved the most interesting and important problems of basic digitization. It’s not just my opinion: four years ago, technical analyst Ben Evans observed that software had scaled the mountain of advertising and media and connected the world, and that technology was looking to climb new mountains and take on new challenges. A chapter was closing, and the most prominent technology executives and investors were looking for the next story.
For years, the leaders of the biggest technology companies have been redirecting their resources to new ventures with uncertain returns. Amazon recently employed more than 10,000 people to work on its AI product, Alexa. (Jeff Bezos quit the company he founded to work on rockets.) At Meta, the parent company of Facebook, Instagram and WhatsApp, Reality Labs, the division working to build a metaverse, has about 15 000 employees. Apple is said to have 3,000 people working on an augmented reality headset, and thousands more are working on Google’s voice assistant. At the same time, the venture capital community was looking for its own moonshot, and many investors found one (or at least wanted people to believe they did) in crypto. VCs have reportedly bet tens of billions of dollars in the space, though despite all the bluster and investment, it’s still mostly a technology looking for a use case beyond betting money on tokens that cash in dollars. Meanwhile, in what could be a literal midlife crisis, car and rocket executive Elon Musk has installed himself at the helm of a digital delivery mechanism for news outrage with, at best, a chaotic plan to resuscitate his company.
It would be unfair to suggest that all of these moves are the emotional equivalent of a 52-year-old man dyeing his hair and swapping the minivan for a Corvette. Companies that grow and spend a lot of money on big, tough problems with uncertain solutions, that’s cool, in a way. But right now, many of these bets seem half-baked, catastrophically expensive or downright fraudulent.
These explanations, macroeconomic and psychodynamic, overlap. The tech industry, which had perfected the art of optimizing digital spaces for engagement and ad placement, was ready to invest deeply in the next venture. But he was hit by post-pandemic inflation and rising interest rates, which made this pivot harder to execute. The result is the current news: mass layoffs in companies that only a few years ago seemed completely unstoppable.
One mistake a journalist can make when observing these trends is to assume that because the software-based technology industry seems to be struggling right now, things will stay that way forever. More likely, we are in an intermission between technological eras. Most of us have been through the browser era, the social media era, and the smartphone app economy era. But in recent months, the explosion of artificial intelligence programs suggests that something quite spectacular and perhaps a little terrifying is on the horizon. Ten years from now, looking back to the tech recession of 2022, it’s safe to say that moment was a paroxysm of scandals and layoffs between two quiet moves.
Want to discuss the future of business, technology, and the abundance agenda? Join Derek Thompson and other experts to That of the Atlantic first Progress Summit in Los Angeles on December 13. Free virtual and in-person passes available here.