As a precocious teen looking to improve my college application, I sat in on a business studies class. I figured taking two extra A-Levels at night school alongside those I took during the day would make me irresistible to admissions tutors. The class I watched examined if it was worth a large factory keeping its own trucks and drivers in-house rather than outsourcing them. The data showed selling the trucks and firing the workers was more expensive in the long run, and yoked the company to the whims of any third-party logistics company in the local area. Not to mention, if you don’t own a mission-critical component of your business, you’re a lot less powerful when negotiating with your suppliers. But the teacher, and the class, all agreed it was smart to sell it all because it made a bigger profit in the quarter and was cheaper for the next two years. These people had never considered if something bad would happen, and how to prepare for it. It was at this point I realized my values were out of step with the commercial orthodoxy and opted not to take the course.
I mention this because I’ve always thought the people in the tech industry with all the money are probably halfway savvy about how All Of This Is Meant To Work. I’d told myself that what, to me, appeared illogical and self-defeating was because they were playing a game of six-dimensional chess on a board I was too dim to see. Unless, of course, the economics of our industry are so unmoored from reality that everyone’s just pretending, or deluding themselves. And more than a decade of cheap money and lax regulation means everyone’s behaved a little bit sillier than they should have. Now the lights are coming up and everyone’s looking to see what’s actually going on, there’s nowhere for these apparently smart people to hide.
It’s stopped making sense for investors
The Silicon Valley mindset is easy to grasp: If you’re lucky enough to have spare cash, put a small bit of it behind some kids with a big idea. All it takes is for one of those bets – emphasis on the word bet – to win and you’ll get a slice of some pretty big profits. In an era where zero interest-rate policies mean it’s almost free to rack up extraordinary debt, it’s a better route than heading to Las Vegas with your 401k. Not to mention the special cachet and attention you can garner by presenting yourself to the world as a “guru.” But you might have noticed that a lot of high-profile bets haven’t been coming off of late, wasting a lot of cash in the process.
Take WeWork, which this year filed for Chapter 11 after working its way through $16.9 billion since 2014. What logic can we apply to its main backer, Softbank CEO Masayoshi Son*, to justify him burning the GDP of Jamaica on such a venture? Especially when Regus, which performs the same decidedly un-techy role of renting temporary office space, owns its properties and makes a small but regular profit every non-COVID year, was available to buy outright for a fraction of the cost? How did this amount of money pass from one company to another without any sort of internal or external oversight? And why did he think that WeWork’s nicer interior design and a beer tap on every floor was such a big draw? The only theory that holds water is that Son was so blindsided by promises of vast future profits (from office rental) that he lost any sense of self-restraint.
That mix of cheap credit and the promise of unbelievable future returns can be applied across the tech industry, too. It might help explain why the cost of streaming has leapt so high while the catalogs available have shrunk. The studios weren’t hurting for profit in the days before Netflix, but the fact it was valued like a tech company enabled it to rack up huge debts. That led plenty of studios to leap onto the bandwagon in the hope of getting some of that mythical profit. In the early days, the hope was that the sheer number of people paying for content would balance out the low cost. But now growth has stalled and there’s still $14.30 billion of debt, plus an audience with an ever-increasing desire for new content.
It’s stopped making sense for consumers
The debt swinging around Netflix’s neck, and the necks of those who followed it into the streaming world save for Amazon, Apple and Warner Bros***, is directly related to this gold rush. And it’ll need to be paid off to the investors and banks who handed over billions of dollars in expectation of vast rewards further down the line. Which is why the cost of a standard Netflix subscription has pretty much doubled since 2011 – with Premium plans now costing $23 a month. Given the scattershot nature of streaming libraries and the fact Netflix can’t be your sole source of entertainment, most consumers have more than one subscription going at the same time. That’s been fine, more or less, while times are good, so what happens when the world’s economies all start to slow down and you’re looking to make room in your monthly budget?
It’s worth remembering new technologies are expensive, both in cost and how much time and effort you spend to get to grips with them. But while technology has had some world-changing hits in the past – personal computing, the internet, smartphones and, uh, social media – it’s been a while since we’ve had anything that big. But the industry can’t help but keep hyping the next big thing even if it’s obvious to anyone with eyes that it’s not going to be a winner. We’re at the peak of the hype cycle for machine learning, which its boosters tell us will automate us all into obsolescence in a decade or so**. The problem is, whenever you actually sit and try to use a generative AI, the results are underwhelming, so great is the gap between the promise and the reality. Take Google’s new AI which managed to give fake answers to spreadsheet-level questions like who won an Academy Award last year. You can already see the itchy feet of those hoping the Humane Pin will be the Next Big Thing despite its risible introduction video.
Consumers lose out here not just because of these expensive boondoggles but because they suck up all the oxygen from everything else. Many of these technologies were designed not to solve real-world problems, of which we have plenty, but to dazzle investors, placate Wall Street and dupe credulous buyers. It doesn’t help that generative AI, like crypto before it, uses a significant amount more energy than it should, exacerbating climate change. Sadly, when all the attention and money shifts to the next thing, we’ll all be poorer for it, both for the folks who were duped into reading machine-written articles about the importance of volleyball, and the folks who got laid off because some genius thought GPT-3 would do a better job without oversight.
It’s stopped making sense for workers
Embracer Group is a Swedish game publisher that loaded up on debt to buy every small studio and IP it could get its hands on. In 2018, CEO Lars Wingefors told GamesIndustry his company would eschew a “fewer, bigger, better” strategy in favor of a “diversified” lineup. In 2021, it said it had access to more than $2 billion in cash and credit to continue its spending spree, bankrolling a slew of newer, smaller titles. That included reviving TimeSplitters developer Free Radical to start work on a new game in the long-dormant cult series.Two years after that, the company admitted that a deal worth $2 billion in revenue over six years had fallen apart and that it would have to cut costs. Free Radical has now been closed, putting the last two years’ worth of work on the shelf and close to 1,000 people across Embracer have lost their jobs.
Across the industry, countless jobs have been lost as even profitable companies look to trim their headcount. Spotify CEO Daniel Ek even said the quiet part out loud when admitting the company “took advantage of the opportunity presented by lower-cost capital” to staff up. Now that the economic situation has shifted, and money isn’t as cheap as it used to be, the company is letting 1,500 people go less than a month before the holidays. Big names who have also trod the same path this year include (deep breath) Amazon (multiple times), ByteDance, LinkedIn (twice), Epic Games, Lyft, Metabook, Dell, Google and Microsoft.
Reality’s going to hit us in the face like a shovel
When I was a kid, a relative worked for a company that made and sold slot machines for adult gambling. I must have been 10 when he came over and set up a game where he gave me a pound in 2p pieces, which I could wager on the outcome of a deck of cards. He’d rigged the game so that, despite all of the pledges to double my cash as my funds shrunk, I’d wipe out. It was a valuable lesson in why it’s not a smart idea to gamble your money, given by someone who saw it up close and personal every day.
The other lesson he taught me was the vow of gratitude he would utter often, which was doubly amusing given his atheism. Whenever there was a bad story in the news, or a tale of corporate woe closer to home, he’d say “there but for the grace of God go I.” Because he knew that so much of what happens in our lives is governed by chance, so it’s pointless to claim it was wisdom. We should always remember that none of us are untouchable, and that the worst phrase in the English language is “what could possibly go wrong?” It’s just a shame that so many of the supposed great minds in the technology industry didn’t get the chance to learn this lesson when they were young enough to appreciate it.
* Wikipedia – hardly a symbol of partisanship – has gone studs-in on Son. At the time of writing, his biography says “his reputation as an investor rests almost solely on his $20 million initial investment in Alibaba Group in 2000.” Given the rest of his track record – and the fact he is presently in debt to his own company to the tune of several billion, ouch.
** I do wonder how many of its backers who spend their days worrying about Roko’s Basilisk have thought about how they’ll be treated by the 85 million or so people suddenly forced into serfdom.
*** Warner Bros. malaise is more directly related to the debt tied to the various buyouts and sales that has seen it shifted from one corporate parent to another. Not that the streaming wars has helped here, but it's fair to say that its problems are a different realm to those of its peers.
This article originally appeared on Engadget at https://www.engadget.com/2023-was-the-year-the-economics-of-tech-caught-up-with-reality-153052312.html?src=rss
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