Why ‘Big Tech’ isn’t scared of the Wall Street wobble

During the Great Recession, Facebook, Amazon, Google, Apple and Microsoft acquired more than 100 companies from 2008-10, according to Refinitiv, a financial data company. Some of those deals have become fundamental to their businesses today, including Apple’s acquisition of chip company PA Semi, which contributed to the company’s development of its new laptop processors, and Google’s acquisition of AdMob, which helped create a mobile advertising business.

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“The big will get bigger and the poor will get poorer,” said Michael Cusumano, deputy dean of the Sloan School of Management at the Massachusetts Institute of Technology. “That’s the way network effects work.”

There are caveats to this sense of invulnerability. The big companies’ plans could always change if the economy continues to deteriorate and consumers pull back even further on their spending. And some of the big companies are more vulnerable than others.

Meta Platforms, Facebook’s parent company, has fared worse than its peers because its business is facing long-term challenges. It has posted falling profits as its user growth slows amid rising competition from TikTok, and changes in Apple’s privacy policy stymie its ability to personalise ads.

Meta CEO Mark Zuckerberg has responded by instituting a temporary hiring freeze for some roles. During a recent all-hands meeting with staff, employees asked if layoffs would follow. Zuckerberg said job cuts weren’t in the company’s current plans and were unlikely in the future, according to a spokesperson. Instead, he said the company was focused on slowing spending and limiting its growth.

Amazon sent a similar signal to its employees last month after it posted disappointing results. In a call with analysts, Brian Olsavsky, the company’s finance chief, said Amazon would look to corral costs after it doubled spending on warehouses and staff to keep pace with pandemic orders. As people return to work and travel, they are making fewer Amazon purchases, leaving the company with more space and staff than it needs.

But Amazon’s lucrative cloud business, Amazon Web Services, or AWS, continues to gush profits. The company plans to lean into its success in the months ahead by increasing its spending on data centres. It also has committed to raising the cap on base compensation of its corporate staff to $US350,000, from $US160,000. And it is investing in a plan to build a network of satellites to deliver high-speed internet by launching 38 rockets into space.

Among them, Facebook, Microsoft, Google, Apple and Amazon had nearly $US300 billion in cash, excluding debt, at the end of March, according to Loup Ventures, an investment firm specialising in tech research.

The cash reserves could fund accelerated stock buybacks as share prices fall, analysts say. Doing so would increase the companies’ earnings per share, deliver more value to investors and signal to the market that their firms are more valuable than Wall Street is willing to acknowledge.

The companies roared ahead during the pandemic as people sequestered at home immersed themselves in a digital world. Customer orders soared on Amazon, for everything from hand sanitiser to Instant Pots. Shuttered stores shifted sales online and ramped up Google and Facebook advertising. Remote students and employees splurged on new iPhones, iPads and Macs.

Big Tech is going to be more powerful. And what’s being done about it? Nothing,”

Richard Kramer of Arete Research

Microsoft, the last tech giant to cull its ranks during a major downturn, is doing the opposite during this turbulent period. Emboldened by a business that has proved more durable than its peers, Microsoft is sweetening salaries, boosting its investments in cloud computing and standing by a $US70 billion acquisition of Activision Blizzard that it expects to unlock more sales for its gaming empire.

Similar resilience has been on display at Google and Apple. Google, a subsidiary of Alphabet, recently overhauled its performance review process and told staff that they would probably get pay increases, according to CNBC. It also plans to increase its spending on data centres to support its growing cloud business.

Apple CEO Tim Cook has a long-standing philosophy that Apple should continue to invest for the future amid a downturn. It more than doubled its staff during the Great Recession and nearly tripled its sales. Lately, it has increased bonuses to some hardware engineers by as much as $US200,000, according to Bloomberg.

John Chambers, who steered Cisco Systems through multiple downturns as its then-CEO, said the companies’ strong businesses and deep pockets could afford them the chance to take risks that would be impractical for smaller competitors. During the 2008 downturn, he said Cisco allowed distressed automakers to pay for technology services with credit at a time when competitors demanded cash. The company risked having to write down $1 billion in inventory but emerged from the recession as the dominant provider to a healthy auto industry, he said.

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“Companies break away during downturns,” Chambers said.

Excelling will require disregarding the broader market’s gloom, said David Yoffie, a professor at Harvard Business School. He said previous downturns had shown that even the strongest businesses were susceptible to profit pressures and prone to pulling back. “Firms get pessimistic like everyone else,” he said.

The first test for the biggest companies in tech will be contagion from their peers. Amazon’s shares in electric vehicle maker Rivian Automotive have plunged more than 65 per cent, a US$7.6 billion paper loss. Apple’s services sales are likely to be crimped by a slowdown in advertising by app developers, which rely on venture-capital funding to finance their marketing, analysts say. And start-ups are scrutinising their spending on cloud services, which will probably slow growth for Microsoft Azure and Google Cloud, analysts and cloud executives said.

“People are trying to figure out how to spend smartly,” said Sam Ramji, chief strategy officer at DataStax, a data-management company.

Regulatory challenges on the horizon could darken the Big Tech companies’ prospects, as well. Europe’s Digital Markets Act, which is expected to become law soon, is designed to increase the openness of tech platforms.

Among other things, it could scuttle the estimated $US19 billion that Apple collects from Alphabet to make Google the default search engine on iPhones, a change that Bernstein estimates could erase as much as 3 per cent of Apple’s pretax profit.

But the companies are expected to challenge the law in court, potentially tying up the legislation for years. The probability it gets bogged down leaves analysts sticking to their consensus: “Big Tech is going to be more powerful. And what’s being done about it? Nothing,” Kramer of Arete Research said.

This article originally appeared in The New York Times.