The Hidden Benefits of Mass Disruptions

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By: Simon Constable

There’s no doubt about it. Consumer-tech companies such as Meta, Apple, Google, Netflix, and Amazon came of age over the last decade or so. Some grew from dorm rooms or garages into corporate behemoths at warp speed and hired experts by the boatload. Collectively they gained colossal publicity and political influence. Then came 2022, with plummeting stock prices. So began the hiring freezes and eye-popping layoffs.

Should we be concerned? Perhaps not. Tech’s always been a rough-and-tumble place, embracing an ongoing cycle of innovation, disruption, and destruction. Each cycle is similar, but each has its unique quirks.

The current shift is a normal part of the ebb and flow of growth in the tech sector and the broader economy. “What we are seeing is a change in consumer tastes and desires,” says Pete Earle, an economist at the American Institute for Economic Research. On top of that, there is pressure from a slowing economy and rising interest rates. In other words, it’s a rough time.

Although the factors Earle mentions affect the entire tech ecosystem, what grabbed the headlines this time was the big companies wielding the ax. Amazon and Meta have each reportedly laid off more than 10,000, and Google plans similar cuts. Netflix has trimmed its staff. The hits look set to keep coming across the sector.

All this will have ripple effects. Obscure start-ups, for one, may have difficulty finding funding. That might lead them to abandon their innovative efforts—or perhaps just to pass them on to better-financed enterprises, Earle says. “That will accelerate the natural destruction process,” he says. “Just like in the internet crash, we had a handful of survivors.” Put another way, it’s like when a wildfire burns down a forest, but a year later, green shoots poke out of the ash.

One specific change in the current retrenchment is how companies track consumer phone-app use. Tech companies, led by Apple, are fast phasing out app tracking without prior consumer permission. “Apple flipped one important construct of digital companies,” says Scott Kessler, a technology expert at private equity firm Third Bridge.

The world went from 80 percent of app users being tracked to 20 percent, he says. That in turn upended the ability of some big tech companies to sustain their profitable marketing businesses. Those firms will need to invent some new software product to fix the issue.

Another shift, albeit minor in comparison, is the post-pandemic change in consumer behavior. Food delivery, home movies, and online shopping all boomed during the COVID lockdowns, giving  some tech firms a lift. “There’s no question that some companies benefited disproportionately,” Kessler says. When life returned to normal, with trips to brick-and-mortar outlets, tech companies had to cut staff.

Historically these tech industry die-offs tend to come in sudden waves rather than incrementally. For instance, hardly anyone uses a fax machine these days. More recently, rideshare company Uber used computer software to disrupt how taxicabs operated—almost overnight. As the economics of the industry change, the price of New York City taxi medallions has dropped precipitously from as high as $1 million to less than $100,000. “Essentially, Uber solved the information part of the taxi business,” says John Freeman, a tech industry stock analyst at CFRA in the Washington, DC, area. “Software disruptions can happen really quickly.” Airbnb altered the hotel business in a similar way.

Still, a temporary crash in the tech sector may be in the cards, if only because it’s been so long since there’s been a mass clear-out. Sometimes destruction leaves room for more innovation. “Tech hasn’t experienced a big wave of extinction since 2001,” Freeman says.

Constable, a former Wall Street Journal TV anchor, is a fellow at John Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.