With the pandemic impact on the economy subsiding and pre-pandemic regularity slowly coming back, technology firms are facing a major setback. How does it impact you?
The exuberance of a pandemic induced growth of tech companies and startups is facing a harsh reality check. Netflix is losing subscribers in hundreds and thousands, Zoom’s stock price is down over 80% from the pandemic highs, the nearly invincible Amazon announced its first loss since 2015 as sales slowed, costs rose and its investment in electric vehicle company Rivian wiped out profits.
Start-ups now talk about real profits
Even startups with dizzying valuations like Uber are talking about showing real profits. Closer home, TechEd unicorns are foraying into offline coaching and laying off employees in the face of mounting losses. During the pandemic, most of these companies, with huge VC and IPO finances at their disposal, went in for aggressive market share capturing strategies. But now as the pandemic weakens in major markets, and people crave social contact once again, the platform companies and service aggregators are perhaps seeing the end of a honeymoon period.
Amazon’s revenues grew at a sluggish 7% in the first quarter to $116.4bn, Amazon’s slowest growth rate in nearly two decades. It lost $3.8bn for the quarter compared with a profit of $8.1bn during the same period a year ago. The company warned there may be more losses ahead. For the current quarter, Amazon expects operating income between a loss of $1bn and a gain of $3bn, compared with $7.7bn in the second quarter of 2021.
Need to show the money
Uber’s chief executive, Dara Khosrowshahi, has emailed employees with an arresting message: “we need to show them the money.” Mangling his metaphors, Khosrowshahi explained that the market was experiencing a “seismic shift” and the “goalposts have changed.” The ride-hailing and food delivery company’s priority must now be to generate free cash flow. “We are serving multitrillion-dollar markets, but market size is irrelevant if it doesn’t translate into profit,” he wrote.
For the boss of Uber to be trumpeting cash flow and profit would once have seemed about as likely as Elon Musk shouting about the benefits of personal humility and petrol-fueled cars. No company has been more emblematic of the long, crazy, capital-doped bull market in technology stocks than Uber. Founded in 2009, the company floated a decade later at a valuation of $76 billion without recording a single quarter of profits. Its belated conversion to financial orthodoxy shows how much markets have been transformed since the turn in the interest rate cycle and the crash of the tech-heavy Nasdaq market, which has dropped 26 per cent this year.
Netflix lost 200,000 subscribers
During the first quarter of 2022, Netflix recorded a net loss of 200,000 subscribers to its streaming service for the first time in over a decade; however, Netflix remains the leader in SVOD services. According to Parks Associates OTT Tracker data, Netflix maintains an estimated 67 million customers in the United States. Netflix executives claim to have 222 million paying subscribers worldwide, but estimate an additional 100 million using a shared password to gain access to the service.
A comeback plan
To mitigate the revenue loss from this quarter’s decrease in subscriptions, Netflix announced two strategies: focusing on password sharing and launching an AVOD (Advertising-Based-Video-On-Demand) tier service. The account sharing plan that Netflix is proposing would potentially allow customers to opt-in but is likely a few years away for those in the United States. An AVOD service where customers subscribe to an ad-supported version of the service at a lower price point is also being discussed.
Parks Associates’ latest data show that 27% of internet households watch ad-based (AVOD or FAST) OTT services. Consumers are enticed by AVOD and FAST services because it allows them to access a massive content library at no extra cost to them, but it would also allow brands and advertisers to collaborate and capture a significant portion of marketing and advertising budgets.
Zoom lost market capitalization
Since the beginning of this year, Zoom has lost about half of its market capitalization—dropping from $54 billion to $27 billion alongside a declining stock market. Zoom became a household name in March 2020 as millions of people were suddenly forced to work from their kitchens and bedrooms. Although video conferencing was far from new technology, Zoom became the preferred application for almost every form of workplace communication. Just over two years later, travel restrictions are easing, the tech market is sagging amid rising interest rates, and Zoom’s stock price has fallen to pre-pandemic levels, down 83% from its all-time high in October 2020.
Only 18 of 100 Indian unicorns are profitable
Only 18 of the 100 unicorns of India are making profits, while the rest are in deep red. Hospitality brand Oyo, B2B e-commerce platform Udaan and e-commerce marketplace Flipkart (acquired by Walmart) were the top three loss-making unicorns with more than Rs 2,000 crore loss each in FY21. Edtech startup Eruditus was the newest among the top 10 groups to post losses close to the top three companies.
The days of unbridled growth fueled by easy money seems to be over for Indian unicorns. Since the beginning of 2022, at least 5,600 startup employees have been impacted by cutbacks, termination of contracts and layoffs. From unicorns such as Unacademy and Vedantu to global tech companies in India and growth-stage startups such as Furlenco and Trell, the tech industry is going through a phase of rationalization after the funding boom of 2021. The spate of layoffs has prompted many to question some of the expansions over the past couple of years, with labels such as reckless and unplanned being attached to these expansion sprees.
The global tech sector, which boomed during the pandemic, is showing signs of tightening its finances and the move is hitting employees first. Facebook parent company Meta is pausing hiring and scaling down some recruitment plans. Amazon’s CFO told analysts on the company’s earnings call that its warehouses have become “overstaffed,” following a large hiring spree during widespread lockdowns that drove consumers more and more to online shopping. Uber’s CEO told employees in a message obtained by CNBC that the company would “treat hiring as a privilege and be deliberate about when and where we add headcount,” adding, “We will be even more hardcore about costs across the board.”
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(Abhijit Roy is a technology explainer and business journalist. He has worked with Strait Times of Singapore, Business Today, Economic Times and The Telegraph. Also worked with PwC, IBM, Wipro, Ericsson.)
(Disclaimer: The views expressed in the article above are those of the author’s and do not necessarily represent or reflect the views of Autofintechs.com. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.)