Tech wreck 2.0 is dead. Long live the AI-led tech boom
Now tech companies that got carried away with hiring during recent years have ‘right-sized’, are we on the cusp of an AI-driven tech-industry boom?
Though such [generative AI] systems have been around for some time, it took a consumer-facing service such as ChatGPT to capture the world’s – and investors’ – imagination. As Mike Volpi of Index Ventures, a venture-capital (VC) firm, says, this happened just as his fellow tech backers, burned by the cryptocurrency crash and the empty metaverse, were on the lookout for the next big thing.
The Economist, 28/2/23
I think we might exceed a one-to-one ratio of humanoid robots to humans.
Elon Musk, 1/3/23
Despite the relentless hype, I think AI overall is underhyped. The long-term effects of AI will affect our society to a greater degree than electricity and fire, but its full effects will take centuries to play out.
Silicon Valley chronicler and sage Kevin Kelly talking to Noah Smith, from
I listen to a wide range of podcasts. The one with the most ‘big dick energy’ – or at least the most air time devoted to the podcast hosts energetically arguing over who, metaphorically speaking, has the biggest dick – is All In.
As it happens, the core team behind the podcast – Chamath Palihpitiya, John Calacanis and David Sacks – do have giant intellects, giant bank balances and, at least in the context of the US tech industry, giant dicks.
I’m hardly some hypersensitive young wokester and have a strong financial incentive to remain au courant with tech-industry goings-on. However, even I can only endure the All In’s hosts' testosterone-sodden tech-bro banter in small doses. So, I hadn’t listened to the podcast for a while when I half-heartedly clicked on the latest episode while exercising the other day. You can find the primary source material here, but, to summarise, there seemed to be a rare consensus among the hosts that:
(1) Most of the companies that needed to shed 10 per cent of their workforce had now done so. Furthermore, the redundancies of the last 12 months have been pretty much all upside. The tech behemoths would now be leaner and more profitable. Perhaps even more importantly, all the talented staff let go from the likes of Alphabet, Amazon, Microsoft, Netflix, Meta and Twitter would now either (a) end up at small or mid-sized tech companies and help at least some of these minnows grow into whales or (b) launch their own start-ups.
(2) Further to the above point, the hosts argued that not only was generative AI the Next Big Thing, it was a thing as big as the mass penetration of the Internet in the latter half of the 1990s or the dawn of the smartphone era in 2007.
Referencing a recently published Economist article (paywalled), ‘Investors are going nuts for ChatGPT-ish artificial intelligence’, Calacanis observed, “There is a massive AI FOMO frenzy going on… there are now 500 generative AI start-ups, according to this [Economist] report. That tracks with what I’m seeing in [the] early stage [investment community], not counting the ten billy [billion] from Microsoft [into ChatGPT] … they [the generative AI start-ups] have now collectively raised $11 billion… we are looking at a complete platform shift.”
Sacks concurred with Calacanis saying, “This is the next big platform shift. Whether it is as big as mobile, or it's more like social or cloud; those have been the big platform shifts over the last decade or two and I think this is definitely on par with those. We don’t know where the value capture is going to be. Maybe it all just ends up accreting to the big companies who can make massive investments in this space… 20 years ago the big companies would just sit on their hands in the face of a platform shift. That’s not going to happen today. That being said, any platform shift creates opportunities for start-ups… you get a Cambrian explosion where the [AI] ecosystem evolves a lot of different types of businesses.”
Long story short, crypto remains in the toilet and Web3 and the Metaverse have turned out – for the time being at least – to be damp squibs. But generative AI is going to be a massive shot of growth hormone for a tech industry that was already in the process of bouncing back.
Is that too good to be true?
As I argued late last year, not at all.
The tech-industry train wreck that never happened
I’m not sure if the legacy media has grown even more sensationalist in the face of more competition for people’s attention, or I’ve got more cynical as I’ve aged, or if both of those things have occurred, but I was sceptical about the ‘This is a tech wreck like the dot-com bust all over again’ narrative since it first started being bandied about around a year ago.
So when a professional services firm targeting mid-sized Australian tech companies wanted me to author an e-book that would serve as a lead magnet last year, I suggested taking a contrarian angle.
As we shall get to shortly, not everything in the e-book has aged well. But I have no regrets about that contrarian angle I took. To quote my (slightly younger) self:
In early 2020 Tesla was putatively worth more than Volkswagen, despite Elon Musk selling less than 400,000 vehicles a year while the German automaker was selling 11 million. With valuations becoming increasingly unmoored from reality, a market correction was inevitable and, in the long run, healthy. The question now preoccupying tech industry types, in Australia and the rest of the world, is how far the pendulum will swing the other way… There was a consensus among those interviewed that the local tech industry was not experiencing anything remotely equivalent to the ‘tech wreck’ that reshaped the American tech industry around the turn of the Millennium. Indeed, those interviewed were universally bullish about the longer-term prospects of the Australian tech industry. Many of them expressed the view that the current downturn would be relatively mild and short-lived.
I may have been a tad Panglossian in predicting the market correction would be “relatively mild and short-lived”. And given Atlassian’s recent decision to give five per cent of its 10,000-strong workforce the heave-ho, the following passage now comes across as somewhat tin-eared:
Atlassian has committed to hiring 1,000 engineers this financial year [2022] and aims to have 25,000 staff on the payroll within the next four years. For reference, that would result in Atlassian having a larger workforce than Qantas, which currently employs around 22,000 staff.
But if it hasn’t been quite as much of a non-event as I imagined it would be in September last year, the tech industry downturn – especially outside of the US – certainly hasn’t been anywhere near as severe as the dotcom bust of 2000-2002.
Good news doesn’t sell newspapers
The argument I made in late 2022 is the same one I make today: we shouldn’t read too much into cash-cow tech companies using the cover of a ‘tech wreck’ to do some cold-blooded housekeeping.
If you’re a tech company CEO, I’d imagine the temptation to announce layoffs would be near irresistible. In fact, it would appear to be a win-win-win proposition. The share price goes up, you get rid of those workers you perceive – accurately or otherwise – not to be adding much value, and the surviving members of your workforce are suddenly much more amenable about returning to the office and much less inclined to push for pay rises.
The impact of peer pressure also shouldn’t be ignored. If every other tech company CEO appears to have gotten in touch with their Inner Elon and cut their headcount by 5-10 per cent, what kind of contemptible softcock will you look like to your current board and any future employers if you fail to wield the scythe?
End result? Lots of media coverage about tech industry workers being laid off with little attention paid to the following confounding facts:
1) Many tech companies, including plenty of high-profile ones such as Apple, haven’t laid off staff. Indeed, many in the tech industry continue to believe there is a huge skills shortage issue.
2) Those staff who have been made redundant by Facebook et al reportedly haven’t struggled to find alternative employment. Quite possibly, they have ended up a little less well-remunerated at their new job, but I’m not sure anybody needs to shed any tears over a software engineer having to make do on $350,000 a year rather than $400,000. Especially if they can demand $500,000 a year or two down the track.
3) Further to the above, most people who exit American companies jump (presumably to better-paid positions) rather than get pushed. For all the news of high-profile businesses making redundancies, “In absolute terms, resignations still far outnumber reductions — people are quitting at three times the rate of layoffs.”
4) Tech companies typically haven’t laid off staff because they are at risk of going under. Companies such as Facebook might have seen their share prices succumb to gravity over the last year, but as was frequently observed during the height of the boom, the correlation between a company’s share price and its fundamentals has long been weak.
It’s far easier to hire and fire workers in the US than it is in countries such as Australia. This means US tech companies are quick to grow their workforces when things are looking promising and unconcerned with throwing staff under the bus when conditions appear challenging. It should be noted that even companies that have made deep cuts are still usually employing lots more people than they were a few years ago. (At the time of writing, Zuckerberg has laid off 11,000 workers. But since 2017 he’s hired 10,000 – 15,000 additional workers every year.)
As an aside, I think of this focus on tech-industry firings over hirings as ‘Sydney property market astigmatism syndrome’. Year after year, Sydney house prices rise 10-20 per cent and everybody considers this the natural order of things. Then, one year, extraordinary events mean house prices (very) temporarily decline by 5-10 per cent and everybody starts carrying on like it’s the 1929 stock market crash.
5) Tech is the future. As the recent emergence of generative AI illustrates, we are drawing ever closer to the Singularity. Most of the world’s big companies – and pretty much all the big companies launched since 1980 – are tech companies. With the fourth industrial revolution picking up speed, there is no way that the tech sector isn’t going to keep growing strongly in the coming decades.
Still not convinced that Tech Wreck 2.0 was little more than a flash in the pan? Let me conclude by diving a little deeper into the recent lay-offs at Atlassian.
In announcing it was letting 500 staff go after growing the business from two to 10,000 employees during the previous two decades, Atlassian’s co-founders were at pains to point out:
We’ve made hard calls to reduce our investment in specific areas, in order to reinvest in others. This is different to a financially driven reduction, where you would look to make ‘broad-based cuts’ – for example, a 10 per cent cut equally distributed across every org within the company. This is not what is happening here.
At the time of writing, Atlassian still has plenty of jobs advertised. I wouldn’t be surprised if the company is again desperately trying to grow its workforce by early 2024. As per its pre-downturn plans, I suspect Atlassian will have a 25,000-strong workforce in 2026. And that the putative tech wreck of 2022-2023 will be a distant memory for Scott Farquhar and Mike Cannon-Brookes, as well as all the people they are employing, by then.