From: allin
Recent shifts in the tech industry highlight a move towards increased austerity and efficiency, challenging prior growth models and corporate cultures [01:00:00]. This trend is driven by shareholder demands, economic conditions, and a re-evaluation of long-standing practices in Silicon Valley.
Layoffs and Cost Reduction
Major tech companies like Google and Amazon are undergoing significant workforce reductions [00:59:03]. Amazon had already announced 10,000 layoffs and signaled more for 2023 [00:59:16]. This represents a reduction in “white collar, high-paying jobs” rather than just factory workers [00:59:27].
A prominent investor, Chris Hohn, advocated for Google (Alphabet) to reduce its headcount and salaries, noting that the average Google salary was significantly higher than even a well-paying workforce like Microsoft’s [00:59:55]. He argued that many employees in general sales, marketing, and administrative roles should be compensated in line with other technology companies, and pushed for an EBITDA margin target and increased share buybacks [01:00:15].
Drivers of Inefficiency in Large Tech Firms
Several factors contributed to the perceived inefficiencies in larger tech companies like Google, Meta, and Twitter:
- War for Talent [01:01:33]: Beginning around 2004-2005, intense competition for computer science graduates led companies to offer excessive perks and benefits, creating a “slippery slope” of wage inflation and an “acceptance or allowance for degrees of complacency” among employees [01:01:55].
- Aging Workforce & Lifestyle Focus [01:02:43]: As the Silicon Valley workforce matured, many employees prioritized family time over intense work, contributing to less time spent at work [01:03:01]. Ballooning compensation allowed for comfortable lifestyles without needing to seek major paydays [01:03:09].
- Lack of Downside for Innovation [01:03:21]: At large companies, employees working on new projects face “no loss” if a project fails, as their job is secure [01:03:25]. This removes the “pain and burn” of a startup founder and diminishes the incentive to “drive and to innovate” [01:03:39].
- Return on Invested Capital (ROIC) [01:05:04]: From a shareholder perspective, many projects within large tech companies offer low returns on invested capital, with a minority of projects and headcount driving the majority of value [01:05:20]. This suggests that a significant portion of current investment in human capital isn’t generating optimal returns.
Google’s Defense and Bezos’s Model
Google might argue that much of its work, particularly on core infrastructure like GFS, Bigtable, TPU, and TensorFlow, is unseen by Wall Street but crucial for service quality [01:06:31]. They also provide free services to support the internet ecosystem [01:07:10]. However, even with these arguments, there remains a gap between perceived necessary headcount and prevailing numbers [01:07:35].
Jeff Bezos, at Amazon, was noted for his ability to “fail fast,” killing projects that weren’t working while aggressively pursuing successful ones like AWS [01:09:03]. This discipline in ending non-performing initiatives is seen as a key area where companies like Alphabet could improve [01:09:10].
The “Blocker Strategy” and Surplus Elites
A whispered theory in Silicon Valley is that large companies pay high salaries to talented individuals not just for their work, but to prevent them from leaving and potentially creating disruptive startups [01:09:31]. This “blocker strategy” is a cost of doing business to mitigate future disruption [01:09:59]. However, truly entrepreneurial individuals are likely to leave anyway, regardless of compensation [01:10:04].
The current wave of layoffs and austerity measures is seen by some as a “revolt by entrepreneurial capital against the professional managerial class regime” [01:13:50]. This professional managerial class (PMC), including parts of the media, is criticized for creating a “jobs program for Surplus Elites” – high-status individuals who are not economically productive [01:15:15].
This phenomenon is tied to the societal quid pro quo where obtaining a college degree, even in fields without marketable skills, was supposed to guarantee economic and social advancement. Tech companies, as “fantastically wealthy monopolies,” hired large numbers of these individuals [01:16:43]. The current economic recession and subsequent layoffs are causing “deep insecurity” among this group, as the reliance on “lip service to the right platitudes” for career advancement may no longer hold true [01:17:07].
Cultural Divide and Future Outlook
The current changes are creating a cultural divide within the tech industry:
- “Hustle Culture”: Companies embracing austerity are re-emphasizing intense work, with expectations of 50-70 hours per week, similar to early startup culture [01:25:22].
- “Lifestyle Business”: Other companies may continue to support a more relaxed work-life balance, allowing employees to work 30-40 hours a week without perfect efficiency [01:26:29].
The current environment is seen as a re-alignment where the “playing field of capitalism will show who is right” [01:26:40]. There’s a growing expectation that software-based businesses, with high gross margins, have a greater responsibility to shareholders to find the “efficient frontier of headcount” [01:24:47]. This efficiency allows new employees joining companies like Twitter to be “100 percent aligned” with the hardcore culture from the outset [01:25:09].
Ultimately, the market will dictate which models succeed, but the period of excess is seen as ending, paving the way for an “age of efficiency, austerity, excellence” [01:41:43]. This shift is expected to be a “strength for these entrepreneurs to have to fight it out in the public market under scrutiny” [01:43:50], providing discipline that was less present in the era of prolonged private company lifespans.