Most of the big tech companies are announcing their quarterly earnings this week. In most cases, they were less impressed. The best you can say about most of it is that everyone expected things to be bad, and the companies lived up to that expectation. I think meeting expectations is a good thing.
Except, these companies are — for the most part — experienced companies that have experienced explosive growth over the past decade. Amazon, Google’s parent company Alphabet, Microsoft, Facebook (now Meta), Apple and Tesla all surpassed $1 trillion in market capitalization last year. Many have reached $2 trillion.
Much of that growth occurred during the pandemic, when none of the normal business rules applied. As movie theaters and sports stadiums close, consumers sign up to evacuate for entertainment. They bought more laptops than ever before, mostly for remote work and school. They signed up for a business service when they were trying to figure out how to keep their teams connected when they weren’t in the office together.
All this led to record sales numbers. Tech companies responded by hiring more people, building factories and warehouses, and spending money as if the line would keep moving up and to the right.
Then things got tricky. As if the global pandemic wasn’t enough, the supply chain disruptions that followed made everything from toilet paper to semiconductors difficult to find. The workers decided they would rather quit their jobs than go back to the office.
Once the epidemic began to cool down, people began to go back outside, and to stores, and movie theaters, and baseball games. In other words, they’re back to the normal version of what it looked like before the pandemic. That sounds like the sort of thing smart business leaders foresaw, but instead, most assumed the explosive growth that hit the pandemic was here to stay.
“The eternal fallacy,” I say. It’s actually quite simple. The Perpetual Lie is the belief that the conditions leading to exceptional growth will continue indefinitely, even if they are not obvious. Progress, no matter how irrational, continues because changes in circumstances are permanent.
There may not be a more dangerous mistake in all business leadership. If you hear Peloton’s CEO talk about how the pandemic created demand, consider how ridiculous that argument sounds, not because nobody can’t go to the gym, but because suddenly your product is in mass demand. Just like the law of large numbers, eventually you reach all your potential customers and you stop growing (see Netflix).
At least Netflix said in its letter to shareholders that “Covid 2019 By 2020, we have significantly increased our growth, which has improved the picture. “Leading us to believe that much of our reduced growth in 2021 is due to Covid going forward,” he acknowledged in a letter to shareholders.
That phrase — pull forward — is a cool way of saying that a long-term change happened too quickly, like an epidemic, due to an unexpected event. This means that the growth you have seen for 10 years has happened in a short period of time.
Tech companies aren’t the only ones using that phrase to explain how the world is changing during the pandemic. There were pundits, and op-eds and articles talking about how Covid has “dragged forward” changes in the way people work, where they live and where they shop. Those changes were here to stay, he said.
Except they weren’t. Some, sure, but most aren’t — especially not what tech companies are counting on.
As you might expect, many companies are now paying a very real price. Google, Microsoft and Facebook have said they will reduce or pause hiring. All three missed expectations this week, with Facebook’s parent company Meta reporting a quarterly revenue decline.
After a decade of growth, Netflix has lost two consecutive quarters of subscribers and announced it is introducing an ad-supported tier. Amazon has hired so many people, built so many warehouses, and is now trying to offload good-sized parts of the two.
Peloton – Well, Peloton has it all wrong. He built too many bikes, spent $400 million on a new factory, and then ran out of warehouses full of inventory he could no longer sell. He has replaced the CEO, laid off employees, and is attempting a major strategic shift.
The reason is the same for each of these companies. They all believed that what was giving them success would continue forever. As we have seen, this is a misconception.
See, that’s probably just human nature. When things are going well, we really want them to keep going, especially when it leads to rewards like recognition and — more importantly — big stock bonuses. We prefer not to think that the circumstances beyond our control that have led us to great success can change. If they do, things can get worse.
If your job is to talk up your company and get the stock market excited about your future growth, chances are you’re going to get it wrong forever. That’s really none of your business. Your task is not to assume that things will always be fine the way they are. Your task is to be realistic about the future and give your company space for whatever comes next.
