Corporate hubris takes various forms. Research shows overconfident CEOs are prone to distorting their investment decisions: They overinvest when cash flows are strong, and cut too deep when they need external financing. Case in point is Meta, where we’re witnessing hubris play out in dramatic form. The unconstrained boy-king is betting his company — his shareholder’s company, really — on a fever dream in which he is God in a world littered with Nissan and Nespresso billboards, a “metaverse”. More recently, FTX founder Sam Bankman-Fried believed he could defy the laws of economics and borrow against large sums of a fake currency he made up. Essentially, Bankman-Fried constructed the Burj Khalifa on a foundation of quicksand. And now comes the fall.
Success can be our undoing when we’re promoted beyond our true capabilities. The Peter principle holds that because people get promoted on the basis of prior performance, they will inevitably rise to the level of their incompetence. Our brains make it easy for our ambition to exceed our ability: The Dunning-Kruger effect describes a demonstrated cognitive weakness, that the less we know about something, the more we overestimate our knowledge. That’s why stupid people, and people who make great cars and then buy media companies, are so dangerous.
This has been a banner week for the powerful coming undone. In no particular order, the largest social network company in history, Meta, which has lost more than two-thirds of its value over the past year, announced it was laying off 11,000 people; the most prominent crypto billionaire lost nearly his entire fortune after he overleveraged his empire to keep it expanding; and the richest man in the world … impregnated a bathroom sink before putting on a master class on how power corrupts.
Scott Galloway
The past year has not been kind to tech companies; between significant declines in stocks, hiring freezes, and more recently layoffs, you might say we’re experiencing a tech recession, affecting the entire sector from the largest companies such as Apple, Amazon, and Meta, to the mixed media & tech companies, such as Disney and Netflix, to startups and Bitcoin. The damage extends outside the US as well, as layoffs are happening in the Asian Internet sector and at our homegrown aspiring unicorn UiPath. A notable exception: TikTok, which apparently plans to double its staff.
There are several factors contributing to this, and they are affecting each company to various degrees. The most impactful and widespread is the overconfidence displayed during the previous years of the pandemic, when many executives assumed the shift to digital-first interactions was permanent and hired and invested accordingly. Instead many trends are reverting to their pre-pandemic course, and tech companies are forced to dial back their plans and budgets.
The overall economic background is certainly playing a role as well. Consumers concerned with higher inflation and the prospect of recession are less inclined to discretionary spending, thus slowing demand for gadgets and streaming, whereas companies are cutting advertising budgets (or shifting spending towards TikTok), reducing the ad revenues of Facebook and Google. Higher interest rates means less cheap cash for the various side-projects of tech giants, from Google’s Other Bets to Facebook’s VR fantasies. And the stronger dollar hits American companies twofold, cooling demand for their products overseas and decreasing their foreign revenues because of unfavorable exchange rates.
Regarding layoffs, I feel that the US labor regulations – or lack thereof – are playing a larger role that many would care to admit. The fact that companies can hire and fire employees with relative ease encourages bad management, overcommitment during growth periods and overcorrections in recessions. If the workforce had better protections against quick layoffs, maybe management would be more diligent in their hiring choices, knowing once hired it would be more difficult to let them go.
On an individual level Meta was impacted by Apple’s app tracking restrictions, while Apple is facing supply issues because its Chinese factories are constantly shut down to prevent the spread of Covid. Tesla stock is declining because of Musk’s distraction with Twitter, as he had to sell off more shares to finance the deal.
Despite the downturn, the largest companies will surely survive through it – hopefully with a better and more cautious understanding of their role in the broader economy.
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