Layoffs now appear to be the new normal in the tech sector. New job cuts are announced on an almost daily basis, and websites have even been created to track the companies involved and the cumulative job losses. Each of Amazon, Microsoft, and Apple have all cut over 10,000 employees from their global headcounts.

The technology sector also suffered some dramatic share price declines in 2022, with the tech-heavy Nasdaq-100 down 33% in the year. This has led some to suggest that we are seeing the end of the ‘tech exceptionalism’ period. Tech exceptionalism is the idea that the dominant technology companies exist in their own unique environment, free from the regulatory and operational constraints that are faced by more traditional sectors, allowing them to establish dominant and almost unchallengeable positions. This idea has been widely adopted in the corporate world in recent years, with the rapid adoption of digital services during the pandemic seeming to underline the dominant position of Big Tech.

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2022 was a challenging year

Many of the leading tech companies that witnessed their revenues and share prices soar amid the pandemic, subsequently saw these fall sharply in the final quarter of 2021, as life began to recover from lockdowns and restrictions. The Economist created its aptly named “lockdown lunacy index”, covering Netflix, Peloton, Robinhood, Shopify, and Zoom, charting a near quadrupling of share prices from early 2020 to a peak in the third quarter of 2021. These declines continued into 2022, with most of these companies now trading below their pre-COVID valuations. The sell-off broadened to impact the whole technology sector, including stalwarts such as Apple and Microsoft.

The sell-offs have been driven by the more challenging macroeconomic outlook and rising interest rates, but also by a sense that the markets are increasingly skeptical not only of the valuations once attached to these companies but more crucially of some of the fundamentals underpinning these businesses.

Financial markets can also not be viewed in isolation from the increasing regulatory scrutiny that the sector is facing. On both sides of the Atlantic (from the typically more interventionist European markets to the more laissez-faire US), tech companies and their business models are facing increasingly greater scrutiny. The latest European regulation is the EU Digital Markets Act, which was passed in late 2022 and will come into effect from March 2024, promising a fundamental overhaul of how Big Tech companies are regulated.

In the US, new legislation such as the Open App Markets Act, which would have regulated app stores and payments in a similar manner to the EU Digital Markets Act, failed to make it into law before the new Republican-led US Congress came into being. Separately, the Department of Justice recently filed a lawsuit against Alphabet, alleging that the company abused its dominant position in the digital advertising market.

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Tech is everywhere

There is a certain irony that while many of the established tech companies are certainly facing significant challenges, the use of technology and its potential to disrupt has never been greater. The widespread press coverage in recent weeks of generative AI, especially the ChatGPT software developed by OpenAI, has reminded everyone of the disruptive potential of technology.

The ability of new AI models to create all kinds of content, ranging from images to music to text, is a reminder both of the rapid pace of innovation but also the potential for AI to disrupt many aspects of work. This may challenge companies across many sectors, not least in technology. While the likes of Google and Microsoft are investing heavily, so are start-ups and consortiums around the world. With the technology still at an early stage, it is impossible to predict the likely winners and losers.