Tech’s new business model: ‘Do more with less’

Sundar Pichai, CEO of Alphabet, speaks during an event in New Delhi, December 19, 2022.

Sajjad Hussain | AFP | Getty Images

It’s been a week since earnings season for mega-cap tech came to an end, with Apple’s report last Thursday. A theme investors heard from top execs across Silicon Valley and beyond was it’s time to “do more with less.”

Cost cuts that kicked into gear in late 2022 ramped up in the first quarter and are continuing into the second. Microsoft CEO Satya Nadella told staffers Wednesday there will be no salary increases for full-time employees, after the company announced 10,000 job cuts earlier this year.

related investing news

A video game developer with nearly 40% upside because of A.I. opportunity, according to Bernstein

CNBC Pro

Even as industry giants are enjoying rebounding stock prices from a brutal 2022, they’re making it clear customers will be conservative with their spending for at least the near future and the days of tech excess are behind us.

Alphabet CEO Sundar Pichai, who has taken flak from his workforce for receiving a stock award of over $200 million while the company downsizes, has been focused on efficiency. In the company’s earnings call in late April, business chief Philipp Schindler described a “macro environment of do more with less.”

That phrase has found its way into several recent tech earnings calls. Jeff Green, CEO of digital ad-buying company Trade Desk, said content owners are dealing with a challenging market to try and grow profitably, “so what that means is people need to do more with less” as they seek to get better value from their ads.

Throughout earnings season, executives cited macroeconomic pressures, foreign exchange headwinds and cautious spending by clients and consumers. For many tech leaders, the planned path forward is to continue to reallocate headcount and spending toward revenue drivers, and to look at how to decrease long-term costs for compute, supply chain and inventory. 

Between the most-valuable U.S. tech companies — Microsoft, Apple, Meta, Amazon and Alphabet — two big areas for increased investment are cloud infrastructure and AI initiatives. In their earnings reports, company executives walked a tightrope in reminding investors of the importance of spending in those areas while maintaining diligence with broader cost cuts.

Alphabet

Sundar Pichai, CEO of Alphabet.

Source: Alphabet

Google parent Alphabet has spent the past few months dealing with the types of cuts the company never had to experience in its first quarter century. It has conducted mass layoffs; slowed hiring; cut travel and entertainment budgets; paused construction on at least one office campus; and reduced investment for more experimental projects, such as its Area 120 tech incubator.

It all comes after Pichai announced plans last year to “make the company 20% more productive.” 

On Alphabet’s first-quarter earnings call, executives discussed efforts to allocate resources to key areas such as cloud, AI, hardware, YouTube and search. Schindler highlighted the “ability of Search to surface demand and deliver a measurable ROI in an uncertain environment,” preceding the company’s announcement Wednesday it would bring AI into Google Search. 

Besides the January layoffs, which hit about 12,000 employees, or 6% of Google’s workforce, Pichai mentioned more structural changes on the call, including bringing AI-focused groups Google Brain and DeepMind under one umbrella with “pooled computational resources.” 

“Beginning in the second quarter of 2023, the costs associated with teams and activities transferred from Google Research will move from Google Services to Google DeepMind within Alphabet’s unallocated corporate costs,” Pichai said. 

Alphabet also plans to look at ways to potentially reduce its real estate portfolio and save on compute costs, in part through efforts to improve training efficiency for AI models and by utilizing data centers more fully, Pichai said. The company will also move to better manage supplier and vendor costs, plus use AI and automation to “improve productivity across Alphabet,” said Ruth Porat, chief financial officer. 

Microsoft 

Satya Nadella, CEO of Microsoft, speaks during an interview in Redmond, Washington, March 15, 2023.

Bloomberg | Bloomberg | Getty Images

Amazon

Andy Jassy on stage at the 2022 New York Times DealBook in New York City, November 30, 2022.

Thos Robinson | Getty Images

Amazon’s first-quarter earnings report followed a period of unprecedented cuts for the e-retailer.

CFO Brian Olsavsky said on the call the environment of pesky inflation and economic uncertainty is leading customers to try and “stretch their budgets further,” adding it’s “similar to what you’ve seen us doing at Amazon.” 

In recent months, the company has reduced its workforce by 27,000 people, including cuts at Amazon Web Services, Twitch, the devices business and advertising unit, as well as in human resources and elsewhere. Amazon also implemented hiring slowdowns or freezes for areas such as retail and Amazon Prime, and slashed budgets for more experimental projects such as delivery robots. 

“We took a deep look across the company and asked ourselves whether we had conviction about each initiative’s long-term potential to drive enough revenue, operating income, free cash flow and return on invested capital,” CEO Andy Jassy said on the earnings call.

Jassy said that led the company to close its physical bookstores, four-star stores and businesses such as Amazon Fabric and Amazon Care, “where we didn’t see a path to meaningful returns.” He added Amazon has also altered some programs, such as eliminating free shipping for grocery orders over $35.

Meanwhile, Amazon is going all in on large language models amid the AI boom, as well as investing in cloud infrastructure, chips, regional fulfillment centers and eventually a business that allows enterprise clients to customize Amazon’s AI models for their own purposes. 

“Every single one of our businesses inside Amazon [is] building on top of large language models to reinvent our customer experiences, and you’ll see it in every single one of our businesses, stores, advertising, devices [and] entertainment,” Jassy said. 

Apple

Apple CEO Tim Cook presents the new iPhone 14 at an Apple event in Cupertino, California, September 7, 2022.

Carlos Barria | Reuters

Meta

Meta Platforms CEO Mark Zuckerberg speaks at Georgetown University in Washington, Oct. 17, 2019.

Andrew Caballero-Reynolds | AFP | Getty Images

Meta CEO Mark Zuckerberg earned praise from Wall Street earlier this year when he said 2023 would be the “year of efficiency” after the company’s stock price lost two-thirds of its value in 2022.

Since November, the company has announced 21,000 job cuts and a hiring slowdown. At the same time, Zuckerberg used every opportunity available to emphasize investments in AI, which the company says will improve internal productivity and advertising efficiency.

On the company’s first-quarter earnings call, executives homed in on Meta’s plan to deprioritize some nonkey revenue drivers and narrow its focus, including to AI-related sectors such as the ranking system for ads, recommendation engines for the feed and Reels, plus a significant push toward generative AI. 

“I think this is literally going to touch every single one of our products and services in multiple ways — and this is just a very big wave and new set of technologies that’s available, and we’re working on it across the whole company,” Zuckerberg said. 

On the same subject, CFO Susan Li added, “We’re still in the beginning stages of understanding the various applications and possible use cases. And I do think this may represent a significant investment opportunity for us that is earlier on the return curve relative to some of the other AI work that we’ve done.”

However, Zuckerberg was insistent the company’s name change to Meta in late 2021 wasn’t done in haste. Meta lost another $3.99 billion in its Reality Labs division, which houses its metaverse investments, and Zuckerberg said on the call, “we’ve been focusing on both AI and the metaverse for years now and we will continue to focus on both.”

WATCH: Alex Kantrowitz on tech earnings

Kantrowitz: We're in a spot where the tech giants shouldn't necessarily be leading the markets