Tech's COVID Hangover

So many layoffs! I can't open Hacker News or LinkedIn without seeing constant stories about the next tech company to lay off hundreds or thousands of employees. For a couple years there, the tech industry was hotter than I had ever experienced in my career.

It never quite made sense to me, but I was riding the wave. Well, that wave has now crashed, and I'm left wondering what happened.

Ben Thompson of the Stratechery blog, a frequent guest on the front page of Hacker News, wrote recently about The Four Horsemen of the Tech Recession, and I found the analysis pretty interesting.

In particular, his discussion of the "COVID hangover" caught my attention. Essentially, demand for digital transformation in companies around the world suddenly sped up when the pandemic hit. Planned investments to modernize were all made at once, rather than the slow rollout that they envisioned before the world suddenly changed. Growth in the tech sector is now slowing as the demand was "pulled forward." Thompson explains…

When corporations the world over were forced literally overnight to transition to an entirely new way of working they needed to scale their server capabilities immediately: that was only realistically possible using cloud computing. This in turn likely accelerated investments that companies were planning on making in cloud computing at some point in the future. Now, some aspect of this investment was certainly inefficient, which aligns with both Amazon and Microsoft attributing their cloud slowdowns to companies optimizing their spend; it’s fair to wonder, though, how much of the slowdown in growth is a function of pulling forward demand.

…the COVID pull-forward was massive, but underneath the inevitable hangover there was a meaningful long-term shift to digital broadly.

The layoffs and slowdown in hiring we're seeing now after the massive boom in hiring during the pandemic is…

precisely because these [only-possible-on-the-Internet] jobs — and similarly, many of the COVID-specific workloads like work-from-home and e-commerce — were digital that it is tech that is in a mini-recession even as the so-called “real” economy is doing better than ever.

The level of growth in the tech industry that kicked off during the pandemic was not sustainable, but if it represented a pulling forward of pent-up demand, then it would make sense that there would be a slowdown in spending to follow. Hopefully after the hangover we get back to a healthy level of demand, that while not at the highest of highs, will be sustainable.