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

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.

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.

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. 

During Microsoft’s earnings call on April 25, executives said the conglomerate will continue to narrow its focus, prioritizing its cloud business, which is seeing an increase in short-term customer contracts. There’s endless talk about AI, alongside the company’s $13 billion commitment to OpenAI. 

“As we look toward a future where chat becomes a new way for people to seek information, consumers have real choice in business model and modalities with Azure-powered chat entry points across Bing, Edge, Windows and OpenAI’s ChatGPT,” Nadella said on the call. “We look forward to continuing this journey in what is a generational shift in the largest software category: search.” 

In March, Microsoft announced it would cut 10,000 jobs, or nearly 5% of the company’s workforce, following executive comments in late 2022 regarding the importance of cost cuts and productivity boosts.

“We’ve been through almost a year where that pivot Satya talked about — from we’re starting tons of new workloads, and we’ll call that the pandemic time, to this transition post — and we’re coming to, really, the anniversary of that starting,” CFO Amy Hood said on the latest earnings call. “We’re continuing to set optimization, but at some point, workloads just can’t be optimized much further.” 

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.