The end of an era for cheap tech-enabled lives
The end of an era for cheap tech-enabled lives
Rising interest rates are putting a rapid end to a 'golden era' of tech utopians
Quick summary:
Inflation and rising interest rates are putting more financial pressure on firms
Similar to the dot-com boom of the 1990s, we are reaching the end of a tech era
Technology isn’t going away, but we are being asked to pay more for it in our lives
Some businesses will survive this shift, but many others appear to be faltering
With uncertainty and layoffs comes a loss of trust both internally and externally
Trust implies vulnerability; if firms lose customer trust, it is harder to win back
A farewell to our nice customer subsidies in tech
I recently listened to a podcast featuring Derek Thompson of The Atlantic, who described his recent article The End Of The Millennial Lifestyle Subsidy. His basic premise is that the last 10-15 years of near-zero interest rates provided a sea of cheap capital that went, in part, to funding new tech startups that were primarily focused on growth and engagement, not profits. Popular tech firms such as Facebook, Twitter, Uber, DoorDash, and Netflix either offered their services for free (in the case of Facebook and Twitter) or at a significant discount relative to the cost of providing those services (see Uber, DoorDash, and Netflix). The justification was the race to grow market share and achieve scale first, then seek profitability later once their dominant competitive position in the market was secure.
Regardless of how sound this model is as a business strategy, the implication for customers is that we have been living in a bit of a utopia for the past decade. A range of new products and services were at our fingertips at competitive prices. This is true in particular for millennials, who have become adults in their 20s during this period, adopting a comfortable tech-enabled lifestyle offered by new startups. With the advent of lasting inflation in the past year and subsequent rise in interest rates, investors are now prioritizing profits as capital costs have increased substantially. Eventually, inflation should be controlled by the Federal Reserve and central banks around the globe, but this will likely do little to reverse the focus on profitability.
Raising prices, cutting costs, and mass layoffs
Ironically, the tech news site Protocol announced it was shutting down its operations this week. Launched in February 2020, the firm was dedicated to covering the shifts in power with an emphasis on technology. It covered significant developments such as crypto and Web3: all 64 employees have lost their jobs. The timing is unfortunate from my perspective as the demise of FTX that I highlighted last week has led to a debate about whether this marks ‘the death of the crypto dream’ and Web3 with it. Twitter continues to be a fascinating story to follow as Elon Musk desperately looks for people to work at an “extremely hardcore” rate to find a workable business model for what he calls Twitter 2.0, as the current ad-supported model isn’t cutting it. Even Amazon announced layoffs of 10,000 employees this week ahead of the year-end holidays amid fears by employees that “no one is safe.”
Even the streaming wars between Disney+, HBO Max, Peacock, Paramount+, Apple, and Amazon Prime are over due to a halt in subscriber growth rates, an alarming burn rate to build these platforms, and demands by investors for a clear path to profitability from each. Firms such as Netflix are looking to introduce an ad-supported tier and cracking down on loose password-sharing rules that were not enforced rigidity due to a desire to promote growth. Add it all up, and the implication is clear: customers will be paying more for the products and services they use in the future. This will inevitably force choices: which of these offerings will consumers view as must-haves and which are superfluous? In particular, services such as Twitter that were previously free to users looking to capture subscription-based revenue to improve its bottom-line performance may turn off many users, leading to a downward death spiral if the platform is used less and less. This strategy could also open Twitter to competition from firms like Meta, Snap, TikTok, or other tech firms.
As prices rise, can firms retain customer loyalty?
Companies exist to make a profit. The path to profitability can take many directions and be shorter or longer, but ultimately there is no such thing as a free lunch. One key to this shift by firms in asking customers to pay more will be how much trust each firm has earned. In their book The Power of Trust, authors Sandra Sucher and Shalene Gupta make a crucial distinction between reliability and trust. Most people equate trust with a person or company being reliable. But the authors point out that trust goes beyond this level: it implies vulnerability.
To trust fundamentally means to make yourself vulnerable to the actions of others. We trust because we believe they will do right by us. When we choose to trust someone, we willingly give them power over us, trusting that they will not abuse that power. Trust is a special form of dependence, and is predicated on the idea that we can be more than disappointed; we can be betrayed.
-Sandra Sucher and Shalene Gupta in The Power of Trust
The authors share four concepts related to trust that companies must learn and retain over time.
Trust is not a binary setting; it is complex and influenced by several factors
To build trust with your customers, you must start with your employees
Trust that is lost can be regained, but only with time and real effort
Once earned, trust creates new opportunities to grow relationships and business
Of note, during the current economic climate of mass layoffs at firms, both large and small, companies need to remember that layoffs can have a devastating impact on the morale of remaining employees. People and processes build products and services that are trustworthy. If distrust enters the workforce because leaders are not transparent about the need for layoffs and the firm's future direction, this could be a problem: a lack of trust has a way of getting into the products and services that customers experience. Trust must first be established among employees, who then are responsible for creating trust in the processes and standards within your organization that lead to earning the trust of your customers.
Have any products and services you use recently changed in price or quality? If so, can you share an example and state whether or not you plan to continue being a customer? How transparent do you feel companies are when it comes to price changes? What about layoffs? What role do external parties, such as regulators, have in building trust? Would more regulation in the crypto world increase the level of confidence? Or is more technology and decentralization the answer instead? Can technology such as blockchain help build trust?