Big tech has recovered in 2023 Wed, 15th Nov 2023 Article tags EconomyTelecommunicationsGlobalCountry AnalysisTechnology Big tech companies have reported better results in 2023, as they reduced costs and the comparison with 2022 is more favourable The focus on AI has driven growth in many digital markets, including cloud and advertising, but this requires high investments The demand for hardware has been softer, as many users are still not thinking of replacing the products bought at the onset of the pandemic Big tech companies are not immune to external factors, including the economy, geopolitics, or regulation As we had expected at the start of 2023, big tech companies—Alphabet, Amazon, Meta and Microsoft—have recovered in 2023, even though Apple’s performance has been weaker because of its reliance on hardware. The recovery is attributable to more favourable year-on-year comparisons, better cost controls and macroeconomic conditions, and the push towards greater use of artificial intelligence (AI) since the launch of ChatGPT in November 2022. This has particularly benefited two core markets, cloud computing and digital advertising. But big tech is not immune to external factors, and companies will need to be aware of the macroeconomic, geopolitical and regulatory conditions as they navigate 2024. Cloud computing is benefitting from AI Through its investment in OpenAI, Microsoft has leveraged AI the best into its Azure cloud platform, with more than 18,000 companies using its Azure OpenAI Service. But AI still only represents a small portion of that growth—about 3 percentage points of the 28% growth reported. Both Amazon Web Services and Google Cloud are lagging behind, and this is why both have invested into Anthropic, one of OpenAI’s main rivals. Amazon and Google have reported that customers are optimising their spending, which means that businesses are spending less than expected. However, Amazon seems to have better momentum than Alphabet, with its profitability increasing much more quickly, despite lower revenue growth than rivals. Part of the recovery in 2023 has been achieved by controlling costs. We expect all three tech companies to keep spending on AI in 2024, which could weigh on their profitability, especially as it is still unclear whether AI would start offering strong returns on investments as soon as next year. Digital advertising is also AI-led Digital advertising, an important source of tech revenues, also saw strong growth in 2023. Alphabet highlights the retail segment was its best performing in the latest quarter (third quarter), while for Meta it was online commerce. And in this market too, AI has had a positive impact. Alphabet has used more AI functions in both its search engine and YouTube, as a way to drive better demand and engagement. Meta has used AI to improve its recommendations, drive online sales for advertisers, and has started rolling out business messaging through WhatsApp. Amazon has also used more AI, adding new language learning models tools to Alexa, and enabling companies to have better experiences with their customers. Going forward, the ongoing strength of the sector will depend on the overall macroeconomic conditions. Already Meta is highlighting that demand has softened a bit because of the situation in the Middle East, and worsening conditions will lead many brands to cut their spending. Hardware under the most pressure The hardware sector is probably under the most pressure, even if Microsoft reported that the PC market is stabilising to its pre-pandemic level. Customers refreshed their products at the start of the pandemic, and many are still happy with what they bought two or three years ago, lengthening replacement cycles. Apple is indicative of that trend, with four straight quarters of revenue declines, as three-quarters of its revenues is coming from hardware. While iPhone sales improved during the quarter, with the iPhone 15 having launched in September, both the Mac and iPad have had tough quarters through the year. The new M3 chip in Mac computers will refresh vendors’ lineup, but will also face new competition from Qualcomm, which is launching a new Arm-based PC chip. Apple is also planning to launch its Vision Pro headset in January, but this will account for a very small part of its hardware business in 2024. External factors will have an impact in 2024 Big tech companies are not immune to external factors. Overall macroeconomic conditions will impact multiple digital markets—while we do not expect a recession in 2024—we still expect the global economy to slow down and growth to be restrained. Geopolitics will also impact the companies, especially the relationship between the US and China. This does not only affect Apple—which this quarter reported its lower share of Chinese revenues in three years, at under 17%. Even in digital advertising, Chinese companies have been driving demand as they look to target customers outside of China, and increased tensions between the two countries will have a negative impact. Regulation is the final risk. The Digital Markets Act and Digital Services Act are becoming applicable in the EU, and this has already led Meta to launch a subscription plan in the region in order to offer users the option to not to be tracked for personalised advertising. The court case between the Department of Justice and Google is ongoing in the US, while other investigations, such as the Federal Trade Commission suing Amazon, or 42 states suing Meta, have also started. While we do not expect any rulings to drastically change their businesses, for instance through a break up, the increasing number of investigations will still have an impact on their daily operations. The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks. Wed, 15th Nov 2023 Article tags EconomyTelecommunicationsGlobalCountry AnalysisTechnology