Is the Tech Industry Over?

Is this really what we need next from the tech industry? (Photo by Uriel Soberanes on Unsplash)

Like my protagonist in Bit Flip, Sam Hughes, I came to Silicon Valley during the late 1990s dot-com boom to pursue a career in the technology industry. In the ensuing twenty-plus years, that industry flourished—transforming modern life for consumers and generating truly unprecedented wealth for people in the industry.

But 2022 feels like a year in which something “flipped” in the tech industry, and I’m not just saying that to promote the title of my book. The Atlantic recently summarized the sentiment that the “tech industry seems to be in a recession.” With astronomical financial frauds, jaw-dropping displays of hubris, and a waning ability to dictate “the next big thing,” there is a growing sense of many in tech that the industry, at least as it has been defined for the last 50 years, is over.

From its inception, the definition of a “tech industry” has been nebulous. Always as much a horizontal set of tools as a true vertical market, the tech industry was initially defined by computer hardware manufacturing, advancing through eras of technical innovation: the mainframe, the microprocessor, the personal computer, the mobile phone. Semiconductors, chips, memory, and storage designed to process data and execute commands—that was what defined the tech industry.

In the early days, the software required to make these machines do anything useful was regarded as uninteresting. Many of the first computer programers were women, because the task was seen as clerical and, consequently, under-appreciated and underpaid. Over time, however, the hardware side of the tech industry became commoditized and off-shored, like many manufacturing sectors. Software turned out to be where the money was. Of the twenty largest tech companies today, only four (Apple, Samsung, Cisco, and Broadcom) generate the majority of their revenue from hardware. The other 16 are predominantly software companies embracing a wide variety of business models from advertising to subscription licenses.

With the advent of the internet, software became interconnected and that’s when the tech industry really transformed. Suddenly, software was “eating the world” in the words of venture capitalist, Marc Andreessen—able to perform almost any function in any industry. Which, somewhat paradoxically, leads me to my arguments that the tech industry is over.

First, the tech industry has completely escaped its boundaries. What makes Stripe a “tech company” but Wells Fargo a “financial services” company? What makes Netflix a tech company but Time Warner a media and entertainment company? What makes Uber a tech company but Hertz a transportation company? More importantly, what justifies the tech industry multiple? Certainly, much of that answer lies in the financial statements. “Tech companies” that have disrupted traditional industries often don't carry the tangible assets, contractual obligations, or labor costs that weigh on the balance sheets of their incumbent rivals—leading to growth rates and profit margins that result in huge valuations. But the distinctions between tech companies and non-tech companies continues to blur—with the tech upstarts realizing the strategic value of traditional industry expertise and infrastructure, and incumbents massively investing (or under-investing in the case of Southwest Airlines) in technology. In short, every industry is tech now. 

Second, the capital advantage of the tech industry is closing. Arguably, the not-so-secret weapon of many software-centric tech companies lies less with innovation or differentiated product and more with seemingly limitless access to cheap capital. For three decades, venture capital firms, private equity funds, and the broader capital markets have pumped massive amounts of cash into tech companies, giving them an arsenal that incumbents typically lack. With interest rates rising and many tech companies struggling, the world is now realizing there is nothing special about “tech.” The massive drops in public market valuations and new venture investment will mean that tech companies and their investors can no longer just bully their way into new markets with a cash war chest. As the free flow of capital dries up, the tech industry advantage will subside. 

Third, the tech industry has lost its moral high ground. One of the great appeals of the tech industry, particularly for employees, was that it was “making the world a better place.” With low externalities, high productivity gains, and egalitarian values, the tech industry long felt like a force for good. Few people share that opinion now. In the wake of multiple industry scandals, we are less comfortable with the tech industry dominating our lives—even as technology itself becomes more unavoidably ubiquitous. The tech industry and tech founders are no longer held on a pedestal. With it, much of what led to outsized growth in the industry will evaporate. 

But perhaps the biggest reason the tech industry may be over is it is failing to generate its next era, its next engine of growth. Not for lack of trying. The tech industry has many shiny new things that proponents are hyping up in the hope they will propel the industry forward—from virtual reality and the metaverse, to cryptocurrencies and NFTs, to the over-hyped and poorly understood field of “artificial intelligence.” But while previous generations of technology innovation promised clear benefit to a wide group of people, the utility of these next new things is less obvious. Many feel like things we don’t really need getting pushed down our throats. In many cases, these “web 3.0” innovations seem designed more to concentrate power and profit in a smaller segment of tech elites than do anything useful for humanity. 

If an industry extends across every other industry, lacks a central defining business model, loses its appeal among investors and customers, and relies on over-capitalization to succeed, it is hard to really call it an industry any more, at least not in the traditional sense. Technology itself will continue to evolve, innovate, and disrupt, improving our lives in many ways, proving detrimental in many other ways. But the “tech industry” as we’ve known it feels like it is entering its twilight—remaining centrally important to our economy, just as energy, manufacturing, transportation, and other legacy industries are, but no longer deserving special distinction, and the market caps that go with it.