Reality-check for the pandemic business models as countries reopen

Netflix is losing subscribers in hundreds and thousands, Zoom’s stock price is down over 80% from the pandemic highs, the nearly invincible Amazon announced its first loss since 2015 as sales slowed, costs rose and its investment in electric vehicle company Rivian wiped out profits. Among the Indian companies, only 18 of 100 unicorns are profitable now

The exuberance of a pandemic induced growth of tech companies and startups is facing a harsh reality check. Netflix is losing subscribers in hundreds and thousands, Zoom’s stock price is down over 80% from the pandemic highs, the nearly invincible Amazon announced its first loss since 2015 as sales slowed, costs rose and its investment in electric vehicle company Rivian wiped out profits.

Start-ups now talk real profits

Even startups with dizzying valuations like Uber are talking about showing real profits. Closer home, TechEd unicorns are foraying into offline coaching and laying off employees in the face of mounting losses. During the pandemic most of these companies, with huge VC and IPO finances at their disposal, went in for aggressive market share capturing strategies. But now as the pandemic weakens in major markets, and people crave for social contact once again, the platform companies and service aggregators are perhaps seeing the end of a honeymoon period.

Amazon’s revenues grew at a sluggish 7% in the first quarter to $116.4bn, Amazon’s slowest growth rate in nearly two decades. The company lost $3.8bn for Q1 compared with a profit of $8.1bn during the same period in the previous year. There might be more losses ahead it warned. For the current quarter, Amazon expects operating income between a loss of $1bn and a gain of $3bn, compared with $7.7bn in Q2 of 2021.

Need to show the money

Uber’s chief executive, Dara Khosrowshahi, emailed employees with a uncharacteristic message: “we need to show them the money.” Using mixed metaphors, Khosrowshahi explained that the market was undergoing a “seismic shift” and the “goalposts have changed.” company’s urgency was to generate free cash flow. “We are serving multitrillion-dollar markets, but market size is irrelevant if it doesn’t translate into profit,” he wrote. For the boss of Uber to be underscoring cash flow and profit would once have seemed about as incongruous as Elon Musk stressing personal humility and promoting petrol-fueled cars. No company has been more illustrative of the long, wild, capital-drugged bull market in technology stocks than Uber. Founded in 2009, the company went public a decade later at a valuation of $76 billion without showing even a single quarter of profits.

The company’s ultimate realization about financial orthodoxy reflects much markets have been transformed since the turn in the interest rate cycle and the crash of the tech-heavy Nasdaq market, that has plummeted 26 percent this year.

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Netflix lost 200,000 subscribers

During the first quarter of 2022, Netflix recorded a net loss of 200,000 subscribers to its streaming service for the first time in over a decade; however, Netflix remains the leader in SVOD services. According to Parks Associates OTT Tracker data, Netflix has nearly 67 million customers in the United States. The company’s executives claim to have 222 million paying subscribers worldwide, but likely an additional 100 million using a shared password to access the service, is what they estimate.

A comeback plan

To mitigate the revenue loss from this quarter’s decrease in subscriptions, Netflix announced two strategies: focusing on password sharing and launching an AVOD (Advertising-Based-Video-On-Demand) tier service. The account sharing plan that Netflix would let customers to opt-in but is likely a few years away for those in the U.S. An AVOD service lets customers subscribe to an ad-supported version of the service at a lower price point is also planned. Parks Associates’ latest data show that 27 percent of internet households watch ad-based (AVOD or FAST) OTT services. Consumers are enticed by AVOD and FAST services because it allows them to access a massive content library at no extra cost, but it would also allow brands and advertisers to collaborate and capture a sizeable portion of marketing and advertising budgets.

Zoom lost market capitalization

Since the beginning of this year, Zoom has lost about half of its market capitalization—dropping from $54 billion to $27 billion. Zoom became a catchphrase for remote calls as in March 2020 as millions of people were suddenly forced to work from home. Just over two years later, travel restrictions are easing, the tech market is wilting amid rising interest rates, and Zoom’s stock price has fallen to pre-pandemic levels, a sharp decline of 83% from its all-time high in October 2020.

Only 18 of 100 Indian unicorns are profitable

Only 18 of the top 100 unicorns of India are profitable, while the rest are in red. Hospitality brand Oyo, B2B e-commerce platform Udaan and Flipkart (acquired by Walmart) were the top three loss-making unicorns with more than Rs 2,000 crore loss each in FY21. Edtech startup Eruditus was the latest to post losses.

The days of unbridled growth fueled by easy money seems to be over for Indian unicorns. Since the beginning of 2022, at least 5,600 employees of startup companies have been hit by cutbacks, termination of contracts and layoffs. From unicorns such as Unacademy and Vedantu to global tech companies and growth-stage startups such as Furlenco and Trell, the tech industry is going through a period of harsh recoking after the funding bonanza of 2021. The spate of layoffs has forced many to question some of the expansion over the past couple of years. These hirings and expansions appear reckless in hindsight.

Hirings hit

The global tech sector, which boomed during the pandemic, is showing signs of tightening its finances and the move is hitting employees first. Facebook parent company Meta is putting the brakes on hiring and scaling down recruitment plans. Amazon’s CFO told that its warehouses have become “overstaffed,” following large-scale hiring during the lockdowns when consumers flocked to online shopping. Uber’s CEO told staff that the company would “treat hiring as a privilege…”

Abhjit Roy

is Technology Explainer & Futurist.

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