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The Sky is Falling? The State of Digital — Q4 2022 (Thinks Out Loud Episode 364)

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It’s earnings season again. And the earnings calls from the tech leaders, the AGFAM (Apple, Google, Facebook, Amazon and Microsoft), help provide excellent insights into the state of digital each quarter. So, what is the state of digital in Q4, 2022?

Well, if you listened to most pundits or watched the stock market, you’d think the sky was falling. Is it, though? Or is there a more nuanced story going on here?

As you might guess, I think it’s the latter. The sky isn’t falling. Instead, the tech giants are using the current moment to refocus on areas where they can continue to dominate today… and in the future. In other words, the current state of digital is "more of the same."

What does this mean for your business? What lessons can you take from what Apple, Google, Facebook, Amazon, and Microsoft are telling their investors? And how can you apply those lessons to your business? The latest Thinks Out Loud dives in and breaks down everything you need to know.

Want to learn more? Here are the show notes for you.

The Sky is Falling? The State of Digital — Q4 2022 — Headlines and Show Notes

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Running time: 24m 28s

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Transcript: The Sky is Falling? The State of Digital — Q4 2022

Well, hello again everyone and welcome back to Thinks Out Loud, your source for all the digital expertise your business needs. I’m Tim Peter. This is episode 364 of the big show and I am so thrilled you’re here. I think we’ve got a really, really cool show for you today.

First, I want to say thanks so much for hanging in with me the last handful of weeks. I don’t like to go too many weeks in a row without a new show. Unfortunately, two weeks ago, I came down with COVID, which is a drag. I’m fully vaxxed, I’m boosted, all of that, but unfortunately I caught a mild dose that knocked me down for a couple days. And then we had a hurricane here in Florida, where I live. That also made things a little challenging around here. So I genuinely appreciate you sticking around and waiting for a brand new episode, and I think you’ll really like where we are today.

The Sky is Falling? What is the State of Digital Q4 2022?

It is that time every quarter where we look at what the big tech players, what the AGFAM, Apple, Google, Facebook, Amazon, Microsoft, are saying about their businesses and using that to help understand, "What’s the state of digital right now?" And if you look at what they’re all saying, you’d think the state of digital is garbage. You’d think things are terrible. "The sky is falling. It’s all a disaster."

Yes, This is a Weird Economy…

And I’m going to be a bit of a contrarian here. I don’t want to go and say, "Everything’s wonderful." I am on record this past July on this show, talking about how to do digital in the weirdest economy ever. Things are very strange right now. I also think it’s really interesting what we’re seeing from the large digital players right now, and this is one time where I think we want to be careful about reading too much into what they’re doing now.

They are bellwethers, right? They are the canaries in the coal mine. They have immense amount of data. We should pay attention to what’s happening with them.

But It’s Not All Bad

Where I do push back a little bit on the narrative around tech right now is that it is being driven more by the stock market than the reality of what’s happening with their business. Every single one of the big players, if you saw their stock announcements, everybody, their stock prices are crazy. Many of them… Amazon is announcing its largest round of layoffs ever. Facebook had its largest round of layoffs ever. We’re seeing some real pullback in terms of the way that they’re hiring.

What I also want to say is that except for Amazon, and Amazon’s a slightly special case here, every single one of them made ridiculous amounts of money in the last quarter. And Amazon only failed to make a profit because it’s investing in the future in a really big way. So even the layoffs that they’re doing now is to pull back from getting too far ahead of their growth plans.

So I actually think the future of digital remains bright despite some of the data that we’re seeing in terms of the earnings that these folks are reporting.

What Big Tech’s Earnings Tell Us Right Now

So let’s talk about the earnings and then I’ll come back to why we are where we are.

Facebook.

Facebook, by far, had the worst reporting of any of the big players and theirs was legitimately not great. Revenue was down about 4% though it was technically up, actually up, I shouldn’t say technically up. It was actually up in terms of constant currency, foreign exchange bit them a little bit. And they had a 50% decline in earnings. I don’t care how big you are, I don’t care how much money you make, if you keep half as much money this year as you kept last year, that’s not good. So please don’t misunderstand. I’m not saying, "Oh, Facebook is great," or any of that kind of stuff, or doing great. What I am saying is that they still made quite a bit of money.

Remember, Facebook — Meta Networks technically — is actually two different companies. One is Family of Apps, which makes the social networks we all know like Facebook and Instagram. And the other is Reality Labs, which more or less is Mark Zuckerberg’s big bet on the Metaverse.

Family of Apps makes essentially all of Facebook’s revenue and more than 100% of the profit. Its revenue was $27 billion in the quarter and it had over $9 billion in profit. That’s huge. That is still a very, very, very large company. And they’re seeing a big shift in terms of customer behavior to short-term video. What they haven’t figured out how do yet — and I emphasize the yet pretty heavily because I suspect they will figure this out — is how to monetize that traffic yet at the same level as they do their existing Facebook platform. That’s something that they need to sort out. They may not, but I’m going to give them the benefit of the doubt that that’s something they’re going to figure out. Because they need to financially, they need to.

The Reality Lab segment of Facebook — and I’m sorry I can’t call them Meta, it’s too confusing — The Reality Labs part of the business had revenue of $285 million and a profit of minus $3.7 billion. So there’s your problem right there in a big way.

At the same time, we don’t want to miss the larger picture here. They’ve had earnings declines every quarter of this year and it has to do more with all the investment that they’re making, their CapEx. Ben Thompson at Stratechery, made a great point about this, that they’re spending a lot of capital in terms of trying to monetize their traffic as effectively as they used to, and that there’s something going on there, that that’s probably a bigger piece that they need to solve for to make the company more effective.

If you look at their monthly active users, they’re still seeing growth. They’re connecting with 46% of the world’s population. Facebook, Instagram, and WhatsApp each have more than 2 billion users. And they need to figure out ways to put ads in front of these people, ’cause let’s face this, they are an ad driven company. Looking for ways that they can monetize as effectively as they did in the past if they’re going to see the growth that they used to see. I actually think Facebook as a company’s got some bigger challenges, but we’ll talk about that later.

Facebook Shows Why "Hub and Spoke" Matters For Your Business

The part that you care about is there is a lesson you can take from this. One of the reasons I always talk about the hub and spoke strategy is that you have to have your own space that you own on the internet. If we look at what’s going on with Twitter right now and Twitter blowing up and people saying, "Oh my gosh, I’m going to move to Mastodon," or, "I’m going to move to LinkedIn," or, "I’m going to move to Tumblr," or something along those lines, is that anybody who’s built their community around their Twitter following, suddenly has realized, "Well, if Twitter goes away, I’ve got a real problem." So they’ve got to figure out, "Where can I live for the long-term?"

Facebook has the same problem. Facebook has its own space, their hub. But what they don’t have, and the other thing that you have to solve for, is distribution of your content and of your message.

The hub is your website. The spokes are Twitter, they’re Facebook, they’re Instagram, they are Amazon if you sell products, they are Expedia if you’re in the hotel industry. Those are all part of distributing your message and your products and your services to a larger audience.

Facebook’s problem is their distribution is Apple, is Google, is the app stores, that’s their distribution. And when we talk about things like App Tracking Transparency (ATT) or we talk about things like "the death of cookies," that hurts Facebook’s ability to monetize its traffic.

So that’s a problem they’re going to need to solve. And there’s a lesson you definitely want to take from that to say, "Okay, do I have the right hub in place and do I have the right spokes in place to make sure that my business continues to thrive?" So Facebook is having some challenges, but I don’t think the sky is falling.

Google

Google, by contrast is doing great. Revenues are up 11%, $69 billion. Profits were down. Their earnings were also down almost 18%. That’s a big number. Also, they had $17 billion in profits. It’s not like Google’s having a tough, tough time here. They actually reported some great news. They said Nielsen reported that YouTube was the leader in streaming television viewership in the United States in September for the first time ever. This is also, according to Nielsen, that Sundar Pichai and the rest of his team talked about on their earnings call, Nielsen said that during "the 2021-2022 US broadcast seasons, YouTube reached more viewers during primetime on connected television than any linear TV network."

Note the trend here. More video, more views of video, not as much success in figuring how to monetize those video views yet.

Sidebar: Why Advertising is Ultimately Bad for Google (and Facebook)

As a quick aside, by the way, and I think I’ve talked about this before, that this is probably bad for users in the long-run, and if so, eventually for Google. Google and Facebook continually have to find ways to monetize their traffic, which probably means greater ad loads, more ads for every view, which probably means that that’s going to be a less enjoyable customer experience for many customers probably, which then will create opportunities for new entrants to steal eyeballs and mind share, which then could hurt Google or Facebook’s overall revenues and profits and their trajectory. There’s a much longer discussion to be had there, but something to be aware as we look at this.

Google Invests In AI and Its Future

Now, despite all of that, Google is also still investing in its future. A lot of its decline in profitability were based on how they’re investing in the future. There were a couple of quotes that I saw as amazing. They said, "Within this slower headcount growth, next year we will continue hiring for critical roles, particularly focused on top engineering and technical talent."

They also see AI, artificial intelligence, quote, "As a big opportunity ahead." I talked about this in episode 351 of the show, which looked at "What’s Going on With AI in Marketing?" that advertising is the largest use case for AI and machine learning at Google.

Sundar Pichai said in their earnings call that, quote, "On the AI front, we are still in very early innings." They’re looking at this in terms of how do we monetize traffic better? And they’re going to invest in that. That’s huge. And so we are going to see them spend a lot of money and potentially have lower earnings — not necessarily lower revenues, but lower earnings — for a time yet while they figure out how to do that. So again, I don’t see that as a sky is falling moment. I see that as an investing for the future moment.

One more Sundar Pichai quote for you, and this one’s longer. He said,

"Obviously, as a company over time, we’ve had periods of extraordinary growth and then there are periods where I viewed it as a moment where you take the time to optimize the company to make sure we are set up for the next decade of growth ahead. I view this as one of those moments. It gives us a chance to make sure we are, with clarity, identifying what are the most important areas and making sure we are directing our incremental investments towards those and as well as where we can realign. So I view this as an opportunity to do that and also being responsive to the current macro environment we are seeing."

That’s a remarkable statement and it’s a sign that they are investing for the longer term. They’re thinking long-term. They actually hired more people last quarter than they had the year prior, even in the face of this "challenging macro environment," because they’re looking at other companies laying people off and saying, "Hey, we can scoop some of those folks up, some of that talent up, to position ourselves better for the long-term." That’s one of the big lessons I think we need to pay attention to here.

If you remember the movie, "It’s a Wonderful Life," when there was the bank run and George Bailey, the main character, the hero of the story, is talking to all of the people trying to take money out of his little building and loan saying, "Look at what Mr. Potter’s doing." Mr. Potter is the villain, if you don’t remember the movie. He’s saying, "He’s buying and we are selling. He’s using this as an opportunity to snatch up everything in town and gain control of it."

Now, I’m not going to go into a whole thing about whether or not Google is evil or Mr. Potter in this situation. I will say that they are executing that playbook to say, "We’re going to invest in talent where it makes sense to, and if we can get that talent from our competitors, all the better." So think about that as you look at what’s happening with the big players and whether or not the sky is really falling.

Apple and Microsoft Are Doing Great

Apple and Microsoft, I want to talk about really quickly. Apple was up 8%, $90 billion in revenue in the quarter. Big earnings, really good stuff. Microsoft, $50 billion of revenue, up 11%. Income of 21 and a half billion, up 15%. Microsoft Cloud exceeded $25 billion in revenue, up 31% if we’re looking at it in constant currency. These companies are crushing it. There’s a reason you don’t see Apple and Microsoft having layoffs.

Amazon: More Good News Than Bad… But Some Bad News Too

Now, I said I was going to come to Amazon later. Amazon had a weird quarter. Their net sales were up 19% to $127 billion. AWS was up 27%, 20 and a half billion. The annual run rate for AWS was about $82 and a half billion. And that’s amazing.

When you are doing double digit growth — this is true for all of these folks, by the way — when you’re doing double digit growth on tens and hundreds of billions of dollars… holy crap.

In Amazon’s case, they did have a loss in their core business, almost $3 billion year to date, based on increased expenses. They hired more than they should have and so pulling back does make some sense.

The Lessons Learned About the Current State of Digital

But again, I don’t see any of this as the apocalypse.

When we look at the big players, they’re facing two big problems at the moment. One is that they make all of their money in one of three ways:

  • They sell advertising
  • They sell services like cloud computing
  • Or they sell some kind of other hardware.

Advertising: Facebook, Google, and to a lesser extent, Amazon, Apple and Microsoft, all make money on advertising. Services: Amazon, Google, and Microsoft, of course are the big players there, but Apple does a good number as well. In terms of hardware, Apple is obviously the dominant player. Microsoft and Google, and then to a lesser extent, Amazon have physical products as well.

Advertising is Challenging at the Moment. But It’s Far From Dead

The advertising side has taken a bit of a hit because lots of companies like yours are watching expenses more closely. You’re pulling back. So that’s part of where they’re seeing some struggles.

Services Shifts Fixed Costs to the Digital Giants

On the services side, you’re seeing the same thing, whereas companies are watching expenses more closely, they’re pulling back. Google and Microsoft both talked about this in their earnings call. As companies have moved to the cloud, they’ve moved what was a fixed expense, running the servers, hosting servers, having engineers to maintain those servers, to Amazon and Google and Microsoft. They’ve taken what was a fixed cost and made it a variable cost and put the fixed cost side on Microsoft, Google, Amazon. That’s going to hurt the consistency of their earnings, which is going to hurt their stock price.

But it doesn’t mean that they’re doing poorly. It’s just that in any given quarter, the amount of revenue they generate for cloud computing or advertising could vary.

Big Takeaways

Instead, if we look at their behaviors, what they are doing is investing in talent. They’re investing in AI. They’re investing in ways to monetize the traffic that they get more effectively. They’re buying when others are selling so that they can charge you, as an advertiser, more later or you, as a person who buys cloud computing from them, more later. So don’t watch the stock market so much. Watch their behaviors, watch where they invest their money. And they’re investing in the future. They’re investing in how they make more money in the long-term. Even where they’re cutting in some areas, they’re still spending in others.

And so I think the lesson we need to learn is obviously, be smart about what’s happening right now. We’re in a weird economy.

  • Don’t spend money you don’t have to.
  • Don’t get too far ahead of yourself if the demand isn’t there among your customers.
  • But continue to invest in those areas that have opportunities for long term growth.
  • Continue to invest in things like artificial intelligence or in platform providers and people who help you do that. And when I say invest, I mean partner with.

This isn’t meant as stock market advice by any stretch. But think about how you can use technology, how you can use digital, more effectively to reach your customers.

So I don’t think the sky is falling. I don’t think the sky is all that gray. I think we have to be smart, we have to look for opportunities between the clouds to fly towards so that we’re setting ourselves up for long-term success. And that is the state of digital in Q4, 2022.

  • Be really smart about where you invest.
  • Don’t get too far ahead of yourself.
  • Look for opportunities to continue to invest.
  • Pick up talent where you can to set yourself up for future success, particularly if it’s talent that has been let go by your competition.
  • And continue to focus on the long-term of where your customers are going to be and how digital continues to shape their lives.

If you do that, you won’t find that the sky is falling. You might find that it’s raining dollar bills on you instead.

Show Closing and Credits

Now looking at the clock on the wall, we are out of time for this week. I want to remind you, you can find the show notes for today’s episode as well as an archive of all past episodes, by going to timpeter.com/podcast. Again, that’s timpeter.com/podcast. Just look for episode 364.

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You can also find Thinks Out Loud on LinkedIn by going to linkedin.com/timpeterassociates. You can find me using the Twitter handle, @tcpeter. And as always, you can email me at podcast@timpeter.com. Again, that’s podcast@timpeter.com.

Show Outro

And with all that said, I just want to say once again, how much it means to be that you tune in to Thinks Out Loud every single week. I hope you have a great rest of the week. I hope you have a wonderful weekend. And I’ll look forward to speaking with you here on Thinks Out Loud next time. Until then, please be well, be safe, and as always, take care everybody.

Tim Peter is the founder and president of Tim Peter & Associates. You can learn more about our company's strategy and digital marketing consulting services here or about Tim here.

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