Tech majors may be staring at the end of their life cycles

The story of GE’s expansion and transformation before it began to shrivel might hold lessons for Big Tech today

Saturday’s Wall Street Journal carried an obituary of Paul A. David, who was an unusual type of economist. He was inclined to look to the past, and not to the future, as most economists do. A lot of his work focused on studying the history of how technologies and industries develop and decay, in the hope of finding clues about how economies develop.

According to the obituary, David looked at both electrification and computerization and came to the conclusion that it could take decades for some businesses to reorganize their organizations to make better use of them. He was well known for a paper titled ‘The Dynamo and the Computer’ in which he examined the slow spread of electrification in the late 19th and early 20th centuries, and posited a question that perplexed many economists in the 1990s. And this was the paradox that an evidently rapid adoption of computers wasn’t delivering (at least as assessed back then) an otherwise-expected surge in the productivity of US workers.

David also attracted attention with ruminations on the ‘Qwerty’ keyboard we use, and why it hadn’t been replaced with a configuration that would allow for much faster typing. The typewriter market had settled on the Qwerty format in the 19th century to reduce human error by slowing typists down, and once this standard was embraced, the switchover costs on equipment and retraining typists were judged too high for anybody to implement a shift. David showed that random events and herd mentality could cause people and organizations to settle for sub-optimal technology.

He was right. I can think of a slew of examples from operating systems such as Microsoft’s Windows as well as numerous database and enterprise resource planning solutions that far outlived (and are still outliving) the introduction of newer, faster and better technology. Switching costs are sometimes far too much for organizations and people to bear, and they see these burdens as outweighing any productivity or speed benefits that newer technology may bring.

Microsoft’s domination of the personal computer operating system was the result of a storied piece of luck when IBM adopted (then little) Microsoft’s disk operating system as its standard. And the same pattern is true of databases such as Oracle’s or ERP systems such as SAP. That is not to say that these companies did not continue to innovate. They did. And when they couldn’t, they outspent rivals, bundled in rival services free, or bought their competition out. These tactics have been at the receiving end of anti-trust regulatory action, and deservedly so. A recent example was the slap on Google’s wrist by India’s rivalry regulator, which fined the company for anti-competitive practices on its Android platform, as reported by Mint in October 2022 (bit.ly/3RyLlLs).

While David’s work focused on how switching costs (and as we have seen, anti-competitive practices) can keep sub-optimal technologies alive, there is also the interesting question of how technology companies die. I worked for one such case myself, Xerox Corp, where I started my post-MBA career in 1990. Once a giant in the imaging field, it is now a shadow of its former self. Two other imaging companies, Kodak and Bausch & Lomb, also with outsize presence and headquarters in Rochester, New York (the optics and chemical engineering capital of the world with world class universities to match), have also all but vanished.

Speaking of history repeating itself, I happened to come across an interesting blog comparing the almost complete dissolution of General Electric with how today’s global technology giants are behaving, written by Evan Armstrong (bit.ly/3JJxU9N).

Armstrong talks about GE, Amazon and what he calls “the flywheel of death”. He uses the GE case to identify four specific phases of a corporate lifecycle: how it expands, morphs and dies. He identifies a “Benign Circle of Power” as the first phase, which leads to enormous growth. It ends when executives start to use financial engineering and balance sheet clout to conduct a series of mergers and divestitures, and start cutting the workforce ruthlessly. GE’s celebrity CEO Jack Welch, who ran the firm from 1981 to 2001, became famous for his “rank and yank” system of ranking employees and firing the bottom 10% every year, and for sending jobs overseas. He also sold off 118 businesses, while Jeff Immelt, his successor, sold 318. It then ended up with a set of unwieldy assets and shrivelled into three smaller companies.

I was witness to the third phase at Xerox. In fact, I worked on a team divesting Xerox’s earlier acquisitions in the financial services sector, including investment banks, insurers and mutual fund houses which constituted almost 30% of the firm’s revenues then. We divested those businesses at considerable cost. One of the deals I worked on—the leveraged management buyout of Furman-Selz, a Xerox-owned investment bank—was an example. Xerox lent Furman-Selz’s partners most of the money they needed to buy the firm back from Xerox, so they didn’t need money from the market, which would have charged a much higher rate of interest; it was a concrete example of financial engineering, with the balance sheet’s strength brought in to assist. As it happens, Xerox has shrivelled since those heady years.

Armstrong maintains that history repeats itself and that today’s technology giants may be beginning to move from a phase of power to the flywheel of death in their lifecycles. Maybe all these layoffs are an early sign.

Siddharth Pai has led over $20 billion in technology transactions. He is the founder of Siana Capital, a venture fund management company focused on deep science and tech in India. These are opinion pieces; the opinions expressed are the author's own and do not represent any entity.

This article first appeared in print in Mint and online at www.livemint.com

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