What lies behind the Q1 tech sector slowdown?
A tech slowdown is impacting the marketing industry. What do experts believe will follow – a return to form or a changed technology market?
As spending around technology decreases, it is ironically big tech that benefits / Adobe Stock
In WPP’s Q1 results (released on April 27), the holding company reported strong growth from its CPG and financial services activities. However, among the good news were warnings about the US technology sector and a slowdown in spending which was a drag on its overall economic activity.
IPG, too, noted that a weakness in the tech sector had negatively impacted its growth, citing a ‘softening’ in that market.
From a consumer perspective, new tech purchases are seen as a luxury while the costs of basic goods continue to rise. That in turn has impacted the marketing activity of consumer tech companies, as they increasingly look for solid and guaranteed ROIA and conversions. PC sales, for example, are down for the fourth consecutive quarter in the US, and predictions are that phone sales will be similarly impacted over the course of 2023.
Further hints of the economic slowdown were visible in Amazon’s Q1 results, though the e-commerce and web services company still posted 9% revenue growth.
Enterprise technology is set to fare slightly better. Investment in technology is seen as a way to counteract the impact of a cost-of-living crisis, and brands are continuing to spend money on new tech that allows them to reach consumers. Again, however, Amazon’s results demonstrate the scale of those investments has limits: Amazon Web Services (AWS) reported 16% growth for the first quarter – compared to the 37% that it reported a year ago.
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Hugh Fletcher, global head of consultancy and innovation at Wunderman Thompson Commerce and Technology, said: “It’s no surprise that Amazon’s earnings were buoyed by its retail performance given the company’s formidable presence in the retail industry.
“Going forward, ensuring this continues will be pivotal to minimize the financial impacts of slow AWS growth. However, the company faces the looming threat of other shopping channels’ growing prominence, which could eat into its market share.”
Insider Intelligence principal analyst Andrew Lipsman explains: "Amazon did what it needed to do in Q1 by reversing – or at least stalling – its most troublesome declining growth trends. Amazon's stronger-than-expected performance for its key profit centers of AWS and advertising indicates that the enterprise and the digital ad sectors may be turning the corner.”
Tech wins
Crucially for the marketing industry, Amazon’s ad business continues to perform strongly. Insider Intelligence expects the company’s US ad business will grow more than 17% this year to reach $34bn, giving it a 12.9% share of the US digital ad market.
Analyst Alex DeGroote suggests that the slowdown is driven in part by the evaporation of some sections of the market that were big in 2021-22, but have since been hit with dwindling interest from investors and consumers: “We can infer this is some e-commerce, and maybe some crypto business dropping out year on year, together with some second line tech clients
“In the early 2000s, we had a major advertising benefit from so-called dot com advertising. In 2023, we now have the hangover from Web 2.0, including crypto. These nascent VC-funded companies will not have the capital to build a brand – hence agencies will see this business dry up.”
Much of the focus in the tech industry is on AI, and companies including Amazon and Snap – which also filed its Q1 results this week – are making their AI capabilities the main differentiator for ad and brand partners. Meta, for example, also delivered better-than-expected results in its advertising division and stated that its investment in AI recommendations had dramatically increased the time users spend on Instagram by 24% in the first quarter. As advertisers look for surety and established channels to deliver on that ROIA, that hands big tech companies a significant advantage.
DeGroote notes that big tech seems to be in “surprisingly robust shape”, although much of that comes from cost-cutting and attempted rightsizing over the past six months, which at the margin may have impacted external advertising. He points out that the second half of this year should feature a return to better growth rates.
Effectively, while tech spending is down overall, that is in part due to a market seeking certainty in the face of a slowing economy. In turn, that benefits the biggest players in the market – many of whom happen to be tech companies themselves.