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Comment by gtirloni | Hacker News Reader

> Like many companies, our business has been impacted by the current macroeconomic environment

I must be living under a rock because, outside big tech self-inflicted wounds, I don't know what they are talking about. Is it Ukraine? SVB? Chinese housing market?

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Federal reserve interest rates.

When interest rates are low, money flows more freely. When interests rates are up, it's harder to lend/borrow, money flows less freely, and the economy cinches up as a whole. This is a major simplification to a very complex system, but it happens because e.g. as someone with money, you'd rather just put it into a government bond that will for sure pay you 4%, rather than chasing speculative investments. When that same bond is only paying out 1%, you might be more inclined to put your money in a start up and see what happens.

Not just your money, renting money is so much cheaper when you only need to pay 0.25% per year against the firehose known as the Fed.

If this is the case, why are layoffs currently mostly in the tech sector and not everywhere? Unemployment budged .2% from Jan - Feb but this is hardly indicative of anything.

The tech sector is doubly impacted. First, a lot of these ZIRP jobs are in technology as that’s where the returns are. Second, there’s another class of tech jobs that are themselves dependent on tech companies (Cloud providers, managed SaaS products, etc.)

because tech was was the biggest beneficiary of monetary expansion, at least by percentage gains in a sector, and would have to be a close second in absolute dollar amounts if not first.

basically TINA principle: there is no alternative, which means that an infinite amount of money was created for a finite amount of assets, people that are paranoid about beating a couple months of high inflation didn’t know where to put the money

established industries with clear revenue trends already had stretched and unattractive valuations

real estate already went to unconscionable price levels

government bonds at record prices and lowest yields, in Europe people would accept negative interest rates literally willing to pay the government instead of investing in unproven businesses

but between the unproven entrepreneur there was still lots of big tech that was the recipient of cheap money and high valuations.

now people are rebalancing. new money isn't being created and existing money is purchasing treasuries at 5%

1) more excessive hiring during 2020-2021-early 2022 in tech than in most sectors 2) some sectors such as domestic manufacturing are ramping up capacity, thus need more people than they expected to, whereas tech companies that thought pandemic-induced changes would stick need fewer people than they expected to 3) lots of excess liquidity went to investors who liked to invest in tech, hoping to get the next FB/Apple/etc., thus it is more of a change for them when that stops happening 4) let's face it more bogus business ideas in the last 10 years were tech than anything else; when interest rates go up is when they face a reality check

Because tech ballooned the most during the covid reaction.

e.g. META has roughly doubled in headcount since 2020. Now it is laying off a fraction of that new headcount.

I'm sure there's a similar stat for Amazon/Twitch.

And think about how much stuff people were buying on Amazon when everything was closed. Think about how many hours of twitch were watched when it was illegal to do anything else.

You can't look at e.g. Walmart and say "hey they doubled in 2 years". Thus, no lay offs needed

Everyone responded with essentially the same thing: that tech over hired, which is not something I am disputing. But parent comment mentioned the economy cinching up as a whole when interest rates rise, but we are not seeing that(yet).

Is the commonality tech companies or high-growth companies?

(Virtually all high-growth companies are tech companies but I don’t think the inverse is true - unless that’s how we define “tech” now which is plausible.)

High-growth companies include both those that plan to grow fast and those that are growing fast. The general theory is nobody really knows how big such a company can grow. (eg, Amazon circa 2006 is dominating e-commerce. Can it get any bigger? Spoiler: yes it can.)

So these companies offer an opportunity: invest money to build more teams doing effectively random trials and see what sticks.

This is the investment opportunity the parent comment described and that’s the calculus that’s changed.

What I find interesting is the same trade-off applies to both profitable and unprofitable companies. Unprofitable startups are deciding where to burn their runway, weighing against the projected cost of raising on more. Profitable companies are deciding where to re-invest profits or whether to pay dividends to shareholders.

A lot of tech companies have been pretending to be high growth startups, but are really utilities.

How does the fed rates impact game streaming revenue? Were they not profitable?

businesses feeling pinched and cut down on ad spending.

Same way Google and Facebook are hit by the reduction in advertising spend. Twitch is, from a business perspective, an advertising company. The streaming is a means to that end, just as search or social media is for Google and Facebook.

And their other side is discretionary spending. Probably of the lowest order as many are likely to pick other discretionary things over donations to streamers. How many will pick donating to streamer instead buying maybe a cheeseburger or some other treat...

The "macroeconomic environment" is the evaporation of available VC funding because higher interest rates provide more lucrative investments elsewhere.

Why would Amazon (owner of twitch) care about that? They have tons of cash and revenues are still quite strong. AMZN isn’t looking for VC funding, they are the whale.

Net income is hard to judge — yes it’s down but not only is Amazon famous for reinvesting all profits and claiming $0 of net earnings, but they’ve also been writing off a lot of one time charges for severances related to these layoffs.

Because their income comes from advertising. Because the economy sucks in general, companies in all industries are being more careful with where they spend their marketing budget.

You can see this reflected in the revenue of other advertising companies as well such as google and meta.

https://www.macrotrends.net/stocks/charts/GOOG/alphabet/reve...

https://www.macrotrends.net/stocks/charts/META/meta-platform...

Is it?

uh yeah it literally is? click into your own links?

Google has their 3rd worst quarter for YoY Quarterly growth out of the last 12 years.

Facebook has 3 consecutive quarters of negative yoy growth

So, Google still grew, and I’m not convinced the performance of Facebook says anything except that people are tieing of Facebook (and techbros like Zuckerberg)

Right so you’re talking about the first and second derivative rather than the value.

>Because the economy sucks in general

But to be clear the economy does not currently "suck in general" hence the confusion over blaming "the current macroeconomic environment".

These companies (including advertisers) are trying to get out in front of an economic downturn that hasn't yet materialized. And if it does materialize, all these companies will have a hand in causing it due to their reduced spending and layoffs which we know has potential to cause an economic slowdown.

Belief in a coming downturn can cause one just as easily as some more tangible factor. Intro econ was a long time ago, but I think this is one of those It Is Known type things.

> But to be clear the economy does not currently "suck in general"

To be clear, what you say has little effect on reality. The decreased discretionary spending, housing market approaching a complete freeze, layoffs (those not being publicized in the news), inflation impacting every vertical, and the various shuttering businesses (survived covid, but died anyway), are what makes it "suck". This is not quantitative, but it is the sentiment.

>This is not quantitative, but it is the sentiment.

I'm looking forward to our first "just bad vibes" recession in which all the quantitative numbers behind what you describe are mostly fine, but we are just going to "sentiment" ourselves into a recession anyway.

Amazon (like every other big company) has raised billions with bonds that they will eventually need to refinance at higher rates.

If they laid off 400 employees, it’s probably because they could afford to (nice way of saying: they were not necessary to keep the business functioning), likely a bet on innovation. As the economy struggles and the prospects of such innovation happening seem far, it makes sense that even a big company like Amazon may choose to cut their losses.

Amazon needs to provide attractive returns to shareholders just like a unicorn. If you $AMZN is not up 5% YoY, then sell it and park it in a 6 month T-bill or I series bond. And as holder of $AMZN, I can tell you that they are definitely not up 5% YoY, let alone the 15% that they generally try to get to.

MYbe it’s time for them to realize there is a point where you have all of the customers, and it’s ok to be boring and just pay a dividend instead of constant growthgrowthgrowthgrowth.

The owner of Amazon was the prime beneficiary of VC funding to tech companies, because oftentimes a large chunk of that went for AWS. In that gold rush, Amazon was the one selling shovels.

The gold rush is now over, for a while at least, so Amazon is probably seeing a lot of their big AWS customers cutting back, or in some cases disappearing. Essentially, AWS is in the same position as SVBank. If your money comes from lots of tech startups that don't want to have their own infrastructure, and didn't used to need to worry about cutting costs, but now they do, then you can see big "outflows" (except unlike SVB it's more decreasing revenue).

Why do you say "probably seeing a lot of their big AWS vueomters cutting back" when it can be verified.

AWS grew at 20% in Q4 2022. Grew less than forecasted but still not "disappearing".

https://www.cnbc.com/2023/02/02/amazon-aws-earnings-q4-2022....

But Twitch is owned by Amazon? They don't need VCs?

The users that use and pay Twitch do? (Not VC but capital in general)

Their source of revenue (i.e. advertisers) are often startups and DTC brands that were kept alive by VC money.

I have never seen an advertisement for a startup on Twitch.

You mean they aren’t flooded with meal kit and mattress ads like every other form of media?

Small businesses like startups would rather pay streamers directly to promote their products than advertise on Twitch.

Huh? LPs don’t put money into a VC fund for 4% returns that they can get on bonds. They do it mostly out of diversification. Usually looking for 10-100x. Why would that change?

Bonds are essentially the "free" rate of return. Assuming you trust the government, there's no reason to earn anything less. That means that everything needs to return something above the bond rate. That goes for debt too, why would you write a riskier loan to someone at a lower rate than the government?

LPs looking to put their money somewhere (or many somewheres) will reconsider as rates change. It might not be "vc or bond" but it will cause every part of the financial system to re-calibrate. Maybe a rich person takes out debt against their assets to invest in a VC fund in 2020, but now that the rates rose and stock values fell, the interest rate on that (or comparable) debt is too expensive. For example, Elon's loans for twitter range from 6% to 11%, and would likely be higher if written today.

TLDR Interest rates don't need to compare 1:1 to a VC fund's returns to have an affect on the decision by LPs to invest in it.

The macroeconomic trend is 'the stock price went down because the fed stopped printing money'.

I don’t understand how this is affecting AMZN’s cash flow though. Seems like both their costs and revenues would scale similarly with inflationary effects, leaving a similar profit margin %.

I think it’s more about expectation for growth being lower, not present cash flow.

Once you realize that sometime in the past 10-20 years the economy started having nothing to do with actual goods and services and instead turned into some sort of weird game played by the powerful and the rich it makes more sense.

Personally I peg it happening sometime around 2008 when it became clear the rules didn't matter, consequences were for the poor and party hearty. Explain how else a company like Uber that was losing money on every ride was able to raise billions in VC funding.

Think of it like that and it makes more sense.

VCs want to capture markets. That's why they pour money into launching what could be the next market leader, even if the model won't work at predatory prices. Because once they own the market they can raise the prices to whatever they want.

All of that is a direct consequence of low interest rates. If money is cheap and easy to borrow, there is less pressure on a business like Uber to turn an actual profit. Instead, investors will encourage them to grow aggressively in the hopes of capturing the market. Once liquidity dries up, there will be more pressure to actually make money.

But the economy is working as intended and it's actors are merely reacting to incentives. The question is whether the wrong incentives have been set that have created large sectors of the economy that are completely dependent on permanently low interest rates.

> Once liquidity dries up, there will be more pressure to actually make money.

No. They IPO and the investors get their money while retail investors hold the bag of poop thinking they just got _in_ on something.

It's not 100% retail investors, and whoever owns it today surely wants money. I don't know Uber's actual finances, but as long as you make enough money every month to cover last month's bills, you don't need to make a profit.

There are a lot of games that can be played with money to keep a company unprofitable but alive and healthy for a while. Look at amazon, a famously "unprofitable" company for almost 2 decades.

I don't know, so I'll offer a plausible, to me, story: Consider that AWS is Amazon's income [0]. VC funded companies may well be a significant portion of its customer base. Hence, if its customers are tightening their belts, they may take short and long term measures to limit their spend on AWS. Amazon presumably prepares for this by lowering twitch's budget.

[0] https://www.investopedia.com/how-amazon-makes-money-4587523

Executives remuneration is often linked to the stock price. So if the price goes down, executives gain less.

If they can keep the price higher for a while longer, they get time to ensure their income and jump ship safely.

I don't know for sure, but it seems to me that advertising spend must be way down, due to interest rates and (related) the expectation that consumer spending will / should be pulling back over the next X months. All the biggest layoffs seem downstream from consumer spending in some way or another.

In case of twitch it's more simple: pandemia is ending, people move back to their normal life outside of twitch. Revenue in the last months has been shrinking for streamers, and thus also for twitch. Their business was blowing up in the last 2-3 years, when so many viewers were at home. And this also resulted in Twitch hiring many new people, like so many other tech-companies. And like so many others, they are now shrinking again, adapting to the new situation.

Advertising, which is how twitch makes money, look at GOOG, FB, Snap revenues, companies are bracing for a recession so have dialed back ad budgets. Enterprise tech spend and consulting/professional services budgets are also being put on hold, it's not the whole economy but the slowdown is clear and obvious in these industries

Its the investors.

I guess Twitch still hardly making any money

despite the huge number of ads being shoved into the user's faces.

Twitch grew very quickly during lockdown and shrank very quickly when it was over.

I assumed rising interest rates primarily.

Advertisers not spending as much

SVB as an excuse for any company turmoil is criminal. Literally nothing happened. Everyone got all of their money. If any company uses SVB as an excuse they must be named and ridiculed for lying.

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