The Great Unbundling: How Rising Interest Rates are Reshaping the Tech Industry
In the not-so-distant past, tech companies were the epitome of innovation and growth. With low interest rates and a willingness to take risks, they invested heavily in ideas that might not have yielded immediate returns. This approach led to impressive returns on equity (ROE) of around 20% in the late 2010s, a significant premium over the risk-free rate of 1% at the time. I.e. a 19% return above the risk free rate.
However, the post-pandemic landscape has changed dramatically. Rising costs and increased competition have eroded profit margins, causing ROE to plummet. For example, Meta’s ROE dropped to 17%, while the risk-free rate increased to 5%, reducing the premium to just 12%. This shift has forced tech companies to reevaluate their strategies and cut non-essential activities.
The Great Bundling
In an effort to diversify and drive growth, tech companies embarked on a strategy known as “the great bundling.” This approach involved offering a wide range of products and services, often at a loss, in the hopes of attracting and retaining customers. The idea was that these losses would be offset by gains in other areas of the business. As Jeff Bezos famously said:
“We get to monetize [Amazon Prime Video] in a very unusual…
