The “Good Times” Delusion

Time to kick blithe optimism to the kerb

It can be hard to suddenly change mentality and a preset way of thinking. We’re conditioned to like consistency, and for all the talk of disruption in the technology industry, it takes time to deliver innovative solutions. Disruption is more a steady process of iteration than a sudden and dramatic event.

I say this because we’re observing an alarming trend whereby some companies in the technology sector and beyond seem to be operating in a different reality, thinking and acting like it’s 4Q19 rather than 2Q20. This may seem a strange observation, but despite the headlines, the International Monetary Fund predicting a recession, and the continual revision of growth forecasts, some businesses appear to be viewing the coronavirus pandemic as an event that’s external to them.

Although we’re are all experiencing the direct impact of the coronavirus outbreak on daily life, a worrying number of people don’t seem to be drawing the parallel with what this could mean for their business and ultimately, their ability to pay the bills. Unfortunately, the same was true as the virus started to spread. People in the US failed to heed the warnings and grave reports from China, Italy and Spain, attending Mardi gras celebrations and spending spring break on Miami Beach as if nothing had changed.

Around the world we’re seeing closed businesses and rising unemployment figures. The New York Times struggled to fit a graph highlighting the number of unemployment claims on a single page (see below). I’ve read reports about how the situation could be a boon for virtual reality over the next few months. I get the theory about escapism, but thinking that folks will splash out on headsets to play Beat Saber when they can’t make the next mortgage payment is devoid of reality.

Not all can remember what happened when the dot-com bubble burst or the financial crisis of 2008. Some weren’t old enough to have experienced it, and others are still on the sugar high of the last decade. Even as pensions and investments decline, the “good times” delusion means some people are finding it hard to equate these factors with their own business and circumstances. It’s been so long since we’ve witnessed this kind of financial and economic turmoil that people who aren’t among the first wave to be affected are numb to the potential consequences.

A similar phenomenon happened at Mobile World Congress 2009 following the financial crisis at the end of 2008. It was as if nothing had changed, but reality bit hard later in 2009 with widespread forecast revisions and lay-offs. What we’re seeing is arguably a classic lag of sentiment going into recession, which will probably lag again as we re-emerge on the other side. This isn’t to say that blind optimism is universal — French telecom operator Bouygues is temporarily cutting its workforce by 20%.

I don’t want to be perceived as overly pessimistic. My hope is that this is a short-term jolt to the system from which the economy makes a swift V-shaped recovery, as this isn’t the structural economic downturn of 2008. But it could also prove to be a U- or even L-shaped recovery. I’m not an economist so it’s not for me to determine where the economy is heading, but these scenarios have all played a role in our forecast revisions (see, for example, Market Forecast: Mobile Phones, Worldwide, 2020 (March 2020 Extraordinary Update)).

Whatever the scenario, it won’t just be the hospitality industry and Uber drivers that are affected. If a start-up such as OneWeb — a low-Earth-orbit satellite communications company backed by SoftBank and with more than $3 billion in funding — is on the rocks, you can bet that many others are going to follow, and spending is going to tighten from top to bottom of the economy.

I sincerely hope that everyone wakes up to this. Companies can take preventative measures now, before things are likely to worsen in the months ahead. Failure to do so is likely to compound the impact as liquidity tightens. The business news cycle will deteriorate, of course, and may not be helped by the release of 1Q20 financial results, which won’t reveal the full picture. Equally, others may choose to throw in everything but the “kitchen sink” in their disclosure and dump every conceivable item of bad news. Either way, it’s coming, and I worry that some businesses are sleep-walking into a 2Q20 and 3Q20 that should not be a nasty surprise.

Regardless of how quickly the industry bounces back, I would argue that the era of growth over profit has gone. We were in the final throes of this in 2019, as the Uber and Lyft IPOs demonstrated. The current downturn has closed the book on the past 11 years of growth. This doesn’t mean that a new cycle won’t be born, but it will start with a far more measured view of fundamentals and a return to the importance of the balance sheet.

A version of this blog post first appeared in FierceWireless on 1 April 2020.