When costs run to billions of dollars, small tweaks mean big savings. This year, both Meta and Alphabet decided to eke out the lifespan of their servers. Meta raised their estimated useful life cycle from four years to five. Alphabet from four years to six. With little more than a keystroke, both companies lifted operating income.
Companies are looking for ways to cut costs. Meta revenues fell 1 per cent last year. Alphabet reported its slowest pace of revenue growth since 2009. Changing the length of server use allows companies to extend the time over which they are expensed. Meta reported a reduction in depreciation expense of $860mn in 2022 annual earnings. Alphabet says the change will reduce depreciation by about $3.4bn for the current fiscal year.
This is not the first time tech companies have made such changes. In 2021, Alphabet raised its estimate from three years to four. Last year, Microsoft and Amazon both made the same move. Amazon added an extra year to the lifespan of servers used by its cloud business AWS. In the company’s last annual earnings report it pointed to this change as helping to offset higher payroll costs and increasing operating income. Microsoft increased the depreciable useful life for its server and network equipment assets from four to six years. It expects this to add $3.7bn to operating income in the current fiscal year.
Estimate changes have clear bottom-line benefits. But if equipment reliability can be increased and companies can add years to the use of their IT equipment without spending more on repairs, it could also help them to avoid semiconductor supply chain problems and improve sustainability. Delaying purchases should mean a more noticeable performance improvement in new equipment too.
Still, a cut-off point is coming. There is no industry standard for server lifespans. But in a 2017 survey by IDC, most participants expected to replace servers after five years. Big Tech may not be able to stretch server life estimates much further.
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