Why are there so many tech and media layoffs in 2023?

Stock prices first fell, then the layoffs began.

If 2022 was when tech companies that had struggled to make consistent profits started laying off employees — Snap cut a fifth of its workforce, Carvana laid off 1,500 employees, Twitter… well, you know — so 2023 looks like the year even the industry giants are downsizing. In recent weeks, Amazon, Google and Microsoft have announced or implemented layoffs of some 40,000 employees combined. Even Salesforce, the enterprise software giant, is laying off 8,000.

While these tech companies — and Meta, which laid off 11,000 people in November — don’t all operate in the same industry — Meta and Alphabet sell ads, Microsoft sells software, Amazon sells too much to list — layoffs happen for everyone. This is because their investors expected more growth than what they are currently showing, stock prices that soared in 2020 and 2021 have come back to earth, and every time stock prices fall, investors and managers get nervous – and workers often pay the price.

These latest announcements are probably not the end of this season of layoffs.

“We … expect a major theme to be tech layoffs as Silicon Valley, after a decade of hyper growth, now comes to the reality of cost-cutting mode to weather this economic storm,” he said. writes Wedbush Securities analyst Dan Ives in a note to clients. “Cinderella’s ride is over (for now).”

Interest rates and stock prices

In September 2021, the Federal Reserve was beginning to wind down its pandemic-era stimulus efforts. In November, he said explicitly that he was ready to start raising rates next year. That same month, the Nasdaq composite, which includes many technology companies, peaked, while the broader market, represented by the S&P 500, peaked in December. In March, the Fed was raising interest rates and would do so steadily for the rest of the year, raising at seven consecutive meetings of the Federal Open Market Committee, taking rates from near zero to over 4%. This had a predictable, intended and realized effect on stock prices last year: they went down. The S&P 500 fell 19.4% in 2022, while the Nasdaq fell more than 30%. For some tech giants, the results were often worse: Amazon’s stock price fell 50%, Meta’s by more than 60%, Alphabet’s by almost 40%.

The near-zero interest rates put in place by the Fed to support the economy in response to covid-19 resulted in a bull market, where tech stocks particularly rose strongly, explained Steven Miran, co-founder of Amberwave Partners and former Treasury. official.

This meant “costless discipline from management as stocks rose no matter what they spent on beer taps and bowling alleys in the office. They could hire a lot of workers, and it didn’t really affect their stock performance,” Miran said.

“Now, with higher interest rates for the foreseeable future, markets have punished these growth stocks, forcing CEOs to find additional ways to support their stock prices,” Miran continued. “The classic thing that a company’s management does in a downturn is cut costs – unfortunately, lay off workers.”

Investor pressure

When stock prices fall, investors start fussing over corporate executives to do something. And that something often eliminates jobs.

When stock prices fell, investors began to notice that big tech companies had lots of highly paid workers. And while it’s not always possible to tie an investor directly into a multibillion-dollar public company — especially ones where the founders still retain substantial control — it’s true that investors and analysts don’t have exactly lamented the departure of thousands of technology employees, especially after years of hiring and higher pay.

One investor, British hedge fund manager Christopher Hohn, wrote a letter to Google chief executive Sundar Pichai last week, saying he was “encouraged to see that you are now taking steps to right-size the cost base of Google.” ‘Alphabet”. While the 12,000 job cuts, Hohn wrote, were a “step in the right direction”, he still called on Google management to “go further” and cut the workforce by a fifth in order to that Alphabet has 150,000 employees. In its latest quarterly report, the company said it had 187,000 employees. Morgan Stanley analysts described the reduction as a “pleasant surprise” and estimated the cost savings would be between $3 billion and $5 billion per year.

Investors were happy to see the layoffs. After their announcement on Friday, its stock price rose about 4%.

Salesforce is cutting 10% jobs, which means around 8,000 employees will lose their jobs. Earlier this week, The Wall Street Journal reported that Elliott Management, the activist hedge fund known for buying up stakes in companies and then pressuring them to adapt their strategy to be friendlier to shareholders, had invested in the enterprise software giant.

Brad Gerstner of Altimeter Capital Management, which owns more than 2 million Facebook shares at the end of September, wrote in a letter in October that Meta should cut its workforce by a fifth, cut its capital expenditure by $30 billion to $25 billion and restricting its investment in its metaverse projects to just $5 billion per year.

In November, Meta announced layoffs that would affect more than 11,000 employees. In its latest quarterly earnings report, the company said it lost $3.7 billion on Reality Labs, its metaverse division, compared to more than $9 billion in profits from its apps and services like Facebook and Instagram.

In October, Facebook said it had more than 87,000 employees; in its latest pre-covid quarterly report, Facebook said it had 43,000 employees.

Competition and privacy

Some tech companies, no matter how complex their services are under the hood or how advanced their research and development projects are, run a simple business: they sell ads. And thanks to a combination of technical changes in the digital advertising market and an industry-wide pullback in demand – when companies are nervous about the future state of the economy, they reduce often their ad spend – several tech colossi have turned out to be, despite all the high-tech research and development, just another media company.

In its most recent quarter, about $61 billion of Alphabet’s $69 billion in revenue came from businesses such as search and YouTube, which are primarily advertising businesses. Google Chief Commercial Officer Philipp Schindler told analysts there had been “modest year-over-year revenue declines” in its YouTube advertising and ad network business. “In these trying times, advertisers are carefully evaluating the effectiveness of their budgets,” Schindler said. In other words, they were spending less.

Facebook, which derives 99% of its revenue from advertising, lamented the “low ad demand”, in the words of Dave Wehner, then chief financial officer. “We’re definitely in a period where we’re seeing a slowdown in ad demand right now,” Susan Li, then Facebook’s vice president of finance, said on the call.

This translated into a 4% drop in revenue compared to the third quarter of 2021. Facebook’s services had to face the double challenge of Apple’s updates to its mobile operating system, which have limited tracking that mobile publishers use to target ads, as well as the rise of TikTok, which prompted Instagram to plaster its app with its own abbreviated “Reels.” YouTube has incentivized creators to produce more content by offering them more money through ads and promoting its own short videos.

The slowdown in advertising activity has not only affected the technology sector, but also the media. Although several companies, especially digital ones, are not publicly traded, they are exposed to the same business pressures as anyone else – or this is the Washington Post, whose owner Jeff Bezos saw his net worth drop by $70 billion last year. In announcing a 7% reduction in the workforce, Vox Media chief executive Jim Bankoff cited “the difficult economic environment which is impacting our business and our industry”.

Thanks to Lillian Barkley for writing this article.

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