American technology companies in the face of a difficult macroeconomic situation and a downturn in the online advertising market are actively laying off employees and looking for ways to reduce other costs. According to some experts, this is a kind of work on the bugs. Others believe that by actively hiring specialists in good years, corporations acted perfectly rationally.
What’s happening
On Wednesday, the founder and CEO of Meta (recognized as extremist in the Russian Federation and banned) Mark Zuckerberg announced the largest reduction in employees in the history of the corporation. 11 thousand people will be fired – about 13% of all employees. Meta’s troubles have been going on for more than a quarter, and the American media have been writing about its plans to cut employees for several months. However, it is not only Meta that is laying off employees this year, but many other American technology companies as well.
Before Elon Musk finally acquired Twitter, the media wrote that he would cut a significant part of the service’s employees – from 25% to 75%. As a result, Mr. Musk decided to cut half of Twitter’s employees, that is, 3.7 thousand people. The same reduction in employees – 3.7 thousand – was reported in May by the online taxi service Uber.
Large reductions since the beginning of the year were reported by Better.com real estate price comparison service (3.7 thousand employees), Groupon discount service and Peloton, a manufacturer of smart exercise machines and other equipment for home fitness (2.8 thousand each). Other companies laying off employees in 2022 include Microsoft Corporation, streaming service Netflix, fintech companies Stripe and Coinbase, and online taxi service Lyft.
More than 770 companies have laid off employees this year, from small startups to giants like Meta, according to Layoffs.fyi, a service that analyzes layoffs in the tech industry. In total, the reductions affected more than 119 thousand employees. Some companies are also freezing new hires, including Amazon and Apple.
Previously, many companies invested in experimental developments and new directions – now they have to close.
So, the Snap messenger in August announced not only the reduction of about a thousand employees, but also the intention to gradually curtail the work of the Zenly location data exchange service and the Voisey music application that it bought a few years ago.
As The Wall Street Journal wrote on Thursday, citing sources, Amazon is studying which unprofitable divisions can be closed to reduce costs, such divisions include the development and production of its own gadgets, including the “smart” Alexa speaker. In August, the company already shut down its Amazon Care telemedicine service.
Why hi-tech cuts
Of course, every company has its own reasons for layoffs. Thus, Meta’s difficulties began last year: its financial results were deteriorating, revenue growth was slowing down, and in the second quarter of this year it fell for the first time in the company’s history. The situation was not improved by Mr. Zuckerberg’s ambitious project to create a metaverse announced last year. It requires large expenses, while at least in the short term it does not bring any positive impact on the business.
Large-scale reductions in Twitter were provoked by a subjective factor – the purchase of the service by Elon Musk. The billionaire is known for sudden decisions and drastic changes in his companies.
However, the general trend of massive layoffs in the industry is indicative of deeper problems for the entire sector.
One of the main challenges is the tougher competition in the online advertising market while many companies are cutting advertising budgets. But for many technology companies, online advertising is the main source of income.
The macroeconomic situation itself also influences. Many companies in letters of dismissal of employees specifically mention inflation, an increase in the key rate, a “possible recession” or “macroeconomic downturn” among the reasons. In such conditions, high-tech companies report very unsuccessfully for the quarter, and their shares are falling.
“We are facing an unusual macroeconomic environment and want to balance hiring and investment given the economics,” said Amazon HR director Beth Galetti, announcing the company’s hiring freeze.
The macroeconomic situation also affects the sales of gadgets and PCs, especially since they were bought very actively during the pandemic. “In the past two years, so many PCs have been bought that now there is simply no demand for them. In addition, in many places hiring is frozen, so the business does not need new PCs, ”said Mikako Kitagawa, an analyst at Gartner research company.
The reductions are also due to the fact that technology companies are very actively, and according to some experts, even too actively, hired employees.
This has continued throughout the previous ten years, which have been remarkably successful for technology corporations. Earnings and stocks soared. Even the COVID-19 pandemic has been good for the high-tech sector.
Hiring employees during this period took place in conditions of fierce competition. In the course were a variety of benefits and privileges. Valuable workers were attracted not only by high salaries and bonuses, but also by, say, free massages in the office and canteens that cooked famous chefs at the level of good restaurants.
The number of Meta employees has doubled over the past three years, to 87.3 thousand people. The investor app Robinhood, which has skyrocketed in popularity during the pandemic, has grown six-fold in 2020 and 2021 to 3,800 people. The company also had to lay off several hundred employees this year.
“During the fat times, there was a surplus that led to over-hiring and optimism… Too much money led to too much hiring,” said Josh Wolfe of investment fund Lux Capital.
“The bubble has burst,” the Financial Times quoted an unnamed former Meta employee as saying. According to another fired, the company had “a lot of unnecessary teams and unknown products.” No wonder they had to be abandoned.
However, not all experts believe that corporations behaved irrationally.
According to Firsthand Funds CEO Kevin Landis, active hiring was a smart tactic. “By hiring engineers, they were ‘taking territory,'” he says. “They certainly knew they were being wasteful, and of course they knew they were doing the right thing.”
As some experts note, the point here is not only in the desire to hire talented specialists as quickly as possible, but also in very specific goals to attract investment. “The pressure is that you have to spend money fast enough so that you can grow fast enough to justify the kinds of investments that VCs want to make,” says Eric Rachlin, co-founder of Body Labs, a startup bought by Amazon.
What will happen next
According to Wedbush Securities analyst Daniel Ives, the current cost-cutting policy will continue. “These companies spent like the rock stars of the 1980s, and in a bleaker economic climate they have to make some difficult cuts. This is just the first step in how these companies are rationalizing their cost structure,” he said.
Some experts point out that, in fact, cuts do not reduce the staff of high-tech companies that much.
“Meta’s layoff of 11,000 employees brings it back to December 2011 levels. Wait, no, December 2021,” jokes independent technology expert Benedict Evans, pointing out that, in fact, the company has laid off as many employees as it has hired since just the end of last year.
Furthermore. The current difficulties of technology companies do not mean that things in the sector are really bad. Various sectors of the economy are not going to reduce investment in technology.
“CEOs and CFOs have no intention of cutting technology spending,” said John-David Lovelock, director of forecasting at Gartner. In his opinion, more traditional technology companies, such as software developers, can seriously slow down, while other areas, including cloud services, will continue to grow rapidly.
At the same time, the current reductions and closures of projects are most likely not the last ones.
“We have a lot of work to do. The reboot is late,” said technology consultant Steve Milunovich, commenting on the situation in the online advertising market and in the technology sector as a whole.