Microsoft’s layoffs could be a sign of a broader tech downturn

News Summary:

  • Microsoft Corp. on Monday gave a taste of what’s to come when it confirmed that it has cut fewer than 1,000 jobs in several divisions, including its Xbox unit. The retreat follows news last week that Intel Corp. plans to cut thousands of jobs amid a slump in PC sales.

  • Mass layoffs are one of the most painful consequences of a looming economic recession, and even the high-flying and well-funded tech industry is not immune.

Facebook parent Meta Platforms Inc. will also be “smaller” by the end of 2023, as Chief Executive Officer Mark Zuckerberg recently told employees when he announced sweeping plans to reorganize the company’s teams and cut jobs for the first time ever. Faced with falling stock prices, both Netflix Inc. and Snap Inc. laid off employees this summer.

The question facing the tech industry is whether the incipient retrenchment is a normal and justified response to the weakening economy, or whether some of the sector’s largest companies are entering a new, more frugal era.

More companies are expected to follow suit. The worsening economic outlook means tech companies will be looking for ways to cut costs while signaling to investors that they are willing to rein in their sometimes wasteful behavior in the face of changing conditions.

Not only is there the downturn, but there are a number of challenges facing individual companies, most notably the threat to the advertising-dependent business model. Meta, in particular, is struggling with a privacy update from Apple that has cost the company more than $10 billion in lost advertising revenue. Meta has invested another $10 billion in building products and services for the Metaverse, hoping that an all-encompassing immersion in the virtual world will anchor the company’s second act.

Google’s ad business, like Meta’s, is vulnerable to an economic downturn, as companies often cut costs like advertising in times of austerity. The company has some buffers that put it in a stronger position than Meta. YouTube Inc. generates billions of dollars in revenue each year thanks to the growth of its premium subscription product, and advertisers tend to increase their spending on search ads during downturns.

Just the thought of layoffs in the tech industry may be hard on the industry’s engineers, marketers and product managers. After all, this is the industry that has set the bar for attractive benefits, high salaries and perks like in-office massages and catered meals.

Not to mention that the tech industry, by and large, has benefited handsomely during the pandemic. Stock prices soared as businesses and consumers turned to tools like Zoom Video Communications, Slack Technologies and Netflix, and spent more time on social media and the Internet in general. Hiring continued to increase and in some cases even jumped.