Since Facebook went public in 2012, a war for talent has been waged in Silicon Valley. Low interest rates and massive pools of venture capital funding meant companies could throw as much money as was needed to attract the best talent. But in the last week, a ceasefire in this war has been declared. The question now is whether these huge cuts will boost margins amid more difficult operating conditions, as activist investors have said.
On 4 November, just a couple of weeks after taking over Twitter, Elon Musk fired half of its 7,500 strong global workforce. A few days later, Mark Zuckerburg, chief executive of Meta Platforms (US:META), said he would lay off 11,000 people, equivalent to 13 per cent of his employees. And then this week, the Financial Times reported Amazon (US:AMZN) plans to cut 10,000 jobs from its corporate workforce, around 3 per cent of its employees.
These layoffs come after the big tech companies have massively increased their headcounts in recent years. Since 2018, Amazon has increased its workforce by 148 per cent to 1.6mn people. Meta more than doubled its headcount to over 70,000 before the recent cuts and Alphabet (US:GOOGL) has grown by around 60 per cent to over 150,000 employees, with median pay of almost $300,000 (£252,000) a year across the company.
Despite the pandemic driving demand for digital advertising, these companies have become less productive during this time on a revenue per employee basis. However, with low interest rates they were able to fund this growth easily. Now interest rates have risen and the digital advertising business has slowed, companies are cutting back on the less profitable parts of their businesses.
The Twitter debacle under Musk, where advertisers have pulled back and the company has had to try and re-hire key workers to keep the platform functioning, has shown the risks of indiscriminate layoffs. But done right a slimmed-down tech giant could improve its fortunes.
Last month, Meta investor Altimeter Capital told the company to get rid of 20 per cent of its workforce and estimated this could boost free cash flow by $10bn next year. Meta's current 2022 free cash flow is forecast to be just $14bn. "It is a poorly kept secret in Silicon Valley that companies ranging from Google to Meta to Twitter to Uber could achieve similar levels of revenue with far fewer people," said Altimeter chief executive Brad Gertsner. Meta has the added costs of Zuckerburg's metaverse spending ($10bn a year or more in capex), so has become a target for investors encouraging spending discipline.
The founder re-committed to his plans, however, in a letter to staff. "We’ve shifted more of our resources on to a smaller number of high priority growth areas — like our AI discovery engine, our ads and business platforms, and our long-term vision for the metaverse," he said. "But these measures alone won’t bring our expenses in line with our revenue growth."
Alphabet – which has not announced any major layoffs – has also been a target for activists. Shareholder TCI Fund Management said this week the company had "too many employees and the cost per employee is too high".
"Our conversations with former executives of Alphabet suggest that the business could be operated more effectively with significantly fewer employees," TCI managing director Christopher Hohn wrote in public letter to the company's chief executive Sundar Pichai. He also said Alphabet's self-driving car unit, Waymo, should be shut down and share buybacks should go up from $60bn because "the stock is very cheap" at 16 times 2023 earnings per share.
Other companies have cut workers from current or previous growth areas.
It is expected that Amazon will target employees responsible for the voice-activated assistant Alexa, and Snap (US:SNAP), which laid off 1,300 workers this summer, has cut back investment in its augmented reality business.
If the decline of the technology industry follows the path of the early 2000s crash, then there could be lot more redundancies to come. Between December 1992 and December 2000, the number of “information” workers in the US rose 39 per cent to 3.7mn, according to the Bureau of Labour Statistics. By December 2005, this had dropped to 3mn and continued to fall until after the 2008 recession.
The loosening of the labour market is already affecting industry wages.
In October, hourly earnings in the information sector dropped on a month-on-month basis for the first time since January 2021. The recent cull at Twitter, Meta and Amazon will release even more workers onto the market. The war for talent has now become a battle for employment.
