Tech sector especially vulnerable to layoffs
Cuts forced by rapid hiring, high inflation, declining advertising
“One of the first things companies do in the face of such uncertainty is they cancel their ad budgets.” Anthony Wood, Roku CEO
The wave of tech layoffs at Bay Area companies in the past month have affected more than 24,000 workers globally, levels of downsizing not seen since the early part of the pandemic. The once-booming job market has cooled, and there are fewer opportunities as companies such as Meta, Twitter and Oracle seek to cut costs.
The tech sector is facing challenges that are also being felt by other industries, but the industry’s trajectory during the pandemic has made it especially vulnerable to downsizings. Here are the main reasons the tech sector has been shrinking:
Overhiring during the pandemic: Some of the biggest layoff rounds have come at companies that have grown at unprecedented rates during the last three years. They’re now scaling back as business has slumped.
Facebook parent Meta roughly doubled its headcount to 87,000 workers as customers stayed glued to their screens and many in-person experiences were put on hold during the pandemic. It’s now cutting 11,000 workers in the first mass layoff in company history and its stock is down almost 75% in the past year.
Amazon’s growth was even bigger, as it doubled in size from nearly 800,000 full- and parttime workers at the end of 2019 to 1.6 million at the end of 2021 — many of them working at warehouses. The Seattle tech giant is now laying off around 10,000 corporate employees after operating income fell in the most recent quarter by $2.4 billion compared with the previous year.
In the wake of Elon Musk’s mass layoffs at Twitter this month, ex-CEO Jack Dorsey apologized for growing the company too fast. “I own the responsibility for why everyone is in this situation: I grew the company size too quickly. I apologize for that,” Dorsey posted on Twitter.
Rising interest rates and high inflation: The Federal Reserve’s multiple rounds of interest rate increases is a major shock to venture capital funding, the lifeblood of tech startups. Venture capital firms are generally less attractive to outside investors as interest rates rise, as investment consultant firm Callan noted recently.
Venture capital firms are also less eager to back unprofitable startups, which must continue to seek new equity and debt funding to fuel their growth.
Those conditions led to Stripe, the second-most-valuable U.S. private startup, to lay off 14% of its workers, or more than 1,000 staff. “We are facing stubborn inflation, energy shocks, higher interest rates, reduced investment budgets, and sparser startup funding,” Stripe CEO Patrick Collison wrote in a memo to employees. “Today, that means building differently for leaner times ... we need to reduce our costs.”
Dropping advertising spending: Ads are what make most of Google’s search and YouTube services, and Meta’s Facebook and Instagram, free to use. A continued drop in spending is an ominous sign for the industry. In October, U.S. ad spending fell 3.2% compared with the previous year, the fifth straight month of declines, according to a MediaPost tracker.
That was a primary reason that Google’s parent Alphabet reported that net income fell to $13.9 billion in the third quarter from $18.9 billion in the previous year. The company hasn’t announced layoffs, but it’s frozen most hiring, and the Information reported that 10,000 workers could be labeled as “low performers” and pushed out of the company.
“One of the first things companies do in the face of such uncertainty is they cancel their ad budgets,” Roku CEO Anthony Wood said in an earnings call this month. The video device maker said it was laying off 200 workers soon after.
Crypto crash: The huge collapse of cryptocurrency exchange FTX, which was once valued at $32 billion, has been tech’s biggest meltdown in years. It’s unclear how many FTX employees will be affected, but other startups in the sector have also downsized.
Crypto.com, the namesake of the Los Angeles Lakers’ arena, has cut hundreds of jobs this year, and the formerly San Francisco-based Coinbase cut 18% of staff in June and reportedly laid off 60 additional workers this month.
“A recession could lead to another crypto winter, and could last for an extended period. In past crypto winters, trading revenue (our largest revenue source) has declined significantly,” CEO Brian Armstrong wrote in June.