How the pandemic Big Tech bubble burst

How the pandemic Big Tech bubble burst

New York

In January 2021, Microsoft CEO Satya Nadella spoke highly of how the first year of the pandemic prompted a massive shift towards online services, benefiting his company in the process. “What we have seen in the last year is the beginning of the second wave of digital transformation sweeping every company and every industry,” he said.

Two years later, the situation looks much bleaker. This week, Microsoft said it planned to lay off 10,000 employees as businesses rethink their digital spending since the pandemic and face broader economic uncertainty. Microsoft customers, Nadella said, now want to “do more with less.”

Microsoft is not the only company with such a dramatic setback. Days later, Google-parent The company Alphabet followed suit, saying it plans to cut about 12,000 jobs, which is more than 6% of its staff.

In the past three months, Amazon, Google, Microsoft and Facebook-parent Meta have announced plans to cut more than 50,000 employees from their collective ranks, a dramatic reversal from the early days of the pandemic when the tech giants were growing rapidly to meet increasing demand from the number of households living, shopping and working online. At the time, many tech leaders seemed to expect that growth to continue unabated.

By September 2022, Amazon ( AMZN ) had more than doubled its corporate headcount compared to the same month in 2019, hiring more than half a million additional workers and significantly expanding its warehouse footprint. Meta almost doubled its staff between March 2020 and September last year. Microsoft ( MSFT ) and Google ( GOOGL GOOGLE ) also hired thousands of additional workers, as did other tech firms like Salesforce ( CRM ), Snap ( SNAP ) and Twitter, all of which announced layoffs in recent weeks down too.

But many of those same leaders seem to have misjudged just how much the pandemic-fueled growth would follow when people returned to their offline lives.

In recent months, higher interest rates, inflation and fears of a recession have caused a pullback in advertising and consumer spending that has hit tech company profits and shares. Wall Street analysts expect single-digit revenue growth during the crucial Christmas quarter for Google, Microsoft and Amazon, and declines for Meta and Apple, when they report earnings in the coming weeks, according to Refinitiv estimates.

The recent cuts in most cases represent a relatively small percentage of each company’s headcount, essentially wiping out the last year of gains for some while leaving them with tens or in some cases hundreds of thousands of workers another. But it nevertheless consumes the lives of many workers who are now left searching for new jobs after their employers have given up on a period of endless growth.

“They went from being on top of the world to having to make some really tough decisions,” said Scott Kessler, global sector leader for technology, media and telecommunications at investment firm Third Bridge. “To see this dramatic turnaround in success… it’s not just the size of these transitions but the speed at which they have been achieved. You saw that companies make the wrong strategic decisions at the wrong times.”

Apple ( AAPL ) remains an outlier as the only major tech company yet to announce layoffs, though the iPhone maker has reportedly instituted a hiring freeze in all areas except research and development. Apple (AAPL) grew its staff by 20% from 2019 to last year, far less than some of its peers.

“They’ve taken a more thoughtful approach to hiring and managing the company overall,” Kessler said.

Tech CEOs, from Meta’s Mark Zuckerberg to Salesforce’s Marc Benioff, have blamed themselves for over-hiring early in the pandemic and misreading how a surge in demand for their products would cool off as soon as Covid-19 restrictions ease. Pichai on Friday also took the blame for Alphabet’s cuts, and said he plans to return the company’s focus to its core business and “highest priorities.”

“These changes deeply affect me, and I take full responsibility for the decisions that got us here,” Pichai said in an email to employees posted on the company’s website Friday.

Notably, however, none of the Big Tech company CEOs it now appears that supervisory layoffs are stricken with any change in their compensation or title.

The tech layoff announcements are likely to continue into the upcoming earnings season, Kessler said, amid continued economic warning signs. And even companies that aren’t feeling the pain yet could follow their peers’ lead in trimming their workforces.

“I think there is an element of it [some companies saying]’We may not see this at the moment but all these other big companies, these companies that we compete with, that we know, that we respect, are doing such activities, so maybe we should be thinking and acting accordingly,” Kessler said.

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