Mass layoffs, Cuts, and Uncertainty: What Is Happening In The Tech Industry

1 year ago

Poor economic prospects and lost advertising investment sink the capitalization of Silicon Valley giants, forcing them to lay off tens of thousands of employees and change their strategy.

In just two weeks, this November is already one of the blackest in the hitherto happy history of the technology industry. A few days after Elon Musk announced the fulminating dismissal of half of the Twitter workforce, Meta, the company that owns Facebook, Instagram, and WhatsApp, announced on Wednesday that it was firing 11,000 employees, its largest historical staff cut. A labor drain that has spread to the entire sector and that points to important changes in the digital ecosystem.

Understanding Silicon Valley's Pullback

Silicon Valley's pullback cannot be understood without taking into account the economic turbulence. Rising inflation and interest rates, the energy crisis, supply chain problems, and recessionary winds have painted a worrying picture.

In this context, companies seek to cut costs and the first to fall is advertising. This being the engine of the business of most digital businesses, the current landscape is a direct torpedo on its waterline. This is the case of Meta, 98% of the income on which depends on ads, whose effectiveness has been hit by a change in Apple's privacy policies but also by the end of cookies and European regulation.

Big Tech Fires And Freezes Hiring

For some, a "tech winter", or a difficult moment for the technology sector, had already been underway for months, given the collapse of stock market valuations of securities in the sector or the drying up of new financing to startups. Last week, however, was even more significant in showing how the slowdown in the technology sector, which during the most acute phase of the pandemic had made the fortunes of many investors, is concrete. A crisis that also affects the labor market with flurries of layoffs and hiring freezes.

The platforms are especially affected by the successive interest rate hikes ordered by the Federal Reserve (Fed), which motivates investors to sell their shares of riskier and more volatile assets – such as technology stocks – to take refuge in Treasuries that now offer a better return and are safer.

Similarly, the economic slowdown and inflation motivate advertisers and consumer firms to cut their advertising budgets, the main source of financing for several of these companies.

Added to this is the strength of the dollar, which reduces the income of firms, measured in that currency, in their operations abroad.

Last week alone, digital payments giant Stripe laid off 14% of its plant of just over 1,000 workers, while mobility platform Lyft, second in the U.S. after Uber, laid off 13%, representing nearly 700 employees.

But not only reasons related to the US economy affect: some of the companies, such as Stripe, admitted that they hired more people than necessary during the pandemic thinking that the pace of growth and user habits would be sustained for years to come.

In the same vein, Twitter founder Jack Dorsey, who left the firm last year, lamented expanding the size of the company "too quickly." Dorsey's statement came after the social network announced last Friday the dismissal of almost half of its 7,500 employees after being acquired by the tycoon and CEO of Tesla, Elon Musk.

To these announcements, a freeze on new hires at Amazon, Apple, and Alphabet (Google's parent company) is added.

Similarly, Meta Platforms, the parent company of Facebook, Instagram, and WhatsApp, plans to lay off "many thousands" of employees in an announcement that would be made official on Wednesday, people familiar with the matter told The Wall Street Journal and Bloomberg reported. The Mark Zuckerberg-led firm, which has 87,000 employees worldwide, posted a 52 percent year-on-year rate in third-quarter net profit, dragging down its shares.

In the case of Meta, investors are wary of the focus that the company has recently put on the so-called "metaverse".

Both in the case of Meta, which lost 71% of its value this year, as in the case of Alphabet, Amazon, and Microsoft, the latest balance sheets did not meet market expectations, triggering a collapse in their prices that came to touch falls of 24%, after their quarterly balance sheets were known.

In the case of Microsoft, this month the company announced the dismissal of almost 1,000 people out of its 220,000 workers, representing 1% of the total workforce.

Other giants implementing labor policies to cut costs include Amazon, which last week said it was halting hiring for its corporate area around the world because of economic uncertainty. And Alphabet (Google), which also pointed out a few months ago that hiring was slowing down in the company. Along the same lines, Uber, Spotify, Salesforce, Nvidia, Snap, Intel, and Microsoft, which recently fired 1,000 professionals, have been pronouncing.

These announcements come after the big technology companies have left two trillion in stock market value in 2022 after the aggressive rate hike being executed by the US Federal Reserve is taking its toll on a sector that benefited years ago by almost free money. And also after a hiring fever between 2020 and 2021, mainly due to the Covid-19 pandemic, which triggered the need for technological employment.

There would be 416 startups and large US multinationals that laid off employees between April and October. Three months were only in 20. Some examples? Online used car dealer Carvana reduced its workforce by 2,500 employees in May. Staff cuts at major companies like Netflix or PayPal have been relatively minor. The former laid off 450 or about four percent of its employees during the second quarter of 2022, while PayPal terminated contracts for 83 of its employees.

The most prominent cases of companies reducing their workforce in October were plant-based food start-up Beyond Meat, meal kit provider Hello Fresh, and exercise equipment maker Peloton. The latter was founded in 2012 but rose to prominence during the early stages of the pandemic. 

The most affected is the fintech sector which has accused the pressures of fraud and hacker attacks as well as a drastic loss of value in recent months of many cryptocurrencies. For example, between April and August, Robinhood, NFT marketplace OpenSea, and cryptocurrency exchange Coinbase all had to lay off between 20 percent and a third of their workforce due to effects at least partly attributable to the so-called "crypto winter."