Microsoft Layoffs Won't Be the Last for Tech

(Bloomberg Opinion/Parmy Olson) -- Mass layoffs are one of the more painful consequences of a looming economic recession, and the high-flying and well-funded tech industry isn’t immune. 

Microsoft Corp. on Monday provided an omen of what’s to come, when it confirmed that it had cut jobs across multiple divisions including its Xbox unit, numbering under 1,000 people. That pullback follows news last week that Intel Corp. was planning thousands of job cuts in the face of a slump in PC sales. 

Similarly, Facebook parent Meta Platforms Inc. will be “smaller” by the end of 2023, Chief Executive Officer Mark Zuckerberg recently told staff, when he shared sweeping plans to reorganize the company’s teams and reduce headcount for the first time ever. Faced with plunging stock prices, both Netflix Inc. and Snap Inc. laid off workers this summer.

Expect more companies to follow. A worsening economic outlook means tech businesses will be looking for ways to trim costs while also signaling to investors that they are willing to rein in their sometimes-profligate ways in the face of changing conditions. 

But a larger question looms over the tech industry, which is whether the incipient pullback is a normal and warranted response to a slowing economy or if some of the sector’s biggest players are entering a new, thriftier era.

Related:Latest Microsoft Layoffs Reportedly Target Close to 1,000 Workers

There isn’t just the downturn, but the array of challenges individual companies face, most notably threats to the advertising-reliant business model. Meta in particular has contended with a privacy update from Apple costing it more than $10 billion in lost ad revenue. Meta has spent another $10 billion on building products and services for the metaverse in the hope that an all-encompassing plunge into the virtual world will anchor the company’s second act.

Google’s ad business is, like Meta’s, vulnerable to an economic slowdown, as companies often cut back on costs like advertising in times of austerity. The company has some buffers that put it in a stronger position than Meta. YouTube Inc. is making 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.

The very idea of layoffs in tech might be hard for the industry’s engineers, marketing experts and product managers to come to grips with. This is, after all, the industry that set the bar for attractive benefits, high salaries and perks like in-office massages and catered meals. 

Not to mention that by and large, the tech industry managed to profit handsomely during the pandemic. Share prices soared as businesses and consumers gravitated to tools like Zoom Video Communications, Slack Technologies and Netflix, and spent more time on social media and the internet in general. Hiring continued apace and in some cases even surged.

Related:5 Job Tips for Developers Preparing for Economic Recession

At the same time, thousands of startups benefited from a gush of new venture capital, with VC funding in 2020 rising by 14% from 2019. There was even a jump in megarounds — deals larger than $100 million — during the pandemic.

But as the world goes back to the office in the midst of rising prices and higher interest rates, businesses are looking to correct course. Earnings results from Apple, Meta and Google next week should paint a clearer picture on how deep each company may need to cut.

Painful as that is, restructuring can lead to greater efficiencies and spending discipline, particularly among younger startups, for whom the better capitalized will now benefit from a richer talent pool.

Tom Stafford, a venture capital partner at late-stage internet investing firm DST Global, said at Bloomberg’s Technology Summit last month that thousands of startup businesses needed to go out of business between now and 2023. Too many bad ideas had been funded. In the last three years, he said, “almost all ideas could raise money. That will change. …Not every company will make it and we should embrace failure.”

The tech industry should prepare for tougher times overall.