Tech stocks are down, advertisers are nervous, and workers are paying the price with layoffs. Here’s why.

Matthew Zeitlin

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First the stock prices came down, and then the layoffs began.

If 2022 was the time when technology companies that had struggled to make consistent profits started letting go of employees — Snap cut a fifth of its workforce, Carvana let go 1,500 employees, Twitter … well, you know — then 2023 seems to be the year where even the giants of the industry are cutting headcount. In the past few weeks, Amazon, Google and Microsoft have announced or implemented layoffs of some 40,000 combined employees. Even Salesforce, the enterprise software giant, is laying off 8,000.

While these tech companies — and Meta, which laid off 11,000 in November — don’t all operate in the same business — Meta and Alphabet sell ads, Microsoft sells software, Amazon sells too many things to list — layoffs are happening for all of them. That’s because their investors expected more growth than they are currently showing, share prices that soared in 2020 and 2021 have come back to earth, and any time share prices fall, investors and executives get antsy — and workers often pay the price.

These most recent announcements are likely not the end of this layoff season.

“We … expect a major theme will be tech layoffs as Silicon Valley after a decade of hyper growth now comes to the reality of cost cutting mode to get through this economic storm,” Wedbush Securities analyst Dan Ives wrote in a note to clients. “The Cinderella ride has ended (for now).”

Interest rates and stock prices

In September 2021, the Federal Reserve was beginning to end its pandemic-era stimulus efforts. By November, it was explicitly saying it was ready to start hiking rates in the next year. That same month, the Nasdaq composite, which includes many technology companies, peaked, while the broader market, represented by the S&P 500, peaked in December. By March, the Fed was bringing up interest rates, and would do so consistently for the rest of the year, hiking at seven straight Federal Open Market Committee meetings, bringing rates from near-zero to over 4 percent. This had a predictable, predicted and realized effect on stock prices last year: They went down. The S&P 500 fell 19.4 percent in 2022, while the Nasdaq fell over 30 percent. For specific tech giants, the results were often worse: Amazon’s stock price fell by 50 percent, Meta’s by over 60 percent, Alphabet by almost 40 percent.

The near-zero interest rates implemented by the Fed in order to bolster the economy in response to covid-19 resulted in a bull market, where tech stocks especially rose sharply, explained Steven Miran, a co-founder of Amberwave Partners and a former Treasury official.

This meant “no cost discipline from management, because stocks went up no matter what they spent on beer taps and bowling alleys in the office. They could hire lots of workers, and it didn’t really affect their stock performance,” Miran said.

“Now, with higher interest rates for the foreseeable future, markets have been punishing those growth stocks, forcing CEOs to come up with additional ways of supporting their share prices,” Miran continued. “The classic thing company management does in a downturn is cut costs — unfortunately, lay off workers.”

Investor pressure

When stock prices come down, investors start agitating for corporate executives to do something. And that something is often eliminating jobs.

As stock prices came down, investors started to notice that large tech companies had a lot of workers who were paid very well. And while it’s not always possible to directly link any one investor in a multibillion-dollar public company — especially ones where founders still retain substantial control — it is true that investors and analysts haven’t exactly been lamenting the departure of thousands of tech employees, especially after years of hiring and higher pay.

One investor, the British hedge fund manager Christopher Hohn, wrote a letter to Google Chief Executive Sundar Pichai last week saying he was “encouraged to see that you are now taking some action to right size Alphabet’s cost base.” While the 12,000 jobs cuts, Hohn wrote, were a “step in the right direction,” he still called on Google management to “go further” and cut headcount by a fifth so that Alphabet had 150,000 employees. In its latest quarterly report, the company said it had 187,000 employees. Morgan Stanley analysts described the cut as a “welcome surprise” and estimated that the cost savings would run between $3 and $5 billion per year.

Investors were glad to see the layoffs. After they were announced on Friday, its stock price rose by some 4 percent.

Salesforce is in the process of a 10 percent employment cut, meaning around 8,000 employees will lose their jobs. Earlier this week, the Wall Street Journal reported that Elliott Management, the activist hedge fund known for buying up stakes in companies and then pressuring them to adjust their strategy to be more shareholder friendly, had made an investment in the business software giant.

Brad Gerstner of Altimeter Capital Management, which owns over 2 million Facebook shares as of the end of September, wrote in a letter in October that Meta should cut its headcount by a fifth, reduce its capital expenditure from $30 billion to $25 billion and restrain its investment in its metaverse projects to a mere $5 billion annually.

In November, Meta announced layoffs that would affect more than 11,000 employees. In its most recent quarterly earnings report, the company said it had lost $3.7 billion on Reality Labs, its metaverse division, compared with over $9 billion in profits from its apps and services like Facebook and Instagram.

In October, Facebook reported that it had over 87,000 employees; in its last pre-covid quarterly report, Facebook said it had 43,000 employees.

Competition and privacy

Some technology companies, no matter how complex their services may be under the hood or how advanced their research and development projects are, run a simple business: They sell ads. And thanks to a combination of technical changes in the digital ad market and an industry-wide pullback in demand — when companies are nervous about the future state of the economy, they often cut their advertising spending — several tech colossi have been revealed to be, despite all the high-tech research and development, just another media company.

In its most recent quarter, about $61 billion of Alphabet’s $69 billion in revenue came from businesses like search and YouTube that are primarily advertising businesses. Google’s Chief Business Officer Philipp Schindler told analysts that there had been “modest year-over-year revenue declines” in its YouTube advertising and advertising network business. “In challenging times like these, advertisers are carefully evaluating the effectiveness of their budgets,” Schindler said. In other words, they were spending less.

Facebook, which derives 99 percent of its revenue from advertising, lamented “weak advertising demand,” in the words of then-Chief Financial Officer Dave Wehner. “We’re certainly in a period right now where we are seeing a slowdown in advertising demand,” Susan Li, Facebook’s then-vice president of finance said on the call.

This translated to a 4 percent revenue decline from the third quarter of 2021. Facebook’s services have had to face the dual challenge of Apple’s updates to its mobile operating system, which have limited the tracking that mobile publishers use to target ads, as well as the rise of TikTok, which has spurred Instagram to plaster its app with its own short-form “Reels.” YouTube has enticed creators to produce more content by offering them more money from ads as well as to promote its own short-form videos.

The advertising business’ slowdown has not only affected the tech sector, but media as well. While several companies, especially digital ones, are not publicly traded, they are exposed to the same business pressures as anyone else — or they’re the Washington Post, whose owner, Jeff Bezos, saw his net worth decline $70 billion last year. In announcing a 7 percent headcount cut, Vox Media Chief Executive Jim Bankoff cited “the challenging economic environment impacting our business and industry.”

Thanks to Lillian Barkley for copy editing this article.