Tech's layoffs are really about profits

Amazon announced 18,000 corporate layoffs as 2023 began, following similar cuts at Meta, Salesforce and Alphabet. On the same day the US establishment survey reported a strong 223,000 net new payroll jobs, leaving unemployment at a historic low of 3.5 per cent. The tech cuts look out of step with the wider labour market, and they are. Silicon Valley is going through an overdue restructuring in which the chase for growth has given way to an obsession with operating margins and free cash flow. It says little about the health of the wider economy.

During the pandemic liquidity boom, tech platforms were told to win market share at any cost. Capital was free and valuations were tied to revenue multiples, so managers hoarded engineers and administrators as a competitive moat and treated operating costs as an afterthought.

Hired for a boom that ended

The hiring was on a scale few other industries could match. Amazon's total workforce roughly doubled between 2019 and 2021 as it built warehouses to meet lockdown demand, and its corporate ranks grew alongside. Meta kept adding staff into the autumn of 2022 before announcing 11,000 job cuts in November, and Salesforce said this week that it would cut about a tenth of its workforce. Twitter shed around half its employees within weeks of Elon Musk's takeover.

The bet behind the hiring was that pandemic habits of online shopping, streaming and remote work would persist at full strength. They did not. Shoppers returned to stores, advertisers trimmed budgets, and Meta reported the first year-on-year revenue declines in its history in 2022.

Growth gives way to cash

The repricing of the government bond curve in 2022 ended that approach. With discount rates at 4 per cent, cash flows expected ten years out lose much of their present value, and shareholders now want operating leverage straight away.

Shareholders delivered that message through prices. Meta's shares lost almost two-thirds of their value in 2022 and Amazon's about half, far worse than the broad market, and executives whose own pay is largely in stock felt the change directly. A company valued on distant growth can afford to spend freely; one valued on near-term cash cannot.

The layoffs undo the over-hiring of the pandemic years. By cutting five to ten per cent of white-collar staff, the tech giants can save billions of dollars a year in pay and stock-based dilution without hurting their core revenue.

Shareholders get the savings

The money saved is going to shore up balance sheets and speed up share buybacks, with little left over for speculative capital spending or moonshots.

Activist investors have pressed the point in public. In October Altimeter Capital wrote an open letter urging Meta to cut its headcount and its spending on the metaverse, and in November TCI, a London hedge fund, wrote to Alphabet demanding lower staff costs. Managers who once answered mainly to founders' ambitions now face shareholders asking for the cost discipline expected of mature industrial companies.

Stock-based pay is the less visible part of the saving. Big tech companies pay engineers heavily in shares, which does not show up as a cash cost but dilutes existing owners unless the company buys back stock to offset it. Fewer employees means fewer new shares issued, so every dollar of buyback goes further in shrinking the share count.

Why the economy barely notices

The sector that is cutting is a small fraction of American employment, and the people losing their jobs are among the most employable in the country. Payroll growth of 223,000 in December shows that healthcare, hospitality and other services are still hiring faster than tech is firing. Banks, manufacturers and retailers that spent years competing with Silicon Valley for software engineers now have a chance to hire them.

The contrast with the dotcom bust of 2001 is instructive. Then, the collapse was in capital spending: companies had bought far more telecoms equipment and computers than they needed, and the investment slump helped tip the economy into recession. Today's cuts fall on operating costs at companies whose core businesses remain highly profitable, and spending on data centres and cloud infrastructure has not collapsed.

Where the cuts do bite

The damage is concentrated rather than trivial. Commercial landlords in San Francisco and Seattle, already struggling with empty offices after the shift to remote work, lose tenants and prospective tenants. Foreign workers on H-1B visas have 60 days to find a new sponsoring employer or leave the country, which makes a layoff far more disruptive for them than for American colleagues.

The strongest counterargument is that the cuts reflect real weakness in demand as well as a change in investor taste. Digital advertising is cyclical, and falling ad budgets are an early sign that companies elsewhere are trimming marketing in anticipation of a slowdown. On that reading, tech is simply first in the queue, as it was in 2001. The argument has force, but it has to explain why hiring outside tech remains so strong.

What would change the call

Fourth-quarter results from the big platforms, due over the next month, will show whether revenue is shrinking or merely growing slowly, and whether managers are cutting capital spending as well as staff. Weekly jobless claims will show if layoffs are spreading beyond tech. A jump in claims across services would suggest the cuts are an early warning after all.

Wall Street's warm response to the cuts confirms that investors now value profits over user growth. The layoffs show Silicon Valley's executives turning to squeeze out cash now that free capital has gone, and they are more likely to lift big tech's margins and buybacks this year than to drag the wider economy into recession.