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Big Tech layoffs are a problem of the industry's own making: Morning Brief

This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox by signing up here.

The tech industry is reeling from a seemingly nonstop parade of layoffs across Silicon Valley and beyond.

And we're not talking small numbers either.

Meta (META) started the mass layoff train, cutting 11,000 jobs in November. Then, on Jan. 4, Amazon (AMZN) piled on by laying off 18,000 employees. Two weeks later, Microsoft (MSFT) let go of 10,000 workers, and two days after that, on Jan. 20, Alphabet (GOOG, GOOGL) laid off 12,000 employees.

And those are just the major announcements.

According to Layoffs.fyi, tech companies have cut 240,000 jobs since the start of 2021. Since the start of 2023? 68,149 jobs have been lost in the industry.

And there’s no sign that the bleeding will stop anytime soon. Just this week, IBM laid off 3,900 employees, while SAP said it will cut 3,000 jobs.

But the numbers of jobs lost are not the entire story.

The tech layoffs that have roiled the industry over the last two years are a disaster of the tech companies' own making. From over-hiring, to a belief that the world would remain perpetually online after the pandemic, the industry is contending with its own miscalculations.

And now the employees who pinned their futures on these strategic misfires are left to deal with the fallout.

So how did we get here? The easy answer is that the economy soured as the world started pulling out of the pandemic. Inflation rose, the Federal Reserve raised interest rates, and that was that. At least that's how tech executives tell it.

NEW YORK, NEW YORK - JANUARY 25: A man walks near Google offices on January 25, 2023 in New York City. The U.S. Justice Department and a group of eight states sued Google accusing it of illegally abusing a monopoly over the technology that powers online advertising. (Photo by Leonardo Munoz/VIEWpress)
NEW YORK, NEW YORK - JANUARY 25: A man walks near Google offices on January 25, 2023 in New York City. The U.S. Justice Department and a group of eight states sued Google accusing it of illegally abusing a monopoly over the technology that powers online advertising. (Photo by Leonardo Munoz/VIEWpress) (VIEW press via Getty Images)

Microsoft's Satya Nadella told employees that the consumers are looking to do more with less now after spending so much during the pandemic. Google's Sundar Pichai told employees that the company staffed up during the pandemic, but the economic situation has changed. And Amazon’s Andy Jassy said the uncertain economy and its decision to hire so many people during the pandemic is why the company is moving forward with layoffs.

The reality is, companies hired for a world in which they thought the growth experienced during the pandemic was permanent. We'd all stay inside, order goods online, and stream content.

Or to use the parlance of analysts and investors, the pandemic appeared to dramatically increase the TAM — or Total Addressable Market — these companies were going after. Using this logic, growing at all costs into a larger-than-expected market was not only reasonable, but necessary, to stay competitive.

From Q4 2019 to Q3 2022, Microsoft grew its headcount 53.5%, while Google added 57% more workers. Amazon and Meta brought on 93.5% and 94.3% more employees, respectively.

With revenue growing by leaps and bounds, and stock prices soaring, Big Tech was looking for a means to keep the party going, and adding more workers was seemingly the best way to do that.

And now that someone — read: Jay Powell — flipped on the lights and turned off the music, those same tech companies have to reckon with their shoddy decisions. And reckon with a sea change in how the industry will measure success going forward.

As Coinbase CEO Brian Armstrong wrote when disclosing his own company's decision to cut 20% of its team earlier this month: "Over the past 10 years, we, along with most tech companies, became too focused on growing headcount as a metric for success. Especially in this economic environment, it's important to shift our focus to operational efficiency."

Even before the pandemic, we can remember Meta Platforms — then known as Facebook — talking up the investment it would need to make hiring to capture an ever-growing opportunity that seemed in front of them.

Those days, clearly, are gone for now.

But it's not just workers that Big Tech is cutting, either.

Firms like Amazon, Microsoft, and Google are reevaluating their product portfolios to see what can stay and what can go. Amazon, which dramatically expanded its warehouse footprint during the pandemic, is looking for ways to sublet some of its warehouse space to third-parties.

Google just closed its Stadia game streaming service, though that's been in the works for some time. Meta, for its part, cut portions of its experimental product division, according to Platformer.

Despite these layoffs and moves, friend of Yahoo Finance Sam Ro points out the tech industry makes up just 2.8% of total U.S. employment. Moreover, the U.S. economy added 223,000 jobs in December and 4.5 million jobs last year.

And while the big name tech companies might be cutting jobs, other industries are adding.

Chipotle announced plans this week to hire 15,000 workers amid continued expansion plans. And Boeing said it would hire 10,000 workers in 2023 as production ramps up.

So while tech giants seemingly got out over their skis extrapolating short-term trends into the future, other industries see the current economic one as one calling out for expansion.

Which side of this divide is proven right long-term could have big implications for the economy in the years ahead. Or, perhaps, both positions will get to be right.

Got a tip? Email Daniel Howley at dhowley@yahoofinance.com. Follow him on Twitter at @DanielHowley.

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