Why Big Tech Layoffs Are Just the Beginning of a New Era

Google, Twitter, Meta, Amazon; all of the big tech companies seem to be convinced that this is mass layoff season. So far we’re talking tens of thousands of employees from some of the world’s largest companies suddenly without a job. My former boss Mark Zuckerberg was in the news recently saying he doesn’t like “managers managing managers”, which is a decent sign that their year of efficiency will result in a flattening of structures and further rounds of layoffs.?

Why are these tech companies going through mass layoffs, and why is this going to have a huge impact on the future of our economy? Let’s dissect these questions one at a time to build the bigger picture.

Why are tech companies laying off staff?

If you’ve been following the news at all, you’ve no doubt seen headlines that normalise these layoffs as a completely natural part of an economic slowdown. For the most part, this explanation has been accepted by the public. However, it’s worth a deep-dive to unpack some of the explanations behind the trend.

Reason 1: A downturn in the economy?

Always a perennial favourite, of course the economy must be to blame. Times are tough, revenues are down. We miscalculated and overhired. Therefore, the only logical solution is we need to make a bunch of roles redundant and reset back to a more conservative headcount. Obviously this is a valid and pragmatic reasoning for why companies need to undertake some level of belt-tightening. However, shrugging one’s shoulders and accepting that the only solution is to let an army of staff loose is an oversimplification.

Let’s look at Meta for example. For a company that makes somewhere in the region of $120 billion in revenue per year, cutting 11,000 people would save them a few billion dollars. Yes, a few billion dollars is a lot of money, but in the scheme of hundreds of billions it’s not the biggest ticket item.?Tim Cook took a 40% pay cut to avoid layoffs. So should all CEOs take a huge pay cut to make ends meet? Not at all, but it’s a sign that there is more than one way to streamline costs during this temporary downturn, with the bonus upside of retaining all that very expensive talent.

Reason 2: “Trimming the fat”?

Some of the more cynical among us have speculated that this is simply convenient timing to let go of underperforming staff. The argument is that it’s not about an economic downturn or roles becoming redundant, but in an industry where employee perks and rights have been held sacred for decades, it’s a rush to hide behind public sentiment to jettison unwanted personnel.

I don’t think so.

These companies have a track record of recruiting, training and investing in the best talent in the world. Any company worth its salt wouldn’t simply turn their back on this to make some short term gains.?

Interestingly, Google went through a round of layoffs during the 2008 financial crisis. Their biggest learning in hindsight was that if they had re-invested at that time and held on to all of that talent, they could have increased their market lead while competitors were applying the brakes. I find it hard to believe that such a smart company, having learned that lesson in such recent history would repeat the same mistake again.

Reason 3: Keeping shareholders happy

So let’s have a think about where these companies are in their journey. Meta, Google and co have enjoyed unconstrained growth since inception. Now what we’re seeing for the very first time in history is that these companies are having to deal with not just a slowdown, but in some cases an actual reduction in revenues. All of a sudden, the darlings of silicon valley are having to deal with the economic realities that most other companies have had to deal with for decades.?

I would argue that the number one reason these companies are making layoffs isn’t to shave off a small percentage of their cost base, or to unceremoniously dump unwanted staff. The number one reason the tech layoffs are happening is to keep shareholders happy and to give the share price a much needed tailwind as it has taken a battering in the preceding 12 months.

To a large extent, this strategy has worked: we’ve seen a correlation in the media frenzy around the layoffs and a rebound in the share price. It’s a deliberate way of signalling to the market: “hey, in tough times we are economically responsible! We know how to deal with these realities! We are grown-ups!”

What do the layoffs have to do with ChatGPT?

So you’ll notice I made a pretty bold claim there: something has just happened to these companies that has literally never happened in their short history before. Unfortunately, in order to unpack that statement, I’m going to have to do the unthinkable: I’m going to jump on the bandwagon and talk about ChatGPT.

Nicholas Thompson, CEO of The Atlantic recently posed a great question: Why was ChatGPT created by OpenAI, a small company of just a few hundred people? Why wasn’t ChatGPT created by Google? They have a lot of the world’s best AI talent, almost unlimited resources, and the world’s largest dataset. You couldn’t ask for better conditions for ChatGPT to be created, could you?

Herein lies the real insight: companies like Google have in fact been working on AI for decades. In fact we’ve seen them talk about it many times, with CEO Sundar Pichai even dedicated a fair chunk of his IO presentation to LaMDA. There was a recent news story about a Google created music AI that can take some pretty basic text prompts to create realistic music. There is no doubt that they’ve been sitting on some AI tech at least as good, if not better than ChatGPT and DALL-E for some time.?

So why did Google let ChatGPT get a head start? Even worse, why did they try to quickly follow suit and stumble so dramatically with their botched announcement of Bard??If you ask anyone at Google, they’ll tell you that it takes years to get a product like this ready for market: Ensuring accuracy of information, filtering out of hate speech, making it compliant with local regulations, and generally avoiding any kind of controversy or legal hot water - this all takes time. Lots and lots of time. Contrast that with a scrappy startup: it’s been well documented that ChatGPT can sometimes return misleading or even downright incorrect information.?

We have come to trust Google as a reliable utility in our lives. My infant son was recently sick and when I got worried in the middle of the night by his elevated heart rate and breathing, rather than rushing him to the hospital, I turned to Google to give me the answers I needed. Once earned, that’s a trust that no company can afford to break.?

Google and the other incumbent tech players have backed themselves into a corner. We would never tolerate our energy provider saying “we move fast and break things”, so it’s not surprise that “move fast with stable infrastructure” has become the name of the game.

How will this impact the business landscape?

I can almost hear all of you innovation experts holding up your copies of Clayton Christensen as I say this: the big penny drop for me is that we are literally seeing the innovator’s dilemma playing out right here, right now in 2023.??

For comparison, let’s look at everyone’s favourite example of Kodak, who invented digital photography but fatally chose not to commercialise this technology because they didn’t want to cannibalise their film business. You could make an argument that that’s exactly what Google is doing right now. Having created a bunch of great AI tech, they’ve held it back because they need to keep their core search and advertising businesses safe. Along comes a smaller, disruptive player and Google is left sitting there holding the baby.

Except, in this case it’s slightly different. Google isn't afraid to disrupt their search business, and in fact they have entire teams of people whose job it is to do exactly this. The problem is: how do you do it without breaking the internet?

What we are seeing right now is a changing of the guard. The FAANG companies who were the disruptors have now become the incumbents, and no doubt we’re about to see a rash of smaller, more disruptive players coming in and eating their lunch. This is a big moment in history. Make no mistake, this isn’t a looming threat in the distance; Microsoft’s heavy investment in OpenAI signals that this is a burning platform that’s here and now.

What does the future look like?

Personally I’m excited to see what the tech companies are going to do to defend their territory now that they are the grownups. But I’m also excited to see something else. With all of these mass layoffs we now have about 100,000 of the world’s most talented people on the open market. At the same time, the market is clearly telling us that AI is the next big thing. Combine these two things and I would be absolutely shocked if we don’t see a whole rash of new, very disruptive startups coming out of this wave. If I were a VC and I’d learned any lessons over the last 30 years, this is exactly where I’d be putting all of my attention. Because if there’s one thing that’s sure to come out of these tech layoffs, it’s this: in a dorm room, a garage or a co-working space somewhere on this planet, the next Facebook, the next Google or maybe even the next ChatGPT is being invented right now.

I’ll be keeping a close eye on this space, and I think you should too.