Why Are Tech Giants Shedding Jobs?
The technology industry is doing terribly. Haven't you heard what happened last year?
"Despite the overall strength of the tech sector, employers in the computer industry saw the heaviest downsizing of the year, announcing a total of 59,528 planned layoffs. That is 69 percent more than a year ago."
Those stats come courtesy of the employment-consulting firm Challenger, Gray & Christmas, which notes that tech giants Hewlett-Packard and Microsoft delivered the biggest portion of the pink slips. By contrast, hiring is up in industries that we don’t think of as booming these days, like insurance. Challenger says that overall corporate layoffs last year were at their lowest level since 1997.
What are we to make of these counterintuitive stats that seem to suggest that the tech industry is in some distress while the much of the rest of the economy booms? The hiring and firing numbers point to a nuanced story that’s important to keep in mind every time you hear tell of the tech sector’s tremendous strength.
The idea that the industry is on fire isn’t inaccurate. Venture financing is through the roof. Late-stage investment rounds in companies like Uber and Airbnb have hit double-digit billion-dollar figures and almost 50 closely held U.S. companies are valued at $1 billion or more. There's so much demand for certain software engineers that investors and executives claim they must find and woo employees from around the globe.
But of course the new, shiny, platform-y, on-demand-y piece of the tech economy is only so big. In terms of investment, market value and employment, the stodgy tech names - which also happen to be the ones having all the layoffs - still largely anchor the industry. Their fates matter and the hot part of the tech market isn't entirely insulated from what happens to the giants.
Here’s how I see it: The speculative parts of tech will thrive, but only a few of the companies that are so richly valued now will go on to be the next Facebook or Google (or Microsoft or HP, for that matter). The rest will wither or be acquired. For now, they are some of the sexiest companies around and everybody (including we in the media) may pay a disproportionate amount of attention to them.
More importantly, the ideas that start-ups have championed and built businesses around will live on, such as cloud computing, software-as-a-service and peer-to-peer networks. Those ideas will become the basis for the better, stronger versions that grow after the bust (which, inevitably, will occur). Just as Netscape begat Google’s Chrome and as Pets.com begat the array of online retailers we frequent everyday, so too will great ideas live on after the early companies that championed them are gone.
The big old companies that are smart and fast enough to adapt to the changed landscape will acquire those disruptive startups. In fact, they won’t be competitive unless they create a host of innovative products in-house or they do the right deals, maybe even at the right price.
In some ways 2014 was the year when companies with legacy businesses were forced to try and do something, anything, to address the big shifts in the tech landscape.
HP and eBay spun off big divisions. EMC’s VMWare is on the chopping block. Microsoft ousted Chief Executive Officer Steve Ballmer and replaced him with Satya Nadella, whose stated mission was to move the company into the cloud. IBM vowed to act more quickly after a string of disappointing earnings and CEO Ginni Rometty acknowledged that her company had been caught flat-footed by cloud computing. Oracle shuffled the names at the top of the company, and founder Larry Ellison dug back into things as chief technology officer. Even co-founder Larry Page at Google - a still-young company that’s showing signs of a slowdown - essentially handed over the day-to-day operations of almost every division to an Android exec, Sundar Pichai.
These big companies also laid off a lot of employees. It’s the sort of thing that is terrible, to be sure. I don't like that executives and venture-capitalists in sunny Silicon Valley like to sit back and talk about the necessary evil of creative destruction (which includes lots of job losses), but leave out the word "evil" as they philosophize. But I agree with them: It's absolutely necessary for all of these companies to clean house.
They have to do it to change and, perhaps, survive. And they have to do it so they can be healthy enough to absorb the companies - and the people - with great ideas. I’ve written in the past about how older tech companies have long kept the venture ecosystem healthy by buying startups and propelling the consolidation that creates returns for small and mid-sized shareholders.
So, as Challenger noted, the tech industry isn’t doing terribly. But a big part of the industry is trying to revamp, catch-up and keep the market healthy - and they're cutting jobs to get there.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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Timothy L. O'Brien at email@example.com