Home What's Brewing? Rising Profits, Record Layoffs: The Paradox of a Puget Sound Sea Change

Rising Profits, Record Layoffs: The Paradox of a Puget Sound Sea Change

In an era that is increasingly being defined by a jaw-dropping array of digital assets created by generative AI from Large Language Models, it is the hard and fast numbers — of profits and, paradoxically, of layoffs — that are registering a sea change in the undulating currents of Puget Sound.

Microsoft’s Blizzard of Earnings Outdoes Windows

For the first time in its history, Microsoft has reported that the revenues of its gaming software have outpaced the income from its venerable Windows platform. At the same time, since its Activision Blizzard acquisition was completed, Microsoft laid off 1,900 workers in its gaming division earlier this month. The Redmond elite has also been overhauling its Xbox management in recent months and named a new Blizzard president earlier this week.

The Verge reports that this is the first quarter Microsoft is reporting earnings as a $3 trillion company and also the first time the company has reported additional revenue from its Activision Blizzard acquisition. This additional revenue has made gaming Microsoft’s third largest business this quarter, above Windows. 

Xbox content and services revenue, which includes Xbox Game Pass, is up by a massive 61 percent. It’s difficult to understand immediately how Xbox did without the Activision Blizzard addition.

Amazon’s Cheers and Jeers

Across Lake Washington, Amazon profits have nearly tripled in the quarter just reported. Investors cheered the results, sending Amazon shares up as much as 8% in trading after the market closed this week at the end of January.

To be sure, Amazon’s e-commerce business generates the most revenue for the company. In the first nine months of 2023, Amazon’s net revenue totaled a little over $66.5 billion. The company’s North American and International segments, which focus primarily on e-commerce, together accounted for 83.6% of that revenue.

But it’s a completely different story when it comes to operating income. Amazon posted consolidated operating income of $23.6 billion in the first nine months of 2023. AWS contributed nearly $17.5 billion, or roughly 74%, of that total.

Despite the whale of a performance, Amazon began the year by shedding jobs in several divisions. Last year, it cut more than 27,000 jobs after hiring heavily during the pandemic like other tech rivals.

A Reality Check on the Kings of the Puget Sound Chessboard

Let’s do a reality check on the kings of the Puget Sound chessboard. Tech company workflows have largely returned to pre-pandemic levels, inflation is half of what it was this time last year, and consumer confidence is rebounding.  Yet, in the first four weeks of this year, nearly 100 tech companies, including Meta, Amazon, Microsoft, Google, TikTok and Salesforce have collectively let go of about 25,000 employees, according to layoffs.fyi, which tracks the technology sector.

“There is a herding effect in tech,” said Jeff Shulman, a professor at the University of Washington’s Foster School of Business, who follows the tech industry. “The layoffs seem to be helping their stock prices, so these companies see no reason to stop.”

Some smaller tech startups are running out of cash and facing fundraising struggles with the era of easy money now over, which has prompted workforce reductions. But experts say for most large and publicly-traded tech firms, the layoff trend this month is aimed at satisfying investors.

Shulman adds: “They’re getting away with it because everybody is doing it. And they’re getting away with it because now it’s the new normal,” he said. “Workers are more comfortable with it, stock investors are appreciating it, and so I think we’ll see it continue for some time.

Stanford business professor Jeffrey Pfeffer has called the phenomenon of companies in one industry mimicking each others’ employee terminations “copycat layoffs.” As he explained it: “Tech industry layoffs are basically an instance of social contagion, in which companies imitate what others are doing.”

Layoffs, in other words, are contagious. Pfeffer, who is an expert on organizational behavior, says that when one major tech company downsizes staff, the board of a competing company may start to question why their executives are not doing the same.

“It’s kind of a self-fulfilling prophecy in some sense,” said Shulman of the University of Washington. “They panicked and did the big layoffs last year, and the market reacted favorably, and now they continue to cut to weather a storm that hasn’t fully come yet.”

Why do Profitable Companies Lay Off Workers?

When looking at the EBITDAs (Earnings Before Interest, Taxes, Depreciation, and Amortization) of uber-successful tech companies, it’s hard to fathom why layoffs have been necessary, according to Business.com.

Companies like WeWork and Spotify had negative EBITDAs.  Others, like Microsoft, earned nearly $10 million (EBITDA) for every worker laid off.

  • Amazon had $2.8 million in earnings (EBITDA) for every staff member they laid off in January.
  • Meta had $3.9 million in earnings for each of the 11,000 staff members they laid off in November. In response to Meta’s cost-cutting strategy, its stock price increased by 19 percent.
  • Microsoft had an EBITDA of $98.8 billion in 2022. This means they earned $9.8 million for each person they laid off in January 2023.

Conclusion: From a quantitative standpoint, layoffs appear to be an overreaction to market instability made by companies seeking to reassure investors of their market valuations. Yet the stock market is reaching new highs. We’d attribute a polarized political climate marked by alarmist rhetoric to be a contributing factor that could only get worse if it continues. Now that fears of recession and inflation are fading away, “hire intelligence” ought to return to normalcy. [24×7]