Meta Chief Executive Mark Zuckerberg confirmed the decision on laying off employees on Wednesday in a letter addressed to meta employees worldwide.
Employees who are to be laid off will receive at least four months of salary, Zuckerberg said in his open letter to staff, detailing the support that Meta would provide to those affected.
The company is expected to cut 11,000 employees beginning Wednesday, representing around 13 per cent of Meta's global workforce, and this will likely be the largest of the year to date in the tech sector. This is in line with reports earlier this week that Meta investors called on the company to reduce its workforce by at least 20 per cent and stop making investments in metaverse.
According to a Wall Street journal report published earlier this week, Zuckerberg mentioned recruiting and business teams as among those facing layoffs.
Meta’s bad run, why?
Meta Platforms Inc., formerly Facebook, has had a 70 per cent slump so far this year. While the reports about the cuts has seen the shares pick up, the company has been on a bad run throughout the year.
While the entire tech industry has seen a slump, Meta’s woes are a bit more specific. The parent company that owns Facebook, Instagram and WhatsApp has been facing intense competition from other social media platforms including TikTok and Snap.
Facebook's share plunged by 11.86 per cent between January and November 2022, data compiled by finance publication Finbold showed. The market share value accounts for desktop and mobile devices worldwide.
In comparison, Twitter’s global market share grew by 55 per cent in 2022.
And the targeted advertising methods that turned Meta into an economic behemoth took a hit last year when Apple introduced privacy restrictions that forced appmakers to explicitly ask users if they could track their activity across the internet - a request many rebuffed.
In addition to all this, Meta’s investors are reportedly extremely skeptical of Zuckerberg’s push for the immersive digital world called the metaverse. This is a long-term and expensive investment in the unproven metaverse strategy, creating hardware and software for a virtual reality-fueled future internet.
During the company's earnings call last month, Zuckerberg said: "In 2023, we're going to focus our investments on a small number of high priority growth areas."
"So that means some teams will grow meaningfully, but most other teams will stay flat or shrink over the next year. In aggregate, we expect to end 2023 as either roughly the same size, or even a slightly smaller organisation than we are today," he had mentioned.
Meta posted another quarterly revenue decline in Q3 as investors began to lose faith in its loss-making, billion-dollars metaverse dream.
The number of users on Meta's legacy Facebook app has largely plateaued over the past 18 months, while the amount it makes for each user slid to the lowest in six quarters.
Hiring spree turned detrimental
As of September 30, Meta reportedly had 87,000 employees. Meta, like other tech giants, went on a hiring spree during the pandemic as life and business shifted more online.
It added more than 27,000 employees in 2020 and 2021 combined and added a further 15,344 in the first nine months of this year--about one-fourth of that during the most recent quarter.
The newly announced cuts are expected to affect about 13 per cent of the company according to Insider. Elon Musk's Twitter laid off around 3,700 employees last week, and if the reports are true, Meta's job cuts would be the biggest in the industry so far.
First time in 18 years, stocks pick up
The cuts would be part of the first major budget cut since the founding of Facebook in 2004, a reaction to the continuous and sharp slowdown in digital advertising revenue, fears of a global recession and Zuckerberg's heavy investment in metaverse.
Meta Platforms Inc jumped following a report that the company was planning to begin large-scale layoffs this week. While layoffs bring economic pain to households, investors tend to look favorably on them because they mean lower costs and higher profits.
Tech industry woes post pandemic
Intel, Amazon, Apple, Lyft, Stripe, Microsoft and other major tech firms have also announced job cuts and/or freeze on hiring which could last well into 2023.
The pandemic cuts do not compare to the current situation. As soon as people started working from home and isolating, they turned to tech companies' products for remote work, food delivery and social connection, spurring significant growth.
Now, the tech companies face a different economic reality. In recent earnings reports, Alphabet, Amazon, Meta, Microsoft Corp. and others fell short of projections, sending shares plunging and shaving hundreds of millions to billions of dollars from their market valuations.
The predicament is more dire for startups, which likely will have to make more significant cuts to their staffs as soaring interest rates hinder their ability to raise capital, Stephen Levy, director of the Center for Continuing Study of the California Economy, a research firm based in Palo Alto, California, told Bloomberg.
Is it really that bad?
To be sure, the scale of layoffs remains a far cry from the cuts made after the dot-com bubble burst. In 2001, the tech industry shed 168,395 jobs, followed by another 131,294 posts lost in 2002, according to Challenger.
The composition of the industry has changed greatly since those days. Many of the firms that survived the dot com bust are now sprawling enterprises, meaning that this contraction in the tech economy may be more a case of large firms tightening their belts, rather than small companies closing up shop.
"Most of the industry, and the jobs, are in the big companies now," Levy said.
Why is this happening
As the Federal Reserve raises interest rates - last Wednesday, it approved a fourth straight hike of 0.75 basis points - the tech sector is being hit especially hard, said Josh White, an assistant professor of finance at Vanderbilt University.
Technology firms' largest asset is their workforce, he said, in contrast with businesses in other industries that have capital-intensive equipment or high-priced materials. And tech companies' debt financing is often reliant on consistent interest rates.
When rates increase, especially this sharply, White said, it gets too expensive for tech companies to keep borrowing money to feed their voracious hiring. And without much else to cut to maintain profit margins, they're forced to shed employees.