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Tech stocks are down, advertisers are nervous, and workers are paying the price with layoffs. Here’s why.

What happens when interest rates rise and investors get antsy.

First the stock prices came down, and then the layoffs began.

While these tech companies — and Meta, which laid off 11,000 in November — don’t all operate in the same business — Meta and Alphabet sell ads, Microsoft sells software, Amazon sells too many things to list — layoffs are happening for all of them. That’s because their investors expected more growth than they are currently showing, share prices that soared in 2020 and 2021 have come back to earth, and any time share prices fall, investors and executives get antsy — and workers often pay the price.

These most recent announcements are likely not the end of this layoff season.

“We … expect a major theme will be tech layoffs as Silicon Valley after a decade of hyper growth now comes to the reality of cost cutting mode to get through this economic storm,” Wedbush Securities analyst Dan Ives wrote in a note to clients. “The Cinderella ride has ended (for now).”

Interest rates and stock prices

The near-zero interest rates implemented by the Fed in order to bolster the economy in response to covid-19 resulted in a bull market, where tech stocks especially rose sharply, explained Steven Miran, a co-founder of Amberwave Partners and a former Treasury official.

This meant “no cost discipline from management, because stocks went up no matter what they spent on beer taps and bowling alleys in the office. They could hire lots of workers, and it didn’t really affect their stock performance,” Miran said.

“Now, with higher interest rates for the foreseeable future, markets have been punishing those growth stocks, forcing CEOs to come up with additional ways of supporting their share prices,” Miran continued. “The classic thing company management does in a downturn is cut costs — unfortunately, lay off workers.”

Investor pressure

When stock prices come down, investors start agitating for corporate executives to do something. And that something is often eliminating jobs.

As stock prices came down, investors started to notice that large tech companies had a lot of workers who were paid very well. And while it’s not always possible to directly link any one investor in a multibillion-dollar public company — especially ones where founders still retain substantial control — it is true that investors and analysts haven’t exactly been lamenting the departure of thousands of tech employees, especially after years of hiring and higher pay.

Investors were glad to see the layoffs. After they were announced on Friday, its stock price rose by some 4 percent.

In November, Meta announced layoffs that would affect more than 11,000 employees. In its most recent quarterly earnings report, the company said it had lost $3.7 billion on Reality Labs, its metaverse division, compared with over $9 billion in profits from its apps and services like Facebook and Instagram.

Competition and privacy

Some technology companies, no matter how complex their services may be under the hood or how advanced their research and development projects are, run a simple business: They sell ads. And thanks to a combination of technical changes in the digital ad market and an industry-wide pullback in demand — when companies are nervous about the future state of the economy, they often cut their advertising spending — several tech colossi have been revealed to be, despite all the high-tech research and development, just another media company.

In its most recent quarter, about $61 billion of Alphabet’s $69 billion in revenue came from businesses like search and YouTube that are primarily advertising businesses. Google’s Chief Business Officer Philipp Schindler told analysts that there had been “modest year-over-year revenue declines” in its YouTube advertising and advertising network business. “In challenging times like these, advertisers are carefully evaluating the effectiveness of their budgets,” Schindler said. In other words, they were spending less.

The advertising business’ slowdown has not only affected the tech sector, but media as well. While several companies, especially digital ones, are not publicly traded, they are exposed to the same business pressures as anyone else — or they’re the Washington Post, whose owner, Jeff Bezos, saw his net worth decline $70 billion last year. In announcing a 7 percent headcount cut, Vox Media Chief Executive Jim Bankoff cited “the challenging economic environment impacting our business and industry.”

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