Amazon layoffs show Big Tech is still coming down from pandemic highs

The COVID-era spending spree is over. And the tech layoffs keep coming.

Amazon (AMZN) is eliminating several hundred roles across Prime Video and MGM Studios, according to a memo sent to staff on Wednesday. And the company's video game livestreaming platform, Twitch, announced it is laying off more than 500 people.

That Amazon is ringing in the new year with another round of cuts highlights the tech sector's climb down from COVID-era expansion. Even as confidence grows on Wall Street that the economy will finally break free from fears of a recession, tech companies are still reeling from heady staffing days and ambitious investments made during the early stages of the pandemic.

During the acute phase of the public health crisis, company ranks swelled alongside aspirations of rapid growth and a tech-centric transformation. Many executives and market observers believed new consumer habits would redefine the trends to come and accelerate changes already on the way. Screen time exploded as social lives shrunk and adapted. But the spike in demand for e-commerce and digital services eventually leveled off, leaving executives with what they claimed were bloated teams and inefficiency. A brutal wave of job cuts was their answer.

"A lot of companies in various sectors of the economy had rapid expansion during the 'stay at home economy,'" said Clark Bellin, president and chief investment officer at Bellwether Wealth. "Amazon is taking steps to narrow the gap between employee headcount and the growth of its business."

Amazon was arguably the darling of the pandemic era as it benefited from consumers’ sudden shift to online shopping and businesses’ broad move to the cloud, said Nicole Tanenbaum, partner and chief investment strategist at Chequers Financial Management. During this period, Amazon’s profitability soared while the company boosted staffing and leaned into expanded offerings and markets. Amazon’s headcount grew by 310,000 from 2020 to 2021, an increase of almost 25%.

But as the disruptions of the pandemic eased into a recovering economy, the company’s prior investment decisions collided with slowing revenue growth, a reset in consumer spending patterns, and increasing cost pressures triggered by historic inflation.

Amazon also faced a major leadership transition. Jeff Bezos, the company’s founder, whose identity is intimately tied to the company, stepped aside as CEO in 2021. Andy Jassy, the head of Amazon’s lucrative and industry-leading cloud service, AWS, then took the reins.

“Not only does Jassy take a much more direct approach with regards to regulatory and political issues, he has not been afraid to admit that the company overbuilt and needed to reset its approach, lasering in on efforts to control margins and operations in the face of significant inflationary pressures,” Tanenbaum said.

For Jassy and Amazon, rightsizing the business arrived in the form of substantial cost-cutting initiatives. The company enacted stark headcount reductions along with a hiring freeze to further control costs.

Amazon's layoffs over the last several years amount to more than 27,000 cuts. The latest round underscores the financial pullback, especially in contrast to massive spending during peak COVID. For instance, Amazon spent $8.5 billion to acquire MGM, the home of James Bond, in 2022. And the company is estimated to have doled out more than $1 billion to produce multiple seasons of The Rings of Power, its Lord of the Rings prequel series, and likely the most expensive show ever.

While Amazon is among the largest private employers in the US, and the biggest within the tech world, several of its industry peers have turned to drastic layoffs. Meta (META) CEO Mark Zuckerberg, for instance, dubbed 2023 the "year of efficiency." The social media company cut more than 20,000 jobs since late 2022 to cope with declining ad revenue and to improve the business and its cost structure.

And Google (GOOG, GOOGL), which has cut more than 10,000 jobs in that period, said on Thursday it is laying off hundreds of workers on its digital assistant, hardware, and engineering teams, as the search giant aims to trim costs and focus on its biggest priorities.

There is a chance Big Tech will bolster its ranks if the Fed starts to cut rates later this year, relaxing the more reserved posture the industry has adopted. But what’s happening now to staff levels suggests otherwise, said Cory Stahle, an economist at Indeed Hiring Lab. After peaking in the spring of 2022, tech industry headcounts suffered a significant decline through the summer of last year. Those losses eventually flattened out and leveled off, a trend that’s likely to continue, as exuberance gives way to caution.

The digital lives of consumers changed during the pandemic — that's undeniable. But they continue to change, along with the next chapter of the US economy.

Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on Twitter @hshaban.

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