recorded its slowest sales growth in more than six years last quarter as demand for its software and cloud services cooled on concerns about the health of the global economy.
The Redmond, Wash., company’s revenue expanded 2% in the three months through Dec. 31 from a year earlier to $52.7 billion. Its net income fell 12% to $16.4 billion. That is the company’s lowest revenue growth since the quarter that ended in June 2016.
“Organizations are exercising caution given the macroeconomic uncertainty,” Microsoft Chief Executive
Satya Nadella
said on an earnings call Tuesday.
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The software company is the first of the tech titans to announce earnings for the quarter. It and others have recently announced layoffs of thousands of people to reflect a sudden lowering of expectations about future demand. Last week Microsoft announced plans to eliminate 10,000 jobs in response to the global economic slowdown, the company’s largest layoffs in more than eight years.
Microsoft said it expects around $51 billion in revenue this quarter, a 3% increase from the same quarter last year. Its shares, which had initially risen on the results in after-hours trading, gave up their gains after the company announced its guidance.
Microsoft’s Intelligent Cloud business, which includes its Azure cloud-computing business, grew 18% to $21.51 billion. Azure grew 31%, which was slightly above some analysts’ expectations.
Microsoft is one of the top companies in cloud-computing services that have boomed during the pandemic. In the middle of the health crisis, Microsoft reported several quarters in a row of 50% or more year-over-year sales growth for its cloud-computing platform, the world’s No. 2 behind
Amazon.com Inc.’s
cloud. While Azure and Microsoft’s other cloud services remain the main engine for the company’s growth, demand isn’t what it was even a year ago as customers try to manage their cloud computing costs.
The company has been betting the next wave of demand for cloud services could come from more companies and people using artificial intelligence. It has been deepening its relationship with the AI startup OpenAI, the company behind the image generator Dall-E 2 and the technology behind ChatGPT, which can answer questions and write essays and poems.
“The age of AI is upon us and Microsoft is powering it,” Mr. Nadella said Tuesday.
Microsoft had been sheltered from much of the recent downturn because it gets most of its sales from companies rather than advertising and consumer spending. However, it isn’t immune to the end of pandemic trends that turbocharged demand, hiring and investment as well as economic headwinds such as high interest rates.
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Demand for Windows operating-system software has fallen with sales of the personal computers that use it. Households, companies and governments that bought computers during the pandemic are scaling back.
That was reflected in Microsoft’s personal computing segment revenue, which fell 19% to $14.24 billion. Sales related to its Windows operating system declined 39% and sales of devices like its Surface tablets fell 39%.
Worldwide PC shipments were down 29% in the fourth quarter last year compared with the previous year, according to preliminary data from the research firm Gartner Inc. Financial analysts don’t expect that trend to improve until 2024.
Photos: Tech Layoffs Across the Industry
Microsoft said its videogaming revenue fell 12% during the quarter. Videogames and Microsoft’s Xbox videogame consoles are increasingly important businesses for the company. The videogaming industry is going through a slowdown as pandemic-related restrictions ease and people spend less time at home.
The company made a huge bet on the sector a year ago with its $75 billion plan to acquire videogame giant
Activision Blizzard Inc.
Last month the Federal Trade Commission sued to block the acquisition, saying the deal would give Microsoft the ability to control how consumers beyond users of its own Xbox consoles and subscription services access Activision’s games. Microsoft then filed a rebuttal saying the deal won’t hurt competition in the videogaming industry. It could take months before it is decided in the U.S. and elsewhere whether the deal can go through.
After the close of regular stock trading on Tuesday, Microsoft shares had slipped around 18% over the previous year, broadly in line with the tech-heavy Nasdaq Composite Index.
The Justice Department is seeking the breakup of Google’s business brokering digital advertising across much of the internet, a major expansion of the legal challenges the company faces to its business in the U.S. and abroad.
A lawsuit filed Tuesday, the Justice Department’s second against the
Alphabet Inc.
GOOG -1.98%
unit following one filed in 2020, alleges that Google abuses its role as one of the largest brokers, suppliers and online auctioneers of ads placed on websites and mobile applications. The filing promises a protracted court battle with wide-ranging implications for the digital-advertising industry.
Filed in federal court in Virginia, the case alleges that Google abuses monopoly power in the ad-tech industry, hurting web publishers and advertisers that try to use competing products. Eight states, including California and New York, joined the Justice Department’s lawsuit.
The lawsuit asks the court to unwind Google’s “anticompetitive acquisitions,” such as its 2008 purchase of ad-serving company DoubleClick, and calls for the divestiture of its ad exchange.
“For 15 years Google has pursued a course of anticompetitive conduct that has allowed it to halt the rise of rival technologies, manipulate auction mechanics, insulate itself from competition, and forced advertisers and publishers to use its tools,” Attorney General
Merrick Garland
said at a press conference Tuesday. “Google has engaged in exclusionary conduct that has severely weakened if not destroyed competition in the ad-tech industry.”
Attorney General Merrick Garland said Tuesday that the digital-advertising industry was harmed by Google’s allegedly monopolistic conduct.
Photo:
Al Drago/Bloomberg News
A Google spokesman said the lawsuit “attempts to pick winners and losers in the highly competitive advertising technology sector.”
“DOJ is doubling down on a flawed argument that would slow innovation, raise advertising fees, and make it harder for thousands of small businesses and publishers to grow,” the spokesman said.
By calling for specific divestitures from Google’s ad-tech business, the Justice Department lawsuit went further in seeking a breakup than some antitrust experts had expected. Shares of Alphabet fell by about 2% in trading on Tuesday.
Though largely invisible to internet users, the ad-tech tools controlled by Google facilitate much of the buying and selling of digital ads that helps fund online publishers. Google’s business includes a tool publishers can use to offer ad space, a product for advertisers to buy those slots and an exchange that automatically links bidders with webpages as they are being loaded for individual users.
Big tech companies such as Google are under a barrage from lawmakers and regulators across multiple continents who have targeted the companies’ dominance in online markets. Justice Department officials also are investigating
Apple Inc.
The Federal Trade Commission has sued
Meta Platforms Inc.’s
Facebook unit over antitrust allegations and
Microsoft Corp.
to block its planned $75 billion acquisition of
Activision Blizzard Inc.
President Biden recently urged lawmakers from both parties to unite behind legislation seeking to rein in tech giants. The European Union also has opened cases looking at alleged anticompetitive conduct by Google, Meta and other companies.
The Justice Department’s 2020 lawsuit against Google targeted its position in online search markets, including an agreement to make Google search the default in Apple’s Safari web browser. Google is fighting the case, which is expected to go to trial this year.
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Alphabet gets about 80% of its business from advertising. The Justice Department’s new suit targets the subset of that ad business that brokers the buying and selling of ads on other websites and apps. Google reported $31.7 billion in revenue in 2021 from that ad-brokering activity, or about 12% of Alphabet’s total revenue. Google distributes about 70% of that revenue to web publishers and developers.
Last year, Google offered to split off parts of its ad-tech business into a separate company under the Alphabet umbrella to fend off the most recent Justice Department investigation. DOJ officials rejected the offer and decided to pursue the lawsuit instead.
For years, Google has faced allegations from advertising- and media-industry executives, lawmakers and regulators that its presence at multiple points of the online ad-buying process harms publishers and gives it an unfair advantage over rivals. Google also operates the most popular search engine and the largest online video-streaming site, YouTube, giving rise to allegations it has tilted the market in its own favor.
Rivals say that Google’s power in digital advertising stems from a series of acquisitions Google used to build its ad-tech business, beginning with the company’s $3.1 billion purchase of DoubleClick. The FTC approved the merger in a controversial decision. Google went on to purchase a host of other startups including the mobile-advertising company AdMob.
“Having inserted itself into all aspects of the digital advertising marketplace, Google has used anticompetitive, exclusionary, and unlawful means to eliminate or severely diminish any threat to its dominance over digital advertising technologies,” the complaint read.
Google has said it has no plans to sell or exit the ad-tech business. It has also strongly contested claims in a lawsuit filed by state attorneys general, led by Texas, containing allegations similar to the Justice Department complaint. A federal judge denied the bulk of Google’s motion to dismiss the case last year, allowing it to proceed to the discovery stage and ultimately toward trial.
Google’s Android operating system is the most popular in the world—you can find Android code on everything from Peloton bikes to kitchen appliances and even NASA satellites. WSJ’s Dalvin Brown explains why it is the world’s most-used OS. Illustration: Rami Abukalam
Any divestiture of parts of Google’s ad-tech business would cause big ripple effects across the online advertising industry, which has recently shown signs of weakness as consumers dial back purchases in response to worsening economic conditions.
Breaking off parts of Google’s ad-tech business from the rest of the company could take years of litigation to resolve. Depending on the outcome of the case, ad-tech executives have said the results could range from a higher share of ad dollars flowing to publishers to lower overall spending because digital ads would be less efficient without Google brokering them.
The 149-page complaint makes detailed allegations about the internal workings of Google’s ad-tech operations. The suit alleges, for instance, that Google used anticompetitive tactics to build up the market share of its own ad server, which issues requests for advertisements on behalf of websites, and then used that market power to effectively push publishers into sending their ad inventory only to Google’s in-house ad exchange, AdX.
The Justice Department argues, in part, that this conduct locked out rival ad-tech providers, increasing prices for advertisers and costs of publishers.
“Google keeps at least thirty cents—and sometimes far more—of each advertising dollar flowing from advertisers to website publishers through Google’s ad tech tools,” the lawsuit alleges. “Google’s own internal documents concede that Google would earn far less in a competitive market.”
The lawsuit also alleges that Google executives worked to kill a rival online-bidding technology called “header bidding,” which the lawsuit says the company referred to internally as an “existential threat.” As part of a plan dubbed Project Poirot, the company allegedly changed its own ad-buying tools to underbid on behalf of advertisers when they turned to outside ad exchanges that used header bidding, so those rivals would lose more auctions and “dry out,” the complaint says.
At one point, Google also approached
Amazon.com Inc.,
to ask “what it would take for Amazon to stop investing in its header bidding product,” the complaint alleges, adding that Amazon rebuffed those requests.
“Google uses its dominion over digital advertising technology to funnel more transactions to its own ad tech products where it extracts inflated fees to line its own pockets at the expense of the advertisers and publishers it purportedly serves,” the complaint read.
The Justice Department case overlaps in some ways with the late 2020 lawsuit from the group of U.S. states led by Texas.
In Tuesday’s complaint, the Justice Department quotes some of the same internal communications as the Texas-led lawsuit, including how one Google executive compared the company’s control over ad-tech to the financial sector: “The analogy would be if Goldman or Citibank owned the NYSE,” referring to the New York Stock Exchange.
The case also shares similarities with an investigation that the EU’s top antitrust enforcer, the European Commission, opened in 2021, as well as one by the U.K.’s Competition and Markets Authority. Those probes are exploring allegations that Google favors its own ad-buying tools in the advertising auctions it runs, but also look at other elements of Google’s ad-tech business. The EU, for instance, is also looking at Google’s alleged exclusion of competitors from brokering ad-buys on its video site YouTube.
Mr. Garland said Tuesday that the Justice Department filed its own lawsuit because the federal government was harmed by Google’s allegedly monopolistic conduct. Federal agencies have since 2019 spent over $100 million on display ads, the complaint says. The government paid inflated fees and was harmed by manipulated advertising prices because of Google’s anticompetitive conduct, the lawsuit alleges.
Microsoft is deepening its partnership with OpenAI, the company behind ChatGPT and Dall-E. That has investors and analysts speculating whether Microsoft could challenge Google’s dominance in search. WSJ Heard on the Street columnist Dan Gallagher joins host Zoe Thomas to discuss how AI could affect search and at what cost.
Jonathan Kanter,
the assistant attorney general for antitrust, said while there are similarities with other lawsuits against Google, the Justice Department’s complaint is based on its own investigation that yielded “meticulous detail” about Google’s ad-tech business.
“We detail many facts, many episodes that in the individual and in the aggregate have maintained numerous monopolies,” Mr. Kanter said.
Google has attempted to settle the claims against its ad-tech business. In addition to offering to split off parts of its ad-tech business to avoid the Justice Department suit, the company last year discussed with the EU an offer to allow competitors to broker the sale of ads directly on the video service.
In 2021, the company agreed to give U.K. antitrust regulators effective veto power over elements of its plans to remove a technology called third-party cookies from its Chrome browser to settle an investigation there into the plan.
In France, Google agreed to pay a fine of 220 million euros, equivalent to about $239 million, and to improve data access to competing ad-tech companies, to not use its data in ways rivals couldn’t reproduce to settle a similar antitrust investigation in the country.
—Keach Hagey contributed to this article.
Write to Miles Kruppa at miles.kruppa@wsj.com and Sam Schechner at Sam.Schechner@wsj.com
said it is cutting 2,500 manufacturing jobs globally as the company confronts turbulence in overseas markets and weakening consumer demand.
The maker of Scotch tape, Post-it Notes and thousands of other industrial and consumer products said Tuesday that it expects lower sales and profit in 2023 after demand weakened significantly in late 2022, pulling down quarterly performance.
The St. Paul, Minn., company forecast sales this year to slip from last year’s level with weak demand for consumer products and electronic items, particularly smartphones, tablets and televisions, for which 3M provides components. Fourth-quarter sales for 3M’s consumer business dropped nearly 6% from the same period a year earlier.
“Consumers sharply cut discretionary spending and retailers adjusted their inventory levels,” 3M Chief Executive
Mike Roman
said during a conference call. “We expect the demand trends we saw in December to extend through the first half of 2023.”
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3M shares were down 5.2% at $116.25 Tuesday afternoon, while major U.S. stock indexes were little changed.
The company said demand for its disposable face masks is receding, as healthcare providers spend less on Covid-19 measures, and mask demand returns to prepandemic levels. 3M said it expects mask sales to decline between $450 million and $550 million this year from 2022.
3M executives said the spread of Covid infections in China is weighing on sales there, and sporadic plant closings are interrupting industrial production. China also is reducing production of consumer electronics because of weakening consumer demand, they said, and 3M’s exit from its business in Russia last year will also contribute to lower sales this year.
The 2,500 layoffs represent roughly 2.6% of the company’s workforce, which a regulatory filing said was about 95,000 at the end of 2021. Mr. Roman declined to specify where the job cuts will take place, or whether the company might make further reductions as it reviews its supply chains and prepares to spin off its healthcare unit.
“We’re looking at everything that we do as we manage through the challenges that we’re facing in the end markets and we focus on driving improvements,” he said.
The company said it would take a pretax restructuring charge in the first quarter of $75 million to $100 million.
Mr. Roman said the job cuts were unrelated to litigation facing the company. 3M is defending against allegations that the so-called forever chemicals it has produced for decades have contaminated soil and drinking water. It is also involved in litigation over foam earplugs its subsidiary Aearo Technologies LLC sold to the military. About 230,000 veterans have filed complaints in federal court alleging the earplugs failed to protect them from service-related hearing loss.
3M has said the earplugs were effective when military personnel were given sufficient training on how to use them. In litigation over firefighting foam that incorporated forms of forever chemicals, 3M is expected to argue that the products were produced to U.S. military specifications, granting the company legal protection as a government contractor.
In both cases, Mr. Roman said the company is focused on finding a way forward.
3M said the strong value of the U.S. dollar continues to erode sales from other countries when foreign currencies are converted to dollars.
The company forecast that sales for the quarter ending March 31 will be down 10% to 15% from the same period last year. For the full year, the company projects sales to fall between 6% and 2%, and expects adjusted earnings of $8.50 a share to $9 a share. The company earned $10.10 a share in 2022, excluding special charges, and analysts surveyed by FactSet were expecting the company to earn $10.22 in 2023.
For the fourth quarter, the company posted a profit of $541 million, or 98 cents a share, compared with $1.34 billion, or $2.31 a share, a year earlier.
Stripping out one-time items, including costs tied to exiting the company’s operations making forever chemicals, adjusted earnings came to $2.28 a share. Analysts were looking for adjusted earnings of $2.36 a share, according to FactSet.
Sales fell 6% to $8.08 billion for the quarter, slightly topping expectations of analysts surveyed by FactSet.
Mr. Roman said there were promising signs for some of 3M’s businesses, including in biopharma processing, home improvement and automotive electrification, the last of which he said grew 30% in 2022 to become a roughly $500 million business.
“There’s more to it than consumer electronics, but certainly the consumer-electronics dynamics are the story of the day,” he said.
Write to John Keilman at john.keilman@wsj.com and Bob Tita at robert.tita@wsj.com
said Monday it is making a multiyear, multibillion-dollar investment in OpenAI, substantially bolstering its relationship with the startup behind the viral ChatGPT chatbot as the software giant looks to expand the use of artificial intelligence in its products.
Microsoft said the latest partnership builds upon the company’s 2019 and 2021 investments in OpenAI.
The companies didn’t disclose the financial terms of the partnership. Microsoft had been discussing investing as much as $10 billion in OpenAI, according to people familiar with the matter. A representative for Microsoft declined to comment on the final number.
OpenAI was in talks this month to sell existing shares in a tender offer that would value the company at roughly $29 billion, The Wall Street Journal reported, making it one of the most valuable U.S. startups on paper despite generating little revenue.
The investment shows the tremendous resources Microsoft is devoting toward incorporating artificial-intelligence software into its suite of products, ranging from its design app Microsoft Designer to search app Bing. It also will help bankroll the computing power OpenAI needs to run its various products on Microsoft’s Azure cloud platform.
At a WSJ panel during the 2023 World Economic Forum, Microsoft CEO Satya Nadella discussed the company expanding access to OpenAI tools and the growing capabilities of ChatGPT.
The strengthening relationship with OpenAI has bolstered Microsoft’s standing in a race with other big tech companies that also have been pouring resources into artificial intelligence to enhance existing products and develop new uses for businesses and consumers.
Alphabet Inc.’s
Google, in particular, has invested heavily in AI and infused the technology into its operations in various ways, from improving navigation recommendations in its maps tools to enhancing image recognition for photos to enabling wording suggestions in Gmail.
Google has its own sophisticated chatbot technology, known as LaMDA, which gained notice last year when one of the company’s engineers claimed the bot was sentient, a claim Google and outside experts dismissed. Google, though, hasn’t made that technology widely available like OpenAI did with ChatGPT, whose ability to churn out human-like, sophisticated responses to all manner of linguistic prompts has captured public attention.
Microsoft Chief Executive
Satya Nadella
said last week his company plans to incorporate artificial-intelligence tools into all of its products and make them available as platforms for other businesses to build on. Mr. Nadella said last week at a Wall Street Journal panel at the World Economic Forum’s annual event in Davos, Switzerland. Mr. Nadella said that his company would move quickly to commercialize tools from OpenAI.
Analysts have said that OpenAI’s technology could one day threaten Google’s stranglehold on internet search, by providing quick, direct responses to queries rather than lists of links. Others have pointed out that the chatbot technology still suffers from inaccuracies and isn’t well-suited to certain types of queries.
“The viral launch of ChatGPT has caused some investors to question whether this poses a new disruption threat to Google Search,” Morgan Stanley analysts wrote in a note last month. “While we believe the near-term risk is limited—we believe the use case of search (and paid search) is different than AI-driven content creation—we are not dismissive of threats from new, unique consumer offerings.”
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OpenAI, led by technology investor
Sam Altman,
began as a nonprofit in 2015 with $1 billion in pledges from
Tesla Inc.
CEO
Elon Musk,
LinkedIn co-founder
Reid Hoffman
and other backers. Its goal has long been to develop technology that can achieve what has been a holy grail for AI researchers: artificial general intelligence, where machines are able to learn and understand anything humans can.
Microsoft first invested in OpenAI in 2019, giving the company $1 billion to enhance its Azure cloud-computing platform. That gave OpenAI the computing resources it needed to train and improve its artificial-intelligence algorithms and led to a series of breakthroughs.
OpenAI has released a new suite of products in recent months that industry observers say represent a significant step toward that goal and could pave the way for a host of new AI-driven consumer applications.
In the fall, it launched Dall-E 2, a project that allowed users to generate art from strings of text, and then made ChatGPT public on Nov. 30. ChatGPT has become something of a sensation among the tech community given its ability to deliver immediate answers to questions ranging from “Who was George Washington Carver?” to “Write a movie script of a taco fighting a hot dog on the beach.”
Mr. Altman said the company’s tools could transform technology similar to the invention of the smartphone and tackle broader scientific challenges.
“They are incredibly embryonic right now, but as they develop, the creativity boost and new superpowers we get—none of us will want to go back,” Mr. Altman said in an interview in December.
Mr. Altman’s decision to create a for-profit arm of OpenAI garnered criticism from some in the artificial-intelligence community who said it represented a move away from OpenAI’s roots as a research lab that sought to benefit humanity over shareholders. OpenAI said it would cap profit at the company, diverting the remainder to the nonprofit group.
—Will Feuer contributed to this article.
Write to Berber Jin at berber.jin@wsj.com and Miles Kruppa at miles.kruppa@wsj.com
Corrections & Amplifications The design app Microsoft Designer was misidentified as Microsoft Design in an earlier version of this article. (Corrected on Jan. 23)
No company is certain to avoid significant cutbacks in an economic environment as volatile as the current one, and Apple isn’t immune to the business challenges that have hit other tech giants. It is expected next month to report its first quarterly sales decline in more than three years. Apple has also slowed hiring in some areas.
But the iPhone maker has been better positioned than many rivals to date in part because it added employees at a much slower clip than those companies during the pandemic. It also tends to run lean, with limited employee perks and businesses focused on hardware products and sales that have so far largely dodged the economic downturn, investors say.
An Apple spokesman declined to comment.
From its fiscal year-end in September 2019 to September 2022, Apple’s workforce grew by about 20% to approximately 164,000 full-time employees. Meanwhile, over roughly the same period, the employee count at Amazon doubled, Microsoft’s rose 53%, Google parent
Alphabet Inc.’s
increased 57% and Facebook owner Meta’s ballooned 94%.
Apple has about 65,000 retail employees working in more than 500 stores who make up roughly 40% of the company’s total workforce.
On Friday, Alphabet became the latest tech company to announce widespread layoffs, with a plan to eliminate roughly 12,000 jobs, the company’s largest-ever round of job cuts.
Alphabet’s cut follows a wave of large layoffs at Amazon, Microsoft and Meta. The tech industry has seen more than 200,000 layoffs since the start of 2022, according to Layoffs.fyi, a website that tracks cuts in the sector as they surface in media reports and company releases.
The last big round of layoffs at Apple happened way back in 1997, when co-founder
Steve Jobs
returned to the company, which then cut costs by firing 4,100 employees.
So far, Apple’s core business has shown itself to be resilient against broader downturns in the market. The other four tech giants have suffered amid slowdowns in digital advertising, e-commerce and PCs. In its September quarter, Apple reported that sales at its most important business—the iPhone—advanced 9.7% from the previous year to $42.6 billion, surpassing analyst estimates.
After a period of aggressive hiring to meet heightened demand for online services during the pandemic, tech companies are now laying off many of those workers. And tech bosses are saying “mea culpa” for the miscalculation. WSJ reporter Dana Mattioli joins host Zoe Thomas to talk through the shift and what it all means for the tech sector going forward.
Apple may face a rougher December quarter, which it is scheduled to report on Feb. 2, as the company encountered manufacturing challenges in China, where strict zero-Covid policies damped much economic activity. Many analysts expect that demand hasn’t subsided for its iPhones and as the company continues to ramp back up manufacturing, demand is anticipated to move to the March quarter.
The company’s business model hasn’t been totally immune to broader slowdowns. Revenue from its services business continued to slow, growing 5% annually to $19.2 billion in the September quarter, shy of the gains posted in recent quarters.
Tom Forte,
senior research analyst at investment bank D.A. Davidson & Co., said he expects Apple to reduce head count, but it might do that quietly through employee attrition—by not replacing workers who leave. The company could move in the direction of making other cuts or adjustments to perks that are common in Silicon Valley. Apple doesn’t offer free lunches to employees on its corporate campus, unlike other big tech companies such as Google and Meta.
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Some of the tech giants cutting jobs have spent heavily on projects that are unlikely to turn into strong businesses anytime soon, said Daniel Morgan, a senior portfolio manager at Synovus Trust Co., which counts Apple among its largest holdings. “Both Meta and Google are terribly guilty of that,” he said.
Meta has been pouring billions of dollars into its Reality Labs for its new ambitions in the so-called metaverse. Meta Chief Executive
Mark Zuckerberg
has defended the company’s spending on Reality Labs, suggesting that virtual reality will become an important technological platform.
After announcing the layoffs, Alphabet Chief Executive
Sundar Pichai
said the company had seen dramatic periods of growth during the past two years. “To match and fuel that growth, we hired for a different economic reality than the one we face today,” he wrote in a message to employees on Friday.
Apple also is working on risky future bets, such as an augmented-reality headset due out later this year and a car project whose release date is uncertain, but at a more measured pace.
Google’s parent company said it would cut its staff by 6% in its largest-ever round of layoffs, extending a retrenchment among technology companies after record pandemic hiring.
Alphabet Inc.
GOOG 5.72%
said the cuts would eliminate roughly 12,000 jobs across different units and regions, though some areas, including recruiting and projects outside of the company’s core businesses, would be more heavily affected.
The layoffs reached as high as the vice president level and affected divisions including cloud computing and Area 120, an internal business incubator that had already faced cuts last year, said people familiar with the matter.
The Google cuts make January the worst month yet in a wave of tech layoffs that began last year, according to estimates from Layoffs.fyi, which tracks media reports and company announcements. This week,
Microsoft Corp.
said it would eliminate 10,000 jobs, the largest layoffs in more than eight years. Online furniture seller
Wayfair Inc.
said it is laying off about 10% of its workforce, and
Unity Software Inc.,
which provides tools for creating videogames and other applications, also cut staff.
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Earlier this month,
Amazon.com Inc.
said layoffs would affect more than 18,000 employees and
Salesforce Inc.
said it was laying off 10% of its workforce. Last year,
Meta Platforms Inc.
said it would cut 13% of staff.
Technology companies including Google expanded rapidly during the pandemic as life moved online. Recent cuts have been part of a broader pivot toward protecting profit and cementing the end of a growth-at-all costs era in technology. Google executives have in recent months said the company would be tightening its belt, reflecting a new period of more disciplined and efficient spending. But the company hadn’t announced cuts as deep as those of its Silicon Valley peers.
Google hired aggressively as demand for its services rose during the health crisis, leading to more than 50% growth in total employee count across Alphabet since the end of 2019. The cuts this week appeared to fall short of the almost 12,800 employees Alphabet added to its roster in the third quarter last year.
“Over the past two years we’ve seen periods of dramatic growth. To match and fuel that growth, we hired for a different economic reality than the one we face today,” Alphabet Chief Executive
Sundar Pichai
wrote in a message to employees sent out Friday and posted on the company’s website.
“I take full responsibility for the decisions that led us here,” Mr. Pichai wrote. The corporate mea culpa for overhiring has become a recurring message in recent months at tech companies as executives realized that some of the hiring they undertook to keep pace with soaring demand for all things digital early in the pandemic left them overstaffed as the business environment soured.
Among the executives who have made such apologies are Salesforce Co-Chief Executive
Marc Benioff,
Meta Platforms CEO
Mark Zuckerberg
and Twitter Inc. co-founder
Jack Dorsey.
The recent headlines about tech layoffs don’t seem to match broader economic indicators, which show a strong job market and a historically low unemployment rate. WSJ’s Gunjan Banerji explains the disconnect. Illustration: Ali Larkin
Alphabet recorded $17.1 billion of operating income in the third quarter last year, an 18.5% decrease from the same period in 2021. Google executives partly blamed a slowdown in revenue growth on the company’s historic performance during the tail end of the pandemic. Alphabet shares rose 4.5% to $97.24 in morning trading Friday.
Alphabet earlier this month said it would cut more than 200 jobs at its Verily Life Sciences healthcare business, accounting for about 15% of the roles at the unit. Before that, some of the last major cuts Google announced were in 2009, when the company said it was reducing the number of jobs in its sales and marketing teams by roughly 200 globally.
Activist hedge fund TCI Fund Management, which had called on Alphabet to cut costs aggressively in November, said Friday the company should go further.
“Management should aim to reduce headcount to around 150,000, which is in line with Alphabet’s headcount at the end of 2021,”
Christopher Hohn,
TCI managing director, said in a letter. “This would require a total headcount reduction in the order of 20%.”
Current and former Google employees said layoffs would likely affect the company’s famously loose and collegial culture, which has been widely imitated in the tech industry.
Google employees have long enjoyed one of the most accommodating environments among large U.S. companies. A letter to potential investors in Google’s 2004 initial public offering said the company provided many unusual benefits, such as washing machines, and would likely add more over time.
As job cuts have accumulated in the tech industry, many employees at Google have pressed executives about the possibility of layoffs at the company. At a companywide meeting in December, Mr. Pichai told employees that the company had tried to “rationalize where we can so that we are set up to better weather the storm regardless of what’s ahead.”
A Google spokesman said that Friday’s cuts would affect not just Google, but also other Alphabet subsidiaries, but didn’t specify at what levels. Alphabet subsidiaries include Verily and the Waymo self-driving-car unit. The spokesman didn’t comment on which specific products or engineering units would be affected.
“Alphabet leadership claims ‘full responsibility’ for this decision, but that is little comfort to the 12,000 workers who are now without jobs,” said Parul Koul, executive chair of the Alphabet Workers Union, in a statement. “This is egregious and unacceptable behavior by a company that made $17 billion dollars in profit last quarter alone.”
Alphabet said it would offer U.S.-based employees two months notice, plus 16 weeks of severance pay, along with two additional weeks for each year an employee being laid off from the nearly 25-year-old company has worked there. In other countries, the company will follow local processes and laws, which sometimes require consultations with employee representatives before workers are laid off.
The company will also offer former employees access to resources to help them with their immigration status, job placement and mental health, the spokesman said. Tech companies in the U.S. often have employees on work visas tied to their employment.
Write to Sam Schechner at Sam.Schechner@wsj.com and Miles Kruppa at miles.kruppa@wsj.com
Purchases at stores, restaurants and online, declined a seasonally adjusted 1.1% in December from the prior month, the Commerce Department said Wednesday. Sales were also revised lower in November and have fallen three of the past four months. The department seasonally adjusts monthly data to make it comparable over time. On an unadjusted basis, December is typically the peak sales month for the year.
A Federal Reserve report Wednesday found economic activity was relatively flat at the start of the year and businesses are pessimistic about growth in the months ahead. A separate Fed report showed U.S. industrial production slumped in December, led by weakness in manufacturing. A Labor Department report showed inflation was cooling.
Stocks fell Wednesday after the data releases. The S&P 500 shed 1.6%. The Dow Jones Industrial Average was down 1.8%, while the Nasdaq Composite Index lost 1.2%. The yield on the benchmark 10-year Treasury note declined 0.16 percentage point to 3.374%.
The latest data add to signs that the U.S. economy is slowing as the Fed pushes up interest rates to combat inflation. Hiring and wage growth eased in December, U.S. commerce with the rest of the world declined significantly in November, and existing-home sales have fallen for 10 straight months.
S&P Global downgraded its estimate for fourth-quarter economic growth Wednesday by a half percentage point to a 2.3% annual rate. Economists surveyed by The Wall Street Journal this month expect higher interest rates to tip the U.S. economy into a recession in the coming year.
“The lag impact of elevated inflation weighs heavily on U.S. households, it’s very clear that the median American consumer is still reeling from the loss of wages in inflation-adjusted terms,” said
Joseph Brusuelas,
chief economist at RSM US LLP. “We’re moving towards what I would expect to be a mild recession in 2023,” he added.
Federal Reserve Bank of St. Louis President
James Bullard
said Wednesday the central bank should keep on rapidly raising interest rates and supported a half-percentage-point increase at the Jan. 31-Feb. 1 meeting.
“We want to err on the tighter side to make sure we get the disinflationary process to take hold in the economy,” he said at a Wall Street Journal Live event.
Mr. Bullard’s position is at odds with several of his colleagues, who have suggested that a slower pace of rate increases would be appropriate to allow Fed officials to gauge how their aggressive pace of policy tightening has affected the economy.
Inflation, while still historically high, is showing signs of cooling as demand eases. Unlike many government reports, retail sales aren’t adjusted for inflation.
Consumer prices advanced 6.5% from a year earlier in December, the sixth straight month of deceleration. The producer-price index, which generally reflects supply conditions in the economy, fell in December from the prior month, and increased at the slowest annual pace since March 2021, the Labor Department said Wednesday.
The National Retail Federation said Wednesday holiday sales were disappointing. The trade group said November and December sales rose 5.3% compared with the same period last year to $936.3 billion. In November, the NRF said it expected holiday sales to rise between 6% and 8%. The NRF figures aren’t adjusted for inflation and exclude fuel, auto and restaurant spending.
Somewhat slower inflation at the end of the year didn’t offset weaker demand, said NRF Chief economist
Jack Kleinhenz.
Consumers are “hit with higher food prices, they are getting hit with higher service prices and they are having to make choices,” he said. Some spending was likely pulled into October as retailers kicked off deals early this year, he added. Retailers discounted heavily and early to clear excess stock from their shelves and warehouses.
Zach Carney, of Boston, said he has been cutting back on eggs and red meat because the prices are so high. “The price of eggs really jumps out at you,” the 28-year-old publicist said. Instead, he has been stocking up on value packs of chicken and buying more store-brand cereal and olive oil, which cost less than national brands.
In 2021, officials thought high inflation would be temporary. But a year later, it was still near a four-decade high. WSJ’s Jon Hilsenrath explains factors that have kept inflation up longer than expected. Illustration: Jacob Reynolds
The retail sales report showed spending declined in a number of gift-giving categories in December, including at electronics, clothing and department stores, and with online retailers, a category which includes companies such as Amazon.com Inc.
Dining out at bars and restaurants dropped 0.9% in December. Sales of furniture and vehicles, which are sensitive to higher borrowing costs, both fell sharply. The only categories to post slight growth in December were grocery, sporting goods and home improvement stores, as winter storms battered many parts of the U.S.
Some retailers have said the recently completed holiday shopping season turned out to be weaker than expected. Macy’s Inc. warned of softer sales, and Lululemon Athletica Inc. said its profit margins were squeezed as shoppers bought more items on sale.
Many retailers had benefited from surging sales earlier in the pandemic as shoppers stocked up on everything from toilet paper to home electronics and furniture, supported by government stimulus dollars. Those tailwinds have cooled, leaving retailers and product manufactures to confront slower spending in some categories and the longer term dynamics of the industry, such as a gradual shift to online spending.
Apparel retailers are especially exposed to the current pullback in discretionary spending, said Kelly Pedersen, the U.S. retail leader at PwC, a consulting firm. “Buying fashion items at department stores is discretionary,” said Mr. Pedersen. Many apparel retailers are still working to sell through excess inventory and offering deep discounts amid weak demand, he said.
Department stores, which saw a 6.6% sales drop in December, struggled to boost sales before the pandemic quickly shifted buying habits. In 2020, a string of department stores filed for bankruptcy, including Lord & Taylor, J.C. Penney Co., Neiman Marcus Group Ltd. and Stage Stores Inc.
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Party City Holdco Inc. filed for chapter 11 bankruptcy this week while noting inflationary pressures have hampered customers’ willingness to spend. Bed Bath & Beyond Inc. said this month it plans more layoffs and cost cuts amid falling sales.
The retail sales report offers a partial picture of consumer demand because it doesn’t include spending on many services such as travel, housing and utilities. The Commerce Department will release December household spending figures covering goods and services later this month.
Corporate reports out in February will add to that picture. Walmart Inc., Target Corp. and other large retailers—which sell a variety of goods such as food, clothes and décor—report quarterly earnings next month, which will include December sales.
—Suzanne Kapner and David Harrison contributed to this article.
Write to Harriet Torry at harriet.torry@wsj.com and Sarah Nassauer at Sarah.Nassauer@wsj.com
Microsoft said Tuesday that it is moving quickly to incorporate artificial-intelligence tools from OpenAI into its products and services. This includes OpenAI’s chatbot called ChatGPT, which launched just over a month ago and has skyrocketed in popularity as users have flocked to the tool, which spits out conversational answers to queries and—much to the chagrin of educators everywhere—can also pen full essays and even poems.
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Chief Executive
Satya Nadella
told a Wall Street Journal panel at the World Economic Forum in Davos, Switzerland, that “every product of Microsoft will have some of the same AI capabilities to completely transform the product.”
Microsoft already invested $1 billion in OpenAI and is reportedly looking to put even more into the startup, so its interest in making use of the technology is unsurprising. But the news was also another unwelcome development for Google, whose core search business could be threatened by the question-answering function of technologies such as ChatGPT.
The New York Times reported last month that ChatGPT’s launch Nov. 30 triggered Google’s management to declare a “code red” internally. Microsoft is Google’s largest rival in web search, though its Bing search engine still only accounts for a low single-digit percentage of the global market.
Shares of Google-parent
Alphabet
GOOG 0.92%
slipped nearly 1% on Tuesday and have fallen nearly 10% since the ChatGPT launch—the worst performance of the big techs and triple the percentage loss of the Nasdaq during that time. Microsoft’s shares rose Tuesday by a fraction while Nvidia, which specializes in artificial-intelligence chips used in data centers by both companies, jumped nearly 5%.
“We see ChatGPT’s prowess and traction with consumers as a near-term threat to Alphabet’s multiple and a boost for Microsoft and Nvidia,” UBS analysts wrote in a recent report.
ChatGPT indeed seems more than a flash in the pan. Data from Similarweb shows daily visits to the tool’s home page recently surpassed 20 million—nearly double the daily hits the site was generating two weeks after its launch.
But investors might be getting ahead of themselves as far as the impact on Google goes. Not all web queries are created equal—especially ones that will generate revenue through advertising links. ChatGPT specializes in natural-language queries that generate humanlike answers.
Not all of those answers contain correct information, however, and tracing the source of that information is difficult. In a recent report, Bernstein analyst Mark Shmulik said there is “an ocean of difference between a general information search query and a monetizable one,” adding that ChatGPT’s shortcomings on the latter were “glaringly obvious.”
Google also has the deeply ingrained behavior of the masses to fall back on. The company has powered more than 90% of global internet searches since at least 2009, according to StatCounter. Even Microsoft’s launch of Bing in the middle of that year didn’t really dent Google’s share.
Ultimately, incorporating AI tools such as ChatGPT could be costly for both companies given the computing horsepower required.
Brian Nowak
of Morgan Stanley estimates that ChatGPT’s cost per query is about seven times as much as the cost to Google for a traditional search query.
That multiple could drop to four times if OpenAI is able to access the lowest price tiers of Microsoft’s Azure cloud service, Mr. Nowak estimates. But that is still quite a gap, and one that is reflective of the costs Microsoft might bear as it works ChatGPT and other OpenAI tools deeper into its products.
Such pressure would be untimely. Investors are placing greater focus on both companies’ profits as revenue growth is projected to slow considerably this year. Alphabet’s operating margins are expected to come in at 27% this year—down from 2022 but still about 5 percentage points above what it averaged in the three years before the pandemic. Meanwhile, Microsoft is expected to keep its own margins above the 40% line for the third consecutive year—a feat not managed since 1999.
That may explain why Microsoft finally elected to follow other major techs in reducing its headcount. The company said Wednesday morning that it plans to lay off about 10,000 employees, or less than 5% of its workforce. Many expect Google’s parent to make a similar move soon.
How to spend more when investors want to see less going out the door is a question even ChatGPT wouldn’t be able to answer.
ChatGPT, OpenAI’s new artificially intelligent chatbot, can write essays on complex topics. Joanna Stern went back to high school AP Literature for a day to see if she could pass the class using just AI. Photo illustration: Elena Scotti
has disclosed a nearly $7 billion offer to acquire
National Instruments Corp.
NATI 10.79%
, which it said it has been trying to buy for more than eight months.
Emerson, a St. Louis-based technology and engineering company, said it was offering $53 a share in cash for National Instruments, which it said represents an enterprise value of $7.6 billion. The offer represents a 32% premium over National Instruments’ closing price from last Thursday, the day before the Texas-based equipment and instrumentation company said its board was evaluating strategic alternatives and had already been approached by potential acquirers.
Emerson’s public proposal comes eight months after National Instruments rejected its offer for an acquisition at $48 a share, the company said. Emerson upped its bid to $53 a share in November, but now claims National Instruments has continued to spurn its advances.
National Instruments confirmed Tuesday that it had received Emerson’s offer but said it remains committed to the strategic review process it announced on Friday.
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By making the offer public, Emerson is hoping to win over shareholders who until now “have been unaware of this opportunity to realize an immediate cash premium,” Chief Executive
Lal Karsanbhai
said Tuesday in a conference call.
“Emerson urges NI shareholders to engage with their board to ensure this public strategic review process is not merely another delay tactic,” he said.
National Instruments’ shares jumped more than 10% to $52.04 by the close of the Tuesday market. Emerson’s shares meanwhile fell almost 7% to a low of nearly $91 in one of their steepest drops since June 2020, according to Dow Jones Market Data.
Emerson said that picking up National Instruments’ portfolio of electronic test and measurement offerings would bolster its automation business while also adding to its adjusted earnings within the first year. The company isn’t putting any financing conditions on the deal, saying it can fund the transaction with cash on hand and existing lines of credit.
On a call with analysts, the company detailed eight months of snubs from the National Instruments board that started in May, when Emerson said it reached out for an in-person meeting about a potential deal and was instead offered a phone call with management. Emerson sent a formal letter soon after with its all-cash $48-per-share offer, but National Instruments turned it down, the company said.
National Instruments continued to rebuff offers to negotiate privately in the months that followed, Emerson said.
Emerson also noted that National Instruments purchased more than two million of its own shares at an average weighted price of $40.25 during that time. Mr. Karsanbhai criticized the company on Tuesday for launching one of its largest-ever buybacks for a per-share price that was well below Emerson’s offer.
Emerson reached out with its improved offer on Nov. 3 to buy National Instruments for $53 a share, which marked a 45% premium to the company’s share price at market close that day. The National Instruments board responded at the time that it had formed a working group to evaluate the proposal and weigh its strategic options, but otherwise refused to engage with Emerson, Emerson said.
National Instruments said Tuesday that it welcomes Emerson’s participation in its strategic review process but also thinks that negotiating exclusively with the company “would be detrimental to shareholders.”
“NI notes Emerson’s expressed disappointment in this effort to maximize NI shareholder value,” the company said.
Businesses and lawyers are beginning to assess what the Federal Trade Commission’s proposed ban of noncompete clauses in employment contracts could mean for worker mobility, wages and the way future compensation agreements are structured.
While a full or partial ban could expand the pool of potential hires, it also would weaken a tool that employers have come to rely on to retain talent and protect trade secrets and other proprietary information, lawyers say. More companies likely would turn to a patchwork of alternative mechanisms to keep people from leaving and taking valuable information with them, including nondisclosure agreements and employment contracts that reward longevity, they say.
“Employers have operated with an understanding that they can protect their interests through noncompetes,” said Matthew Durham, a Salt Lake City-based attorney with Dorsey & Whitney LLP who advises companies on employment matters. “What you’re seeing, reflected in the FTC proposal and elsewhere, is a growing hostility to the idea that there should be those kinds of restrictions, and it’s changing the environment that employers have been comfortable with in the last number of years.”
The FTC proposed a ban this month on nearly all noncompetes, saying that the clauses—which typically prohibit workers from moving to a new employer or starting new ventures of their own—hamper competition in the labor market, suppress wages and hold back innovation and entrepreneurship. The proposal came in response to an executive order from President Biden in 2021.
Businesses say they impose noncompete clauses on employees to protect trade secrets and other confidential information, including customer lists and financial data.
The FTC contends that noncompete clauses discourage innovation and entrepreneurship.
Photo:
Eric Lee for The Wall Street Journal
Mr. Durham and others say they believe the FTC may narrow its rule after hearing comments from the public, including employers and business organizations that have already signaled their opposition to the current proposal. The agency could, for example, allow noncompetes for highly compensated workers.
Noncompetes are common in employment contracts for senior employees like software engineers, sales representatives and top executives. Over time, they have been applied to many parts of the U.S. workforce, including some janitors, baristas, schoolteachers and entry-level workers. According to the FTC, one in five U.S. workers is currently subject to a noncompete clause.
Noncompetes are regulated at the state level, and many states have already taken action to limit use of the clauses by, in some cases, forbidding employers from imposing them on people earning under a particular wage threshold or for certain types of workers.
“The vast majority of people in America can’t afford a lawyer to defend a noncompete case,” said Jonathan Pollard, an attorney in Florida who represents workers whose employers are trying to enforce noncompete clauses. “Just the threat of enforcement is often enough to restrain talent in the labor market.”
The Federal Trade Commission proposed a new ban on noncompete clauses, which the agency says hurts workers and competition. Companies argue they protect trade secrets. WSJ breaks down what a federal ban could mean for workers and businesses. Photo illustration: Jacob Reynolds
Some states, such as California and Oklahoma, hold that the clauses are unenforceable in all or nearly all employment contracts.
A number of studies suggest noncompetes suppress wages and innovation. A review of Oregon’s 2008 ban on noncompetes for hourly workers found that wages rose an average of 2% to 3%. Another study, examining Hawaii’s 2015 ban on noncompete agreements for high-tech workers, found an 11% increase in job moves and a 4% increase in new-hire salaries.
The clauses restrain not just pay and entrepreneurship, but also professional development, workers and some attorneys say.
Daniel Bachhuber had worked as a software consultant for years when he decided to take an in-house job in the fall of 2018. His new employer required that he sign a one-year noncompete agreement, which he said was so broad it would have prevented him from practicing his core skills if he were to leave the company or be fired.
Mr. Bachhuber balked. Earlier in his career, he had been laid off a few weeks into a new job, just after his first child was born. If that happened at the new job, he recalled thinking, he would be unable to earn a living for a year. “I’m always thinking, worst case scenario, what kind of downstream protection do I have?” the 35-year-old said. “Even if I was employed just one day, I couldn’t go back to the same clients I had.”
Daniel Bachhuber turned down a job after an employer wouldn’t change a noncompete clause.
Photo:
Mason Trinca for The Wall Street Journal
He consulted a lawyer and tried to renegotiate the contract, hoping to salvage a role that would have expanded his skills and given him a chance to work directly with the chief technology officer on special projects. The company declined to change the noncompete clause and, reluctantly, Mr. Bachhuber turned down the position.
Employers have other tools to protect information besides noncompete agreements, including nondisclosure agreements, trade secret laws and nonsolicitation agreements, which prohibit workers from poaching customers or employees of their prior firm.
But those tools generally can only be used after an employee violates the agreement, said Julie Levinson Werner, who represents employers as a partner with law firm Lowenstein Sandler LLP. “Once someone goes to another company, you’re really on the honor system. You have no way to monitor what information is being disclosed or not,” she said.
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Observers on both sides say that limitations on the clauses will compel employers to get more creative about how they retain talent, using everything from compensation to career advancement to keep workers engaged and loyal to the company. Some companies use deferred compensation—such as retention bonuses or rolling stock options that vest after, say, three years—to give people incentives to stay.
“Do you get better results with honey or vinegar?” said Ms. Werner. “If you want to motivate people and have them happy to stay, you have to look at compensation, the overall environment, how you treat them.”
The fate of the FTC’s final rule is up in the air. After a 60-day comment period, the commissioners will consider potential changes to the initial proposal and then issue a final rule. That rule will likely be challenged by business groups or individual companies, and courts will determine its trajectory, attorneys say.
