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Business

Corporate Layoffs Spread Beyond High-Growth Tech Giants

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The headline-grabbing expansion of layoffs beyond high-growth technology companies stands in contrast to historically low levels of jobless claims and news that companies such as

Chipotle Mexican Grill Inc.

and

Airbus SE

are adding jobs.

This week, four companies trimmed more than 10,000 jobs, just a fraction of their total workforces. Still, the decisions mark a shift in sentiment inside executive suites, where many leaders have been holding on to workers after struggling to hire and retain them in recent years when the pandemic disrupted workplaces.

Live Q&A

Tech Layoffs: What Do They Mean?

The creator of the popular layoff tracker Layoffs.fyi Roger Lee and the head of talent at venture firm M13 Matt Hoffman sit down with WSJ reporter Chip Cutter, to discuss what’s behind the recent downsizing and whether it will be enough to recalibrate ahead of a possible recession.

Unlike

Microsoft Corp.

and Google parent

Alphabet Inc.,

which announced larger layoffs this month, these companies haven’t expanded their workforces dramatically during the pandemic. Instead, the leaders of these global giants said they were shrinking to adjust to slowing growth, or responding to weaker demand for their products.

“We are taking these actions to further optimize our cost structure,”

Jim Fitterling,

Dow’s chief executive, said in announcing the cuts, noting the company was navigating “macro uncertainties and challenging energy markets, particularly in Europe.”

The U.S. labor market broadly remains strong but has gradually lost steam in recent months. Employers added 223,000 jobs in December, the smallest gain in two years. The Labor Department will release January employment data next week.

Economists from Capital Economics estimate a further slowdown to an increase of 150,000 jobs in January, which would push job growth below its 2019 monthly average, the year before pandemic began.

There is “mounting evidence of weakness below the surface,”

Andrew Hunter,

senior U.S. economist at Capital Economics wrote in a note to clients Thursday.

Last month, the unemployment rate was 3.5%, matching multidecade lows. Wage growth remained strong, but had cooled from earlier in 2022. The Federal Reserve, which has been raising interest rates to combat high inflation, is looking for signs of slower wage growth and easing demand for workers.

Many CEOs say companies are beginning to scrutinize hiring more closely.

Slower hiring has already lengthened the time it takes Americans to land a new job. In December, 826,000 unemployed workers had been out of a job for about 3½ to 6 months, up from 526,000 in April 2022, according to the Labor Department.

“Employers are hovering with their feet above the brake. They’re more cautious. They’re more precise in their hiring,” said

Jonas Prising,

chief executive of

ManpowerGroup Inc.,

a provider of temporary workers. “But they’ve not stopped hiring.”

Additional signs of a cooling economy emerged on Thursday when the Commerce Department said U.S. gross domestic product growth slowed to a 2.9% annual rate in the fourth quarter, down from a 3.2% annual rate in the third quarter.

Not all companies are in layoff mode.

Walmart Inc.,

the country’s biggest private employer, said this week it was raising its starting wages for hourly U.S. workers to $14 from $12, amid a still tight job market for front line workers. Chipotle Mexican Grill Inc. said Thursday it plans to hire 15,000 new employees to work in its restaurants, while plane maker Airbus SE said it is recruiting over 13,000 new staffers this year. Airbus said 9,000 of the new jobs would be based in Europe with the rest spread among the U.S., China and elsewhere. 

General Electric Co.

, which slashed thousands of aerospace workers in 2020 and is currently laying off 2,000 workers from its wind turbine business, is hiring in other areas. “If you know any welders or machinists, send them my way,” Chief Executive

Larry Culp

said this week.

Annette Clayton,

CEO of North American operations at

Schneider Electric SE,

a Europe-headquartered energy-management and automation company, said the U.S. needs far more electricians to install electric-vehicle chargers and perform other tasks. “The shortage of electricians is very, very important for us,” she said.

Railroad CSX Corp. told investors on Wednesday that after sustained effort, it had reached its goal of about 7,000 train and engine employees around the beginning of the year, but plans to hire several hundred more people in those roles to serve as a cushion and to accommodate attrition that remains higher than the company would like.

Freeport-McMoRan Inc.

executives said Wednesday they expect U.S. labor shortages to continue to crimp production at the mining giant. The company has about 1,300 job openings in a U.S. workforce of about 10,000 to 12,000, and many of its domestic workers are new and need training and experience to match prior expertise, President

Kathleen Quirk

told analysts.

“We could have in 2022 produced more if we were fully staffed, and I believe that is the case again this year,” Ms. Quirk said.

The latest layoffs are modest relative to the size of these companies. For example, IBM’s plan to eliminate about 3,900 roles would amount to a 1.4% reduction in its head count of 280,000, according to its latest annual report.

As interest rates rise and companies tighten their belts, white-collar workers have taken the brunt of layoffs and job cuts, breaking with the usual pattern leading into a downturn. WSJ explains why many professionals are getting the pink slip first. Illustration: Adele Morgan

The planned 3,000 job cuts at SAP affect about 2.5% of the business-software maker’s global workforce. Finance chief

Luka Mucic

said the job cuts would be spread across the company’s geographic footprint, with most of them happening outside its home base in Germany. “The purpose is to further focus on strategic growth areas,” Mr. Mucic said. The company employed around 111,015 people on average last year.

Chemicals giant Dow said on Thursday it was trimming about 2,000 employees. The Midland, Mich., company said it currently employs about 37,800 people. Executives said they were targeting $1 billion in cost cuts this year and shutting down some assets to align spending with the macroeconomic environment.

Manufacturer

3M Co.

, which had about 95,000 employees at the end of 2021, cited weakening consumer demand when it announced this week plans to eliminate 2,500 manufacturing jobs. The maker of Scotch tape, Post-it Notes and thousands of other industrial and consumer products said it expects lower sales and profit in 2023.

“We’re looking at everything that we do as we manage through the challenges that we’re facing in the end markets,” 3M Chief Executive

Mike Roman

said during an earnings conference call. “We expect the demand trends we saw in December to extend through the first half of 2023.”

Hasbro Inc.

on Thursday said it would eliminate 15% of its workforce, or about 1,000 jobs, after the toy maker’s consumer-products business underperformed in the fourth quarter.

Some companies still hiring now say the job cuts across the economy are making it easier to find qualified candidates. “We’ve got the pick of the litter,” said

Bill McDermott,

CEO of business-software provider

ServiceNow Inc.

“We have so many applicants.”

At

Honeywell International Inc.,

CEO

Darius Adamczyk

said the job market remains competitive. With the layoffs in technology, though, Mr. Adamczyk said he anticipated that the labor market would likely soften, potentially also expanding the applicants Honeywell could attract.

“We’re probably going to be even more selective than we were before because we’re going to have a broader pool to draw from,” he said.

Across the corporate sphere, many of the layoffs happening now are still small relative to the size of the organizations, said

Denis Machuel,

CEO of global staffing firm Adecco Group AG.

“I would qualify it more as a recalibration of the workforce than deep cuts,” Mr. Machuel said. “They are adjusting, but they are not cutting the muscle.”

Write to Chip Cutter at chip.cutter@wsj.com and Theo Francis at theo.francis@wsj.com

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Technology

Microsoft’s Cloud Doesn’t Quite Cover All

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Demand for Windows operating-system software has fallen with sales of the personal computers that use it.



Photo:

STEVE MARCUS/REUTERS

Microsoft’s

MSFT -0.22%

latest results are like a blast from the past—and not in a good way. 

The software titan has come a long way from the days when it depended on its ubiquitous Windows operating system. But it is still a lucrative business—enough so that a slump in personal computer sales can weigh on Microsoft’s financial results. And a slump this is; IDC reported earlier this month that PC unit sales slid 28% year over year during the December quarter—the biggest drop tracked by the market research firm’s numbers going at least back to 2015. 

Not surprisingly then, Microsoft said Tuesday in its fiscal second quarter results report that Windows revenue slid 27% year over year to about $4.9 billion for the same period. That is less than 10% of the company’s revenue now, but it is a profitable contributor given that much comes from PC makers simply paying Microsoft to bundle Windows onto their machines. Hence, operating profits in Microsoft’s More Personal Computing segment that includes the Windows business slid 48% year over year. That played a big part in the company’s total operating profit for the quarter coming about 3% shy of Wall Street’s forecasts, at $20.4 billion.   

Investors have largely learned to look past Windows these days in favor of Microsoft’s far more important cloud business. But as Microsoft’s last report three months ago proved, even that isn’t immune to the slumping global economy. Azure, the cloud computing service that competes squarely with

Amazon

‘s AWS, grew revenue by 31% year over year. That slightly exceeded Wall Street’s forecasts, but it was still a record-low pace for the business. Things also aren’t looking like they will get much better anytime soon. Chief Financial Officer

Amy Hood

noted that cloud growth moderated, “particularly in December,” and projected revenue growth of 14% to 15% year over year for the company’s Intelligent Cloud segment during the March quarter—a deceleration of 11 percentage points from the same period last year. 

Investors were at least better-prepared for bad news this time. Microsoft’s share price slipped 1% in after-hours trading following the results and forecast compared with the 8% drop sparked by its previous quarterly report. As the first major tech player to post results for the December quarter, Microsoft also casts a large shadow. It has a highly diversified business that spans corporate and consumer software, cloud services, videogame systems and even online advertising. The company even noted that the recent spate of big tech layoffs will hurt its LinkedIn business, which is a major corporate recruiting tool in the tech sector. Those layoffs include 10,000 positions to be cut from Microsoft’s own payroll–another sign that even a cloud titan can’t keep floating above the economy. 

Write to Dan Gallagher at dan.gallagher@wsj.com

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Business

Microsoft Earnings Fell Last Quarter Amid Economic Concerns

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Microsoft Corp.

MSFT -0.22%

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.

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.

Write to Tom Dotan at tom.dotan@wsj.com

Write to Tom Dotan at tom.dotan@wsj.com

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Business

Microsoft to Deepen OpenAI Partnership, Invest Billions in ChatGPT Creator

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Microsoft Corp.

MSFT 0.98%

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.”

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)

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Business

Microsoft and Google Will Both Have to Bear AI’s Costs

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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.

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

Write to Dan Gallagher at dan.gallagher@wsj.com

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Technology

Microsoft Prepares to Go to Battle With FTC Over Activision Deal

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Microsoft Corp.

MSFT -1.73%

has signaled it plans to challenge the Federal Trade Commission’s lawsuit to block its $75 billion deal for

Activision

ATVI -0.38%

Blizzard Inc., and is expected to argue that it is an underdog in videogame developing.

The personal-computing company has been publicizing its position for months, saying the acquisition wouldn’t threaten competition in the industry because Microsoft trails rivals in videogame consoles and has a limited presence in mobile-game development. The company has also said it expects the industry to get more competitive in the future with the rise of cloud gaming.

Legal experts say Microsoft will likely build its case around those talking points as well as the fact that it is pursuing what is called a vertical merger, meaning it is buying a company in its supply chain as opposed to a direct competitor.

The deal “is fundamentally good for gamers, good for consumers, good for game developers and good for competition,” said

Brad Smith,

Microsoft’s president and vice chair, at the company’s annual shareholders meeting Tuesday. “We will have to present this case to a judge in a court because this is a case in which I have great confidence.”

Microsoft has until Thursday to respond to the FTC’s suit, which was filed Dec. 8 in the agency’s administrative court.

In its complaint, the FTC alleged the deal is illegal because it would give Microsoft the ability to control how consumers access Activision’s games beyond the Redmond, Wash., company’s own Xbox consoles and subscription services. The company could raise prices or degrade Activision’s content for people who don’t use its hardware to access the developer’s games, or even cut off access to the games entirely, the FTC said.

“If you can control an important source of content like Activision Blizzard, you have a variety of tools to leverage at your disposal,” which could stifle competition, an agency official said earlier this month.

At the shareholder meeting, Mr. Smith challenged the FTC’s concerns that Microsoft’s chief rival, PlayStation maker

Sony Group Corp.

, would be harmed by the deal, saying Sony has too big a lead in the high-performance console space to warrant protection.

Microsoft Gaming CEO Phil Spencer discusses growth in cloud gaming, gaming subscriptions and the planned acquisition of Activision Blizzard.

He further argued that the FTC’s case largely hinges on a worry that Microsoft could one day make games from Activision’s “Call of Duty”—which has been a hit among PlayStation users—exclusive to its Xbox system. Mr. Smith said Sony has about four times as many exclusive games on its consoles today as Microsoft has on its gaming machines.

Sony didn’t respond to a request for comment.

Microsoft said it made a last-minute offer to keep “Call of Duty” games accessible to others through a legally binding consent decree, augmenting an offer that the company had made months earlier to keep it accessible for at least 10 years.

A hearing would take place in the FTC’s administrative court in August, unless a resolution is reached before then. After the case is heard, legal experts say it could take months before a decision is handed down, and the losing side can then appeal it with the full commission. If an appeal is filed, the commission reviews the entire record anew and hears oral arguments, before deciding to uphold or overturn the administrative law judge’s order. At that point, if Microsoft loses, the company can appeal the commission’s decision to a federal appeals court.

“This is no way a slam-dunk case for the FTC,” said

Eric Talley,

a professor at Columbia Law School. “Even if the odds are a little bit long, they’re showing they’re willing to kick the tires to budge legal precedent a little bit more in their favor.”

Microsoft recently made a last-minute move to augment its offer to keep Activision’s ‘Call of Duty’ games accessible to others.



Photo:

Martin Meissner/Associated Press

Some analysts said Microsoft might want to drop the acquisition, which the company values at $68.7 billion after adjusting for Activision’s net cash, to avoid executive distraction and expensive regulatory concessions. Microsoft has said it is committed to addressing regulators’ concerns.

While the litigation is continuing, Microsoft could offer the FTC additional commitments or implement them itself, said

Benjamin Sirota,

an antitrust attorney with the law firm Kobre & Kim LLP in New York. But to be satisfied, the government would have to enforce those commitments, which “takes resources and circumstances often change,” he said. The agency might also consider how “commitments that solve a competition problem now might not work in the future,” he added.

The FTC faces hurdles in its case because of the deal’s vertical-merger status, according to

David Hoppe,

mergers and acquisitions, tech and media attorney with Gamma Law in San Francisco.

“With these cases, it’s hard to prove consumer harm,” he said. “It’s not two competitors combining, in which case the harm to consumers is typically self-evident.”

The FTC has been clear about its intention to expand the scope of harm beyond a merger’s likely impact on consumer prices, Mr. Hoppe said. The agency might be concerned about actions that could indirectly put consumers at risk, he said, such as the misuse of sensitive competitor information by the combined enterprise. That information could give Microsoft a way to keep newcomers in videogame distribution from succeeding, which could result in fewer options for consumers, he said.

“It’s all about the network effect,” Mr. Hoppe said.

Write to Sarah E. Needleman at Sarah.Needleman@wsj.com

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Technology

FTC’s Tussle With Microsoft Puts Spotlight on Cloud Gaming

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Cloud gaming is an emerging technology that allows people to stream videogames to nearly any internet-connected device, similar to how movies and shows are viewed on

Netflix,

Hulu and other streaming platforms.

The business model being developed alongside cloud gaming is a subscription service, where consumers get to play a catalog of games for a flat monthly or annual fee. With cloud gaming, players can avoid downloading games to their devices, which takes up memory, and they don’t need to invest in hardware such as a console or high-end computer. 

The FTC and videogame industry participants anticipate cloud gaming will become a much larger part of the market in years to come. With its lawsuit, the FTC says it is protecting the videogame-distribution market—as it is today and how it is expected to evolve—from being dominated by a few companies.

Microsoft is an early leader in cloud gaming with its Xbox Game Pass subscription service. The company’s $75 billion deal for Activision would bolster its content library, adding several blockbuster franchises including “Call of Duty,” “World of Warcraft” and “Candy Crush Saga.”

Microsoft, which has pledged to fight the FTC’s suit, has said it is an underdog in the existing console market, with Xbox’s position trailing

Sony Group Corp.’s

PlayStation and

Nintendo Co.

’s Switch. The company doesn’t disclose Xbox sales by volume.

Shoppers are seeing more out-of-stock messages than ever, but inventory tracking websites like HotStock and Zoolert are giving people a better chance of finding the hot-ticket products they’re looking for. Here’s how those websites work. Illustration: Sebastian Vega

The technology giant has also said that it has no meaningful presence in mobile, the biggest corner of the overall videogame industry by revenue.

Apple Inc.

and

Alphabet Inc.’s

Google, makers of the predominant smartphone operating systems, play a critical role in how people access mobile games, and they take a cut of developers’ in-app and subscription sales.

Xbox Game Pass, which Microsoft launched in 2017, offers a library of hundreds of games for subscribers to play starting at $9.99 a month. The basic plan allows subscribers to download individual games on their Xbox or PC to play whenever they want. For $14.99 a month, subscribers can play some of those games via the cloud, all part of Microsoft’s ambitions to build a “Netflix of gaming.” The company in January said Game Pass had 25 million subscribers.

Global consumer spending on cloud-gaming services and games streamed via the cloud will reach a combined $2.4 billion by the end of this year, according to an estimate from Newzoo BV. That is a tiny fraction—1.4%—of the $184.4 billion in overall spending on videogame software.

Sony, which has aggressively lobbied governments around the world to oppose the Microsoft-Activision tie-up, and others have attempted to grow their own cloud-gaming subscription services. Microsoft, for now, is the dominant player, accounting for 60% of the overall cloud-gaming business last year, according to an estimate from research firm Omdia.

Microsoft is an early leader in cloud gaming with its Xbox Game Pass subscription service.



Photo:

etienne laurent/Shutterstock

The FTC appears concerned that it “can’t see the unintended consequences even just a few years down the road for an acquisition like this,” said

Paul Swanson,

a Denver-based antitrust lawyer at Holland & Hart LLP. “What they’re saying here is we’re going to err on the side of preserving as many independent competitors as we can.”

Over the past decade, Microsoft has poured billions into its cloud operations primarily for selling software and infrastructure for enterprise customers. It is now building out a separate cloud infrastructure to power its videogaming ambitions, which have been under development since it launched its first Xbox console in 2001.

Cloud gaming hasn’t been an easy business to navigate. The technology is difficult for companies to execute smoothly because games need to support multiple players with minimal delay regardless of where players are located. Earlier this year, Google shut down its game-streaming service, Stadia, after struggling to gain traction with users.

Microsoft remains heavily invested in its Xbox hardware, but cloud gaming gives it an opportunity to reach more gamers. It wants to build its own mobile app store, a move it says would create more competition in mobile videogames, not less. The Redmond, Wash., company has argued that Apple and Google’s app marketplaces have policies that pose technical and financial barriers to its goals.

Representatives for Apple and Google didn’t respond to requests for comment. Apple has said that it doesn’t prevent cloud-gaming apps from appearing in the App Store and that it isn’t trying to block their emergence. 

Industry researcher and academic

Joost van Dreunen

said Microsoft’s mobile move would likely benefit the videogame ecosystem by diminishing Apple and Google’s grip.

Microsoft has said it is an underdog in the console market, with Xbox trailing consoles such as Nintendo’s Switch.



Photo:

Guillaume Payen/Zuma Press

“It breaks down the so-called walled-garden strategy that has dominated the game industry for 20 years,” he said.

Since Microsoft announced its deal for Activision, which it values at nearly $69 billion after adjusting for the developers’ net cash, some videogame players have been concerned about what it means for industry competition. 

Steve Schweitzer of State College, Pa., is worried that Microsoft will raise the price of Game Pass over time. He said that it is affordable now but that in a few years, if Microsoft becomes more dominant, it could bump up the price and start cutting back on quality. Mr. Schweitzer, 55 years old, said he remembers back in the 1990s when Microsoft was able to use its market power to capture market share in the browser wars. “I’ve seen this game before,” he said.

Before its lawsuit, the FTC had been reviewing the deal for months. Regulators in other jurisdictions, including the European Union and the United Kingdom, are doing the same. The company has gained approval for the deal in smaller markets such as Brazil and Saudi Arabia.

Write to Sarah E. Needleman at sarah.needleman@wsj.com and Aaron Tilley at aaron.tilley@wsj.com

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Technology

FTC’s Move to Block Microsoft’s Deal for Activision Blizzard Came Despite Charm Offensive

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Microsoft Corp.

MSFT -0.80%

had been working for close to a year to calm regulators’ concerns about its acquisition of videogame developer

Activision Blizzard Inc.,

ATVI 0.54%

but the Federal Trade Commission’s suit to block the deal raised doubts about the company’s pledge not to shut out rivals. 

The FTC this week took one of its biggest swings ever against a big technology company and sued to stop the planned $75 billion acquisition, setting the stage for a court challenge over a deal the antitrust agency said would harm competition.

The commission’s complaint said the deal is illegal because it would give Microsoft the ability to control how consumers beyond users of its own Xbox consoles and subscription services access Activision’s games. Microsoft has repeatedly said it wouldn’t engage in such actions. The FTC’s complaint accused Microsoft of reneging on a similar pledge to a European regulator in the past, a criticism the company disputes.

Earlier this week, as the possibility of a lawsuit grew, Microsoft touted the deal’s benefits to gamers through an op-ed article in The Wall Street Journal and announced an agreement to give a competitor access to one of Activision’s most popular games. The FTC filed its lawsuit on Thursday.

“The Proposed Acquisition, if consummated, may lessen competition substantially or tend to create a monopoly,” the FTC said in its complaint against Microsoft.

Executives at the Redmond, Wash., company have said it would take a long time to get all the approvals needed from regulators around the world, and it had given itself close to 18 months for the process. The deal could now miss Microsoft’s mid-2023 deadline, and some analysts said Microsoft might want to drop the acquisition.

Microsoft should “take the hint and give up the deal that, if completed, might end up a Pyrrhic victory of executive distraction and expensive regulatory concessions,” John Freeman, vice president at investment-research firm CFRA Research, wrote in a note to investors.

Competitors had expressed concerns the deal would block them from access to Activision games such as the popular ‘Call of Duty’ franchise.



Photo:

Allison Dinner/Associated Press

At stake is Microsoft’s big ambitions for its videogaming business, which had revenue of $16 billion in the company’s last fiscal year. That total represents less than 10% of Microsoft’s overall revenue. The business is a crucial part of Microsoft’s plans to diversify to attract more noncorporate customers.

The FTC’s move came after the company had avoided the brunt of the anti-tech backlash of recent years.

The suit represents a “somewhat meaningful setback” for Microsoft because of the company’s longtime lobbying efforts, said Stifel Nicolaus analyst Brad Reback. “They’ve worked very hard to stay on the right side of government agencies.”

Microsoft’s representative in Washington—its vice chairman and president,

Brad Smith

—has been building relationships in the capital for decades. He had helped cultivate an image of the software giant as one of the friendly technology leaders, an enviable position in a regulatory environment that has been increasingly hostile toward tech titans.

One of the longest-serving leaders inside Microsoft, Mr. Smith joined the company in 1993 and was a legal adviser through its bitter antitrust disputes with regulators worldwide in the 1990s.

“We have been committed since Day One to addressing competition concerns, including by offering earlier this week proposed concessions to the FTC,” Mr. Smith said after the lawsuit was filed. “While we believed in giving peace a chance, we have complete confidence in our case and welcome the opportunity to present our case in court.”

In its complaint, the FTC accused Microsoft of previously suppressing competition from rivals through its 2021 acquisition of ZeniMax Media Inc., parent of “Doom” developer Bethesda Softworks, despite giving assurances to European antitrust authorities that it would do otherwise. Microsoft said the FTC’s ZeniMax allegation is misinformed.

Brad Smith, Microsoft’s vice chairman and president, has been building relationships in Washington for decades.



Photo:

Zed Jameson/Bloomberg News

Microsoft officials have expressed confidence in closing the Activision deal, which it has valued at $68.7 billion after adjusting for Activision’s net cash. Lawmakers and industry representatives have said it would be hard for any of the biggest U.S. tech companies—including

Apple Inc.,

Amazon.com Inc.,

Google parent

Alphabet Inc.

or

Facebook

owner Meta Platforms Inc.—to win approval for a large acquisition in the current political environment.

In recent years, as government scrutiny and competition between the biggest tech companies have been increasing, Microsoft has tried to appease regulators.

For example, in May, Microsoft announced a set of principles it would abide by when dealing with cloud-service providers in Europe, hoping to assuage concerns its cloud business was hurting European cloud companies. The principles included pledges to work with European cloud providers and support the success of software vendors running on Microsoft’s cloud.

Amid concern the deal could hurt attempts to unionize at Activision or elsewhere in the gaming industry, Microsoft in June said it was open to working with any labor unions that want to organize.

As PlayStation maker

Sony Group Corp.

and others said they were concerned the acquisition could leave competitors locked out of Activision’s popular “Call of Duty” franchise, Microsoft this week said it would make it available for the first time on Nintendo Co.’s Switch gaming consoles for at least 10 years.

Microsoft this week also made its case to the public. “Blocking our acquisition would make the gaming industry less competitive and gamers worse off,” Mr. Smith, wrote in the Monday op-ed article in the Journal. “Think about how much better it is to stream a movie from your couch than drive to Blockbuster. We want to bring the same sort of innovation to the videogame industry.”

It is too soon to tell whether the FTC can succeed in blocking the acquisition. The agency likely will have to go before a federal judge, a process that could take months to unfold, said Eric Talley, a professor at Columbia Law School.

The case could be difficult for the regulator to win because courts have traditionally not seen deals among companies that specialize in different phases of the same industry’s production process—so-called vertical mergers—as competitive dangers, he said.

“It may require the commission to convince a judge to change the law somewhat,” he said. “That makes it a difficult case for the FTC to win, though they presumably knew this going in.”

Write to Sarah E. Needleman at Sarah.Needleman@wsj.com

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Business

Opinion: The cloud boom has hit its stormiest moment yet, and it is costing investors billions

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The cloud boom has finally reached a resting altitude, but Wall Street is doing anything but resting.

Amazon.com Inc.
AMZN,
-4.06%,
the original pioneer in cloud computing, confirmed Thursday what rivals Microsoft Corp.
MSFT,
-1.98%
and Alphabet Inc.
GOOGL,
-2.85%

GOOG,
-2.34%
suggested with their earnings reports earlier in the week: Cloud-computing growth has finally reached a plateau, as companies around the world cut costs to address the slowing economy. Amazon Web Services, the backbone of Amazon’s profit, saw revenue hit its slowest growth on record, and executives said that it will slow down even more.

“The back end of the quarter, we were more in the mid-20% growth range, so carry that forecast to the fourth quarter — we are not sure how it’s going to play out, but that’s generally our assumption,” Amazon Chief Financial Officer Brian Olsavsky told analysts after reporting quarterly growth of 27.5%.

It was a jarring slowdown for AWS, which recorded 33% growth in the second quarter, 37% growth in the first, 37% in the fourth quarter of 2021 and 39% growth a year ago. It shouldn’t have been too much of a surprise, though: Smaller rivals reported similar slowdowns earlier in the week.

Microsoft’s Azure cloud business grew 35% in its fiscal first quarter, down from 40% in the previous quarter and 50% the year before, and executives predicted another five-percentage-point fall this quarter. Alphabet’s Google Cloud is also slowing, even though it was the bright spot of double-digit growth in the disappointing quarter for the internet ad and search giant. Google’s Cloud Services grew 37.6% in the third quarter, up from 35.6% growth in the second quarter, but down from 43.8% in the first quarter, and 44.6% in the fourth quarter.

Regular readers of this column should also not be surprised, as we predicted three months ago (perhaps just a tad early) that a slowdown was coming. It probably should have happened in 2020, but the COVID-19 pandemic caused a rush of companies to boost their cloud services, as remote work suddenly made a move to the cloud essential for many businesses.

More recently, though, the largest businesses with the most complex workloads are shutting down or putting off major projects, and cutting their spending on the cloud-computing power they would have needed to support hem.

“There are three parts to the cloud slowdown,” said Maribel Lopez, principal analyst at Lopez Research, who joined MarketWatch in predicting a cloud-spending slowdown earlier this year. “One is related to reigning in and rationalizing the Wild West of spending that companies did during COVID to keep the lights on,” which is leading to the cutbacks we see now. Second, recent waves of cloud workloads by the industries that are still slow-rolling their move to the cloud — such as government, healthcare and education — “are the most complex, time consuming and challenging to move to the cloud quickly.” Lastly, is a general fear related to the macroeconomic environment, leading to cuts anywhere executives can find them.

Read also: The cloud boom is coming back to earth.

Wall Street has reacted swiftly and strongly, ripping more than $300 billion in market cap away from just Microsoft and Amazon this week, if Amazon’s steep decline in Thursday’s after-hours session persists. But this is where it helps to think about a longer-term view: Just because cloud growth is declining does not mean that the technology is still not core to the future.

Microsoft and Amazon will continue to develop and sell their cloud-computing offerings, and they will see healthy margins on them. Google is continuing to invest in its cloud business, adding 2,000 new employees via its acquisition of Mandiant last quarter, and executives said this week that businesses and governments are still in the early days of public cloud adoption.

“We’re pleased with the momentum in Cloud and do continue to be excited about the long-term opportunity,” Alphabet Chief Financial Officer Ruth Porat told analysts this week.

Many analysts agree. Dan Ives, an analyst with Wedbush Securities, said this week in a note about Microsoft that “the shift to cloud is still less than 50% penetrated.” Growth is slowing as inflation continues and the strong dollar outside the U.S. hits the revenue lines of many tech giants, causing many companies to pause in their spending, but that is a short-term problem.

Moving to a cloud provider is not for the faint of heart, and it is a transition that in some cases takes longer than expected. The same will hold true for investing in the cloud for the long term, even as there is some pain now. It’s still a massive and important part of the tech sector, an essential business that enabled companies to keep operating around the world during the pandemic. Whatever the future growth rate, the cloud appears here to stay.

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Business

Apple, Amazon, McDonald’s Headline Busy Earnings Week

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Amazon.

com Inc.,

Apple Inc.

and

Meta Platforms Inc.

are among the tech heavyweights featured in a packed week of earnings that investors will probe for indicators about the broader economy.

Other tech companies scheduled to report their latest quarterly reports include Google parent company

Alphabet Inc.

and

Microsoft Corp.

Investors also will hear from airlines such as

Southwest Airlines Co.

and

JetBlue Airways Corp.

, automotive companies

General Motors Co.

and

Ford Motor Co.

, and energy giants

Chevron Corp.

and

Exxon

Mobil Corp.

Nearly a third of the S&P 500, or 161 companies, are slated to report earnings in the coming week, according to FactSet. Twelve bellwethers from the Dow Jones Industrial Average, including

Boeing Co.

and

McDonald’s

Corp., are expected to report as well.

The flurry of results from a broad set of companies will give a sense of how businesses are faring as they deal with inflation denting consumer spending, ongoing supply-chain challenges and a stronger dollar.

People awaited the release of Apple’s latest iPhones in New York last month. The company will report quarterly results on Thursday afternoon.



Photo:

ANDREW KELLY/REUTERS

One area holding up to the challenges has been travel. Several airline companies have reported that consumers still have an appetite to spend on trips and vacations. On Friday,

American Express Co.

raised its outlook for the year in part because of a surge in travel spending.

“We expected the recovery in travel spending to be a tailwind for us, but the strength of the rebound has exceeded our expectations throughout the year,” American Express Chief Executive

Stephen Squeri

said.

In addition to airlines reporting, companies such as car-rental company

Hertz Global Holdings Inc.

and lodging companies

Hilton Worldwide Holdings Inc.

and

Wyndham Hotels & Resorts Inc.

will offer reads into leisure spending.

Overall, earnings for the S&P 500 companies are on track to rise 1.5% this period compared with a year ago, while revenue is projected to grow 8.5%, FactSet said.

Other companies will serve as a gauge for how consumers have responded to higher prices and whether they have altered their spending as a result.

Coca-Cola Co.

and

Kimberly-Clark Corp.

on Tuesday and

Kraft Heinz Co.

on Wednesday will show how consumers are digesting higher prices.

Mattel Inc.,

set to report on Tuesday, will highlight whether demand for toys remains resilient. Rival

Hasbro Inc.

issued a warning ahead of the holiday season.

United Parcel Service Inc.

will release its results on Tuesday and provide an opportunity to show how it is faring ahead of the busy shipping season. The Atlanta-based carrier’s earnings come weeks after rival

FedEx Corp.

warned of a looming global recession and outlined plans to raise shipping rates across most of its services in January to contend with a global slowdown in business.

Results from credit-card companies

Visa Inc.

and

Mastercard Inc.

will offer insights into whether inflation has finally put a dent in consumer spending after both companies reported resilient numbers last quarter.

Wireless carrier

T-Mobile US Inc.’s

numbers on Thursday will give more context to mixed results from competitors

Verizon Communications Inc.

and

AT&T Inc.

AT&T

issued an upbeat outlook on Thursday after its core wireless business exceeded the company’s expectations, whereas Verizon on Friday said earnings tumbled as retail customers balked at recent price increases.

Other notable companies lined up to report include

Chipotle Mexican Grill Inc.

on Tuesday, chicken giant

Pilgrim’s Pride Corp.

on Wednesday and chip maker

Intel Corp.

on Thursday.

Write to Denny Jacob at denny.jacob@wsj.com

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