Recruiting is a challenge for any industry, but especially for technology.
The workforce is highly skilled and difficult to recruit. Companies need to develop and improve employee capabilities to stay ahead of the competition. Retaining experienced and talented employees requires high wages and benefits.
“Competition for highly skilled staff is intense,” Twitter said in its 2014 annual report shortly after the company went public. “Our growth strategy depends in part on our ability to retain our existing staff and add additional highly skilled employees.”
In 2013, Twitter employed just over 2,700 people. By 2021, the company had grown to more than 7,500 full-time employees.
But just days after Elon Musk acquired the social networking platform, the world’s richest man is expected to cut about half his workforce, or about 3,700 jobs. All employees were to be notified by 9 a.m. Friday if they still had jobs, according to a company email shared with the Los Angeles Times.
“A possible spasm”
This year has been a tough one for the tech industry – amid economic turmoil, there have been hiring freezes at major companies like Google and Meta and layoffs at companies as diverse as Coinbase and Netflix. But laying off 50 percent of a company’s workforce is “out of the norm,” Anat Lechner, a business professor at New York University’s Stern School of Business, said before news of the layoffs became official.
“I don’t recall any case of this magnitude,” he said. “I’ve been in this space since the late 80s. I just don’t remember anything like that.”
Even historically large cuts, such as Yahoo’s 2012 layoff of 2,000 employees in a turnaround effort, made up only 14 percent of the company’s workforce.
For tech companies that came of age after the dotcom crash, it’s even more unusual. The industry has been a hotbed of hiring for years, even more so during the pandemic when stay-at-home regulations boosted demand for home entertainment, digital technology and e-commerce.
Such a dramatic cut would upend the lives of thousands and undo years of work in recruiting, employee development and institutional knowledge at the company.
Laying off so many employees could also raise serious concerns about cyber security, IT and the overall stability of the platform, said Dan Ives, managing director of Wedbush Securities.
“Fifty percent layoffs is a potential break for Twitter,” he said. “There were going to be cuts. 50% is an impressive number.”
The albatross around Twitter’s neck
Key to understanding the scale of the rumored cuts is the mechanism Musk used to buy Twitter.
To finance his $44 billion buyout, Tesla Inc.’s CEO and SpaceX financed the deal with debt borrowed from banks. In this type of leveraged buyout, it’s the company — not Musk — that gets saddled with the debt.
This means that Twitter is ready to pay huge amounts of interest, as well as the loans themselves.
With a whopping $13 billion in new debt hanging over the social media company, Musk needs Twitter to turn a profit — fast.
“The debt element is an albatross around Twitter’s story,” Ives said. “Cash flow now has to come from Twitter, and there’s only one way for that to happen, which is through headcount costs. It puts tremendous pressure on the cost side of Twitter’s history that didn’t exist before this deal.”
How to earn money
Twitter’s business wasn’t necessarily booming before the acquisition. The company has been largely unprofitable for most of its existence as a public company, losing $270 million in its last quarterly report in June after posting disappointing revenue of $1.18 billion.
Getting out of that much debt as a mature company in a competitive sector will be difficult, Ives said.
“For Musk, the easy part was buying Twitter,” he said.
In addition to the specter of layoffs, Musk has tabled a number of proposals to try to increase revenue, including requiring users to pay $8 a month to verify their accounts with a check mark.
“Monetization remains an uphill battle,” Ives said. “And Musk could continue to cut, but that’s not going to make it any easier to grow revenue.”