Google May Need to Change Its Approach

Google prefers not to lay off employees, but it may still find that it has to in some cases.

The internet giant has been avoiding the tech layoff trend so far. However, last week Salesforce announced cuts affecting about 8,000 employees. This follows a raft of reduction plans from a swath of tech players. Layoffs are falling especially hard on Google’s main competitors in the online advertising business. Combined cuts at Facebook The parents of Meta Platforms, Amazon.com, Snapchat's parent Snap, and Twitter have a total of about 34,000 workers, according to disclosures from the companies and reporting by The Wall Street Journal.

When Meta announced that it would lay off 13% of its workforce in early November, speculation began that Google might have to follow suit. Both companies rely heavily on online advertising for revenue, and the global economic slowdown is taking a toll on that market. Some analysts estimate that ad revenue for Google-parent Alphabet could drop by as much as 1.60%.

Advertising revenue growth for both Google and Facebook is expected to stay in single-digit territory in 2023. Google's ad revenue is expected to grow just 9% in 2022 compared with 43% the previous year, while Facebook's parent company is expected to show an annual ad revenue decline for the first time ever, according to FactSet.

Google is not Facebook. While the latter has made a shift into becoming a "metaverse company," this has caused investors to rebel—particularly after seeing the company's third-quarter results in late October. Meta's share price had decreased by more than 70% before the company announced its layoff plan two weeks later.

Alphabet's stock price has outperformed Meta's significantly over the last year, even though Meta's stock has rallied since its restructuring announcement. Search advertising has proven to be more resilient to both the slowing economy and changes made by Apple to its mobile platform, as opposed to social-network ads on platforms like Facebook and Snap. Alphabet is also much stronger financially, with more than twice Meta's net cash balance and trailing 12-month free cash flow.

Despite its dominance, Google has not been immune to the advertising downturn. Operating margins in the core Google Services segment, which is mostly made up of the ad business, fell 7 percentage points in the third quarter from the year before. This has put a spotlight on the company's rapid head-count growth: more than 30,000 new employees were added in the first nine months of 2022, which is more than the company has added in any full year before.

Alphabet executives promised in the third-quarter call that head-count growth would slow significantly. However, this might not be enough to placate investors who are looking for more drastic cost reductions. Google generates billions of dollars in revenue every year from intellectual property such as search algorithms, so the people who develop that property are its most valuable asset—and also its biggest cost center. Alphabet’s median employee pay for 2021 totaled $295,884—the highest of any company in the S&P 500, according to calculations by The Wall Street Journal.

According to a report by CNBC last month, Google is adopting a new employee-ranking system that would result in more workers getting lower performance scores, and thus being more likely to be “managed out.” The company has never done large-scale layoffs in its core business; a major head-count reduction in 2013 was the result of cuts in the Motorola business the company then owned. The idea of mass layoffs is anathema to the company’s employee-centric culture. Google used its first initial public offering filing in 2004 to tout some of its perks—including “meals free of charge, doctors and washing machines”—as a competitive advantage to keep workers engaged and productive. “Expect us to add benefits rather than pare them down over time,” the filing read.

Google has grown a lot in the past few years, and with that growth has come a decrease in revenue per employee. With rivals looking to do more with less, some Googlers may need to start springing for their own laundry again.