Microsoft CEO feels weighed down by job cuts

3 months ago 1

Microsoft CEO Satya Nadella on Thursday told employees in a memo that the company's recent layoffs have been "weighing heavily on me."

Thanking terminated employees for their service, Nadella attempted to address the cognitive dissonance that follows from headcount trimming at a time of strong financial performance.

In Microsoft's fiscal 2024, which ended June 30 of last year, it reported $245 billion in annual revenue, up 16 percent year-over-year, and over $109 billion in operating income, up 24 percent. Yet this calendar year, the software giant has cut more than 15,000 jobs, including 9,000 in July.

"By every objective measure, Microsoft is thriving – our market performance, strategic positioning, and growth all point up and to the right," Nadella said.

"We’re investing more in CapEx than ever before. Our overall headcount is relatively unchanged, and some of the talent and expertise in our industry and at Microsoft is being recognized and rewarded at levels never seen before. And yet, at the same time, we’ve undergone layoffs."

Nadella continued, "This is the enigma of success in an industry that has no franchise value."

We have no idea what Nadella – or perhaps Microsoft Copilot – is trying to say here. Industries don't have "franchise value," which describes estimated revenue from present and future business opportunities, including intangibles like customer loyalty and brand reputation.

But companies do. Microsoft, with its thriving Productivity and Business Processes, Intelligent Cloud, and More Personal Computing segments, certainly has franchise value. If Nadella is trying to suggest that layoffs and growing profit go together because Microsoft's business could disappear at any moment, because the company has no franchise value that keeps revenue flowing, that just doesn't make sense. Perhaps it's just an admission that nobody – including Microsoft – has really figured out how to make big money from AI, much less how to value potential future revenue.

The enigma here is why Microsoft feels the need to cut staff as it pours money into AI, given that it's not likely to save all that much from job cuts compared to its expected datacenter outlay.

At the start of this year, Microsoft said it would spend $80 billion in capex to build out AI infrastructure. That's the equivalent of 533,333 employees – more than twice Microsoft's actual headcount of 228,000 – if expensed at a rate of $150,000 each.

ZipRecruiter estimates that the average salary of a Microsoft employee is about $115,000 annually. That's around $150,000 if you add about 30 percent of salary in benefits. So while cutting 15,000 jobs might save $2.25 billion annually based on the above assumptions – excluding severance costs – that's still a very small portion of the funds allotted for Microsoft's AI building spree this year.

We note that Nadella, with his $79.1 million annual pay package in 2024, could be exchanged for about 527 employees at the above market rate.

Having failed to provide a clear answer about the need for layoffs, Nadella argued that Microsoft must redefine its mission because company co-founder Bill Gates' vision of "a software factory, unconstrained by any single product or category" is no longer enough.

Microsoft, Nadella wrote, must be reimagined as "an intelligence engine empowering every person and organization to build whatever they need to achieve."

"Just imagine if all 8 billion people could summon a researcher, an analyst, or a coding agent at their fingertips, not just to get information but use their expertise to get things done that benefit them," Nadella mused. "And consider how organizations, empowered with AI, could unlock entirely new levels of agility and innovation by transforming decision-making, streamlining operations, and enabling every team to achieve more together than ever before."

We're just guessing here, but given that 1 in 3 people lack clean drinking water – a popular beverage at datacenters – a few billion among us probably have priorities other than kibitzing with Microsoft Copilot. As for those of us fortunate enough not to worry about such matters, interest in chatbot access probably takes a backseat behind having a job.

Microsoft clearly does consider AI to be a priority. In fact, it's one of three that Nadella cites: security, quality, and AI transformation.

In terms of security and quality, Microsoft's record speaks for itself. That leaves AI transformation.

Nadella may be uncomfortable with layoffs, but they're a convenient counterweight to suppress concerns among investors and financial analysts about lavish AI spending on services that have yet to turn a profit.

Microsoft is scheduled to report its fiscal 2025 fourth quarter earnings next Wednesday. ®

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