BREAKINGVIEWS-AI fears give tech CEOs convenient cover for cuts

By Robert Cyran

NEW YORK, Feb 27 (Reuters Breakingviews) - How many workers does a world with Claude need? Block XYZ.N CEO Jack Dorsey upped the urgency of the debate over whether productive chatbots will reduce employment on Thursday, when he announced that the payments company would fire nearly half its workers. Whether artificial intelligence really can do the work of thousands of humans, or just provides impetus to slim down a bloated organization, is unclear. Nonetheless, investors added more than $6 billion to the company’s market value on Friday morning. Such gains will help prod other firms into finding AI savings, real or illusory.

It’s hard for bosses, and more difficult for outsiders, to judge the optimal number of workers for a tech firm. When times are good, there’s the temptation to overhire, ensuring that there are enough engineers to satisfy growing demand and fix emerging problems. That comes at the obvious cost of profitability, but valuations rarely paid the price, while CEOs could reasonably fret about the dangers of underinvestment. Just look at Southwest Airlines, which learned this lesson in 2022 when a software meltdown led to over 10,000 flight cancellations.

Dorsey claims that machine learning has reset this balance of concerns, and rapidly. He said that Block had seen a 40% increase in production code shipped per engineer since September, as well as fruits of an order-of-magnitude jump in the capability and intelligence in its in-house AI framework, Goose. Hence fewer employees will do more, and faster.

Coding-adept chatbots really are remarkable. But Block also had a lot of fat to cut. The company’s headcount exploded during the pandemic, more than tripling between the pre-Covid year of 2019 and the peak in 2023.

Meanwhile, it engaged in questionable deals and breakneck expansion. It agreed to pay $29 billion in stock for buy-now-pay-later company Afterpay in 2021. Such businesses are worth far less today. Rival Klarna, for example, was valued at $46 billion that summer in a private funding round, and now trades at $5 billion. Block also bought music streaming service Tidal in a bizarre expansion, adding musician Jay-Z to the board. Then there was a big push into highly speculative cryptocurrencies, including making bitcoin wallets and a mining system. The stock has performed poorly over the past five years.

Block was far from the only technology company to overextend, especially in the frothy period exiting the pandemic. Its stock gain from pivoting away from that era, AI-driven or not, is concrete. With software valuations plummeting and machine learning fears top of mind, the signal to bosses is to fire away.

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CONTEXT NEWS

Block said on February 26 that it will cut over 4,000 jobs, or nearly half of its workforce. Chief Executive Jack Dorsey said that intelligence tools allow a smaller team at the payments company to do more and do it better.

"I don't think we're early to this realization. I think most companies are late," he said.

Block’s stock rose 18% on the morning of February 27.