The news: Microsoft is laying off 5% of its staff, affecting 10,000 employees mostly from its engineering divisions, while it is refocusing heavily on artificial intelligence, per Bloomberg.

Layoffs could foreshadow a wider pivot to AI: Microsoft, which cut about 1,000 of its employees in October, will take a $1.2 billion loss in Q2 related to “severance costs, changes to our hardware portfolio, and the cost of lease consolidation.”

• Microsoft is already adding ChatGPT in various products, including Azure, Bing Search, and Microsoft Office, which could be the impetus for laying off engineers.
• The company eliminated open positions and slowed hiring in May in reaction to decelerating market conditions.

Why it’s worth watching: The timing of the layoffs comes a week after Microsoft committed to investing $10 billion in OpenAI, the company behind the transformative ChatGPT AI. 

• Plummeting personal computer sales and an 11% YoY revenue growth in Q3 2022—the weakest in over five years—likely led Microsoft to view the job cuts as a necessary tradeoff to secure its AI ambitions.
• The cuts could help appease Wall Street and justify the massive investment in generative AI, which we predict will fuel an AI funding trend.
• Though expected to be lucrative, AI comes with significant uncertainty about effective commercialization and potential legal fallout. 
• With Microsoft’s planned expansion of its Azure OpenAI Service, CEO Satya Nadella said he expects generative AI to yield $7 billion in cloud revenue within three years. 

An alarming time for the tech sector: The deluge of layoffs in the tech sector is expected to continue and could affect nearly every company in the segment. 

• A report from outplacement firm Challenger, Gray & Christmas found US tech layoffs were up 649% YoY in 2022, versus a 13% uptick in job cuts in the overall economy during the same period.
• Gartner predicts that 70% of organizations will implement structured automation by 2025, per VentureBeat. And workers are aware: 61% of 32,500 employees surveyed around the world by PwC are worried that automation is putting people’s jobs at risk.

Our take: The Cambrian explosion of widely available generative AI tools during an economic upheaval could result in reduced hiring and increased layoffs, but AI is not foolproof and could potentially introduce problems that AI alone can’t solve. 

But given a void of government oversight of the technology, expect companies like Microsoft to continue a cavalier approach as the legal system catches up. 

This article originally appeared in Insider Intelligence's Connectivity & Tech Briefing—a daily recap of top stories reshaping the technology industry. Subscribe to have more hard-hitting takeaways delivered to your inbox daily.

• Are you a client? Click here to subscribe.
• Want to learn more about how you can benefit from our expert analysis? Click here.