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It has been a chaotic couple of weeks at Spotify. The tech group’s thousands of staff woke up Monday morning last week to mass lay-offs, alongside a pointed statement by chief executive Daniel Ek, who said that there were too many people at Spotify “doing work around the work” rather than making a real impact.
The following day, chief financial officer Paul Vogel sold $9mn in shares, seemingly cashing in on the stock market’s positive reaction to the brutal cuts. Two days after that, Ek announced another bombshell: Vogel was among the employees who were exiting.
In another sharply worded statement, Ek said that Spotify was “entering a new phase and needs a CFO with a different mix of experiences”. (A former senior Spotify executive described Ek’s comments in their directness as “very Swedish”). Vogel, a former Barclays analyst who joined Spotify in 2016, did not offer a statement. He is set to depart at the end of March.
In total this year, Spotify has fired about 2,300 employees, or roughly a quarter of its staff. Ek himself admitted that the severity of the cuts would come as a surprise to many employees, because Spotify’s business has actually been doing quite well.
Before the December 4 lay-offs announcement, Spotify’s stock was up 130 per cent this year. In the first nine months of 2023, Spotify added a staggering 85mn users, including 21mn paying subscribers. It did so even as it raised prices in dozens of countries. In the video streaming wars, it is becoming clear that Netflix has run away with its lead over the competition. Spotify is on the cusp of a similarly definitive victory in music streaming.
In spite of its popularity, Spotify has never consistently made a profit. For a long while, the simple excuse was that Spotify’s business model itself was flawed. For every dollar Spotify makes in revenue, it pays about 70 cents back out to the owners of the music on the app.
And what has Spotify been doing with the remaining 30 cents? In recent years Ek embarked on a hiring spree — nearly doubling headcount from 4,405 employees on average in 2019 to 8,359 in 2022, according to regulatory filings. Excluding the fees it pays to music rightsholders, Spotify’s expenses ballooned from €2.3bn in 2020 to €3.6bn in 2022. Spotify in 2021 also borrowed $1.3bn, seemingly to help pay for the surge in spending.
Investors were briefly tantalised by Ek’s gusto as he spent $1bn to thrust Spotify into podcasting. But by 2022, Wall Street had lost patience. Spotify’s revenue was rising, but so were its losses. Spotify shares dropped by 66 per cent that year. Now, the Swedish billionaire has explicitly called time on that freer-spending era.
“We now find ourselves in a very different environment. And despite our efforts to reduce costs this past year, our cost structure for where we need to be is still too big,” Ek said. “We have to become relentlessly resourceful . . . being lean is not just an option but a necessity.”
That should satisfy the market. Lightshed analyst Rich Greenfield described last week’s mass lay-offs as “tremendous news”. Rosenblatt Securities analyst Barton Crockett wrote in a research note that the cost controls could prompt Spotify’s profits to “explode”. Macquarie analysts estimate the cuts could reduce Spotify’s costs by €300mn next year. Spotify’s stock is up about 10 per cent since the cuts were announced on December 4.
It is cold comfort for the thousands of people who have been left unemployed. In the midst of the swirl of news last week, it was revealed that Spotify also cancelled two prestigious podcasts — Stolen and Heavyweight — which audio consultant Jay Cowit likened to the Breaking Bad or Sopranos of the podcasting world.
Over the years Spotify has tried out a wide range of corporate gambits. (Does anyone remember the dashboard accessory known as the “car thing”?). Recent moves suggest that Ek no longer has lofty ambitions to create The Sopranos of podcasting. The coming years for Spotify might resemble more of an autopilot mode: cutting costs, raising prices and perhaps even retreating from countries where they are losing money.
The revolutionary ardour that defined streaming’s earlier days has been replaced with the realities of running a publicly traded business. After years of resisting calls to trim its bloated costs, it appears Ek is finally listening.
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