Popular streaming service: First profit for Spotify and yet the wave of layoffs continues - why?

Anyone who has been on platforms like Instagram or Tiktok in the past few days has hardly been able to ignore one thing: musical annual reports - who listened to what, who and how often.

Popular streaming service: First profit for Spotify and yet the wave of layoffs continues - why?

Anyone who has been on platforms like Instagram or Tiktok in the past few days has hardly been able to ignore one thing: musical annual reports - who listened to what, who and how often. Modernly prepared, accompanied by music from the relevant artists, sometimes good, sometimes questionable taste. But what it is in any case: good promo for the Swedish company Spotify, which offers a personal evaluation of your own usage behavior every year. For each of its 550 million users.

If the social buzz that the campaign attracts every year is anything to go by, the company should be doing really well. And why not? The reality of life for many people is that they no longer leave the house without headphones and music or a podcast. With Spotify as your constant companion.

Spotify is the clear number one among music streaming services, with user numbers increasing for years. However, and this is the downside: Spotify has so far been unable to convert user growth into profit. At a time when interest rates were low, it was no problem to invest unprofitably in new content. But investors now demand profitability, and growth stocks like Spotify are finding it extremely difficult to achieve this.

This is reflected in a message from this week. Spotify wants to lay off around 1,500 employees, around 17 percent of the total workforce. Spotify boss Daniel Ek cited the "dramatically slowed economic growth" as the reason, but also mentioned the most crucial reason: the company's costs are still far too high.

Spotify announced a “new record” this summer with the “strongest second quarter in the company’s history.” According to Spotify, the number of monthly active users rose by 27 percent to more than 550 million, subscriptions also increased by 17 percent year-on-year, and total sales rose to 3.2 billion euros. Sounds good, you might think. But the truth also included an adjusted operating loss of more than 100 million euros. And the Swedish company continued to make losses.

While user numbers and sales continued to rise, the company did not make it into the black until the middle of this year. Last year was one of the most loss-making for Spotify since it was founded in 2006, with a loss of EUR 430 million. It was clear to the management level, the employees, and actually everyone: costs had to come down. To achieve this, the company focused on the content, especially the expensive “Spotify Exclusives”. Extremely high expenses were incurred for the exclusive podcasts of celebrities such as Michelle and Barack Obama or Prince Harry and Meghan Markle. Harry and Meghan alone are said to have received at least $20 million for their 12-part podcast.

Spotify boss Ek explained that these investments "generally worked" and contributed "to Spotify's greater production and the platform's robust growth." “In 2020 and 2021, we took advantage of the opportunity presented to us by the lower cost of capital,” Ek wrote in his published memo on Monday. "We have invested significantly in expanding the team, improving content, marketing and new verticals." The problem: The cost structure has become too large, also in view of the changed economic situation.

In addition to some exclusive formats, Spotify has also dropped a number of other shows, including several true crime series. There were also job cuts in the first half of the year: around 800 of the 9,800 employees at the time had to leave.

In addition to savings, customers should also help. For the standard “Spotify Premium” subscription, you have been paying 1 euro more since October (or existing customers from January) and therefore 10.99 euros. Subscriptions that can be used by several people became 2 to 3 euros more expensive. “This is necessary so that we can continue to innovate as market conditions change,” Spotify said. “These pricing changes will help us continue to deliver value to fans.” Other streaming services such as Apple Music and Amazon Music Unlimited had also previously increased their subscription prices due to the general price increases. This is Spotify's first price increase in ten years.

This measure is not yet reflected in the most recent balance sheet. But the cost reductions actually had a positive effect. For the third quarter from July to September 2023, Spotify reported a profit of 32 million euros for the first time - also because personnel and marketing costs were lower than expected.

And yet the savings were apparently too small. Ek acknowledged that the extent of the job cuts may be surprising. The numbers wouldn't necessarily have reflected that. Initially there was discussion about smaller cuts before the group decided on a major restructuring. "Given the gap between our financial target and our current operating costs, I have determined that a comprehensive measure to adjust our costs is the best option to achieve our goals," Ek said Monday. You have to be both productive and efficient and not just productive, as was the case recently. It seems to be becoming increasingly clear to the company that the large amount of output also needs to be financed.

Analysts at Bank of America said back in October that Spotify had now reached a "turning point" for earnings and suggested management's comments and actions were likely to lead to further improvement. The development of Spotify shares on the New York Stock Exchange on Monday suggests that investors are really confident again: the price jumped from 180 to almost 200 US dollars and settled at around 195 dollars over the course of the day.

Note: This article first appeared on Capital.de.