Is Spotify doomed? Wall Street cheers layoffs amid business model uncertainty

The music streaming giant announced a shock round of layoffs Monday that it said would affect 17% of the group’s nearly 9,000 employees. Driven by the insatiable tech euphemism of efficiency, CEO and co-founder Daniel Ek warned his staff to stop doing “work around the work” as it aims to capitalize on its first profitable quarter since 2021.

While Ek’s words may have prickled Spotify’s outgoing employees, his ruthless move has won over investors. Shares in Spotify jumped more than 11% when the New York Stock Exchange opened Monday, a familiar reaction to headcount reductions, with investors seeing belt-tightening as a good sign for reining in unnecessary staffing costs. The group’s share price has now doubled this year after a difficult 2022, although it is still worth 35% less than at its peak in 2021.

With a lower cost base and new mood music around ambitious new revenue streams, Ek might feel freshly vindicated in his belief that he can get Spotify back to that summit. But lurking underneath the exuberant stock price is a truth that hundreds of staffers’ redundancies can’t hide: Spotify’s biggest challenges haven’t gone away by cutting 17% of its workforce.

Investors divided on Spotify

Spotify has grown from humble roots defined by a yearslong slog to gain a foothold in an industry once thought to be doomed by pirate websites like Napster and Limewire. Ek described in September how he lost his hair and put on 30 pounds in the early years of the company as he tried to establish the next big music streaming model. 

The company is now worth $35 billion, boasting 226 million subscribers as it returned to profit in October for the first time since 2021. Its rude health was seemingly on display last Thursday, when Spotify held an exclusive event in London to celebrate the launch of its 2023 edition of Wrapped, an annual report that regales the company’s 574 million monthly users with stats on what they listened to over the year.

Fortune was on hand to see in the form of this correspondent. There was a special VIP area with an open bar that housed scores of YouTubers, TikTokers, and Love Island stars. They and thousands of Spotify listeners enjoyed performances from the likes of Sam Smith and Charli XCX, in addition to a pre-recorded performance from RAYE at a trendy venue in North London.

It’s not the first time Spotify has splashed out on wining and dining for a corporate event, a fairly run-of-the-mill strategy designed to boost user engagement. Then came the layoff news days later. “Today, we still have too many people dedicated to supporting work and even doing work around the work rather than contributing to opportunities with real impact,” Ek wrote in a memo announcing the 1,500 job cuts. 

“More people need to be focused on delivering for our key stakeholders – creators and consumers. In two words, we have to become relentlessly resourceful.”

Evidently, Ek has realized that the company’s 6% job cuts from January, followed by another layoff round in June when Spotify said goodbye to a further 200 staffers in its podcast division, weren’t nearly enough to satiate the company’s rising costs.

The latest round of layoffs comes in a context where big tech companies have been forced to slash costs to prove to investors they’re profitable in an age of rising inflation and higher interest rates.

These cuts are just the latest in a 256,000-strong purge of employees by tech companies this year, according to data compiled by Layoffs.fyi. If Wall Street opinion is anything to go by, the grim cuts are a sign of the company righting the ship.

MacQuarie, an asset manager, thinks it could save the company €300 million ($323 million) in costs next year, while Justin Patterson, an analyst at KeyBanc, said the company’s latest reduction in force (RIF) isn’t a sign of panic, but rather falls in line with an organizational review that began in January this year, reassuring investors. “Our sense has been that a larger RIF was coming as new leaders evaluate “core” vs. “nice to have” roles,” Patterson wrote in a briefing note.

The reaction to job cuts mirrors investor enthusiasm following cuts at tech giants like Google and Meta. Wired magazine, however, bluntly concluded that “Spotify is screwed,” and several analysts on Wall Street say Ek’s layoffs don’t mask the structural issues Spotify faces in driving crucial revenue growth to the platform.

Citigroup director Jason Bazinet said that while the bank likes Spotify’s strategy and execution, it no longer believes the risk-reward tradeoff was compelling for investors. “We see a few reasons to be a tad more cautious,” Bazinet said in a briefing note last week before the company’s layoff announcement. 

Citigroup isn’t convinced by optimistic Wall Street expectations of how quickly Spotify will increase paid subscribers or how much it will reduce people leaving the platform.

That concern is amplified by Spotify’s two biggest challenges as it seeks to move into a new phase of growth: becoming more like the tech giants it calls rivals while wooing the restless artists that made it into the streaming giant it is today.

A representative for Spotify declined to comment further on Ek’s memo.

Spotify’s many headaches

Spotify has, on reflection, done incredibly well to maintain its status as the world’s biggest music platform as tech giants like Apple, Google, and Amazon tried to grab a piece of the market with their own offerings.

The difference though, is Spotify’s reliance on subscribers. In short, Spotify isn’t attached to a tech giant, it’s just a streaming company.

Apple Music makes up about 6% of its company’s broader services revenue channels, which itself is just a quarter of its total sales. Meanwhile, Google Music looks like a drop in the ocean compared with the company’s mammoth advertising business.

It has forced Spotify to diversify. The group has ramped up spending on research and development for new product offerings to bring in more subscribers, increasing expenses there in the first nine months of 2023 by 38% compared with the whole of 2021.

But so far the results of that expansion are still to be realized.

A $1 billion outlay on the group’s podcast division on mega deals for Barack Obama, Joe Rogan, and Prince Harry and Meghan Markle shook up the industry but has so far been perceived as a headache for the company.

Amid the announcement of cuts, Spotify also disclosed the cancelation of two critically acclaimed podcasts—Heavyweight and Stolen—in a sign of its retreat from prestige podcasting.

Spotify maintains that the $1 billion-plus investment was crucial in bringing new podcast listeners to the platform, and a recent strategy shift that has seen big deals not renewed is a product of a plan to drive higher margins for each of its sponsored shows.

A bigger challenge for Ek may come from the growing wave of disenfranchised artists.

Spotify’s users pay $10.99 per month for the privilege to listen to its millions of artists, but the company has long been criticized for how much of that revenue goes back to those performers. 

In an “off-script” rant in May, Snoop Dogg said music streaming is “not working for the artist right now” as he challenged artists to stage a walkout similar to the Hollywood writers’ and actors’ strikes from the summer.

“Some of these artists are streaming millions and millions of streams and they don’t have millions of dollars in their pocket,” he said at an event held at the Milken Institute Global Conference.

However, no artists have pulled their content from the platform as a result of those perceived low payouts.

If that were to happen, Spotify’s model is hardly set up to pay artists more. The company has long fought with tight margins owing to pricey deals with record companies, noticeably in its rare and slim €32 million ($34.5 million) operating profit in the third quarter of 2023.

The only solution may be to continue increasing subscription fees, but hiccups in its new offerings have left some analysts unconvinced.

For now, though, many believe Spotify is still in command of most of the controllables through future subscription fee hikes and by finding other new ways to get money out of its loyal listeners.

Goldman Sachs hailed Spotify’s November announcement on plans to change its payment system, which is predicted to drive an extra $1 billion to real artists and away from low-streaming artists, often dominated by things like rain sounds. The bank described this as the first step into a new age of music streaming.

A July report by Goldman Sachs projected global revenue for music will grow 8.6% annually through 2030, and it expects streamers like Spotify to increase their pricing power to charge users more.

“We believe that such price increases are not just a one-off, and we would expect the industry to work towards implementing price increases on a recurring basis, especially in an environment of higher inflation,” Lisa Yang, head of Goldman Sachs’ European media and internet research team, wrote.

But Ek’s next bet on the company’s future will come with less wriggle room than his last one, and he’ll surely hope it doesn’t end with more layoff plans. Wall Street may cheer them anyway.