First profit for Spotify and yet the wave of layoffs is rolling

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

If you've been on platforms such as Instagram or Tiktok in the past few days, there's one thing you've hardly been able to avoid: musical annual reviews - who listened to what, who and how often. In a modern format, accompanied by music from the relevant artists, sometimes in good taste, sometimes in questionable taste. But what it is in any case: good promotion for the Swedish company Spotify, which offers a personal evaluation of its own usage behavior every year. And it does so 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? After all, the reality of many people's lives is that they no longer leave the house without headphones and music or podcasts. With Spotify as a constant companion.

Spotify is the clear number one among music streaming services, with user numbers that have been rising for years. However, and this is the downside: Spotify has hardly been able to convert user growth into profit so far. In times of low interest rates, it was no problem to invest unprofitably in new content. Now, however, investors are demanding profitability, and growth stocks like Spotify are finding this extremely difficult.

This is reflected in a piece of news from this week. Spotify wants to lay off around 1500 employees, around 17 percent of the total workforce. Spotify CEO Daniel Ek cited the "dramatic slowdown in economic growth" as the reason, but also mentioned the probably decisive reason: the company's costs are still far too high.

Savings potential for Spotify, especially with expensive exclusive contracts

This summer, Spotify announced a "new record" 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 revenue rose to 3.2 billion euros. Sounds good, you might think. But the truth is that there was also an adjusted operating loss of more than 100 million euros. And the Swedish company made losses on an ongoing basis.

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 years for Spotify since it was founded in 2006, with a loss of 430 million euros. It was clear to the management, the employees, in fact everyone: costs had to come down. To achieve this, the company focused on content, particularly the expensive "Spotify Exclusives". Extremely high costs were incurred for the exclusive podcasts from 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 US dollars for their 12-part podcast.

Spotify CEO Ek explained that these investments "generally worked" and "contributed to Spotify's greater production and the robust growth of the platform". "In 2020 and 2021, we took advantage of the opportunity presented 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 industries." The problem: the cost structure had become too large as a result, also in view of the changed economic situation.

In addition to some exclusive formats, Spotify has therefore also discontinued a number of other programs, 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 were also asked to help. Since October, they have been paying 1 euro more for the standard "Spotify Premium" subscription (and existing customers from January), which amounts to 10.99 euros. Subscriptions that can be used by several people have become 2 to 3 euros more expensive. "This is necessary so that we can continue to innovate as market conditions change," Spotify said. "These price changes help us to continue to offer fans added value." Other streaming services such as Apple Music and Amazon Music Unlimited had also previously increased their subscription prices due to the general price increases. For Spotify, this is the first price increase in ten years.

First profit for Spotify, but the wave of redundancies is still rolling in

This measure is not yet reflected in the latest balance sheet. However, the cost reductions have already 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 - partly because personnel and marketing costs were lower than expected.

And yet the savings were apparently too small. Ek admitted that the extent of the job cuts may have come as a surprise. The figures would not necessarily have indicated this. Initially, smaller cuts were probably discussed before the group decided on a major restructuring. "Given the gap between our financial target and our current operating costs, I have decided that a comprehensive measure to adjust our costs is the best option to achieve our goals," Ek said on Monday. You have to be both productive and efficient and not just productive, as has been the case recently. The company seems to be increasingly realizing 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 an "inflection point" for profits and suggested that management's comments and actions should lead to further improvement. The performance of Spotify's shares on the New York Stock Exchange on Monday suggests that investors really are feeling confident again: The share price first jumped from 180 to just under 200 US dollars and settled at around 195 dollars over the course of the day.

Capital.de.