Spotify, arguably the most popular music streaming app in the world, isn’t immune to the global economic pressures and demands of shareholders. Although they made £55m profit over the past year and increased their market share of subscribers, the company became the latest tech giant to shed large numbers of staff just before Christmas.
Despite the size and turnover of Spotify, they suffer from the same ailments as tech companies much smaller. A slowing economy and high cost of living mean that businesses and individuals alike are looking to cut expenditures, a common one being subscriptions deemed less necessary than once thought, as the threat of recession looms into 2024 for many countries.
There’s also the higher cost of borrowing for all businesses, with interest rates steadily rising globally, and significantly less capital available than a couple of years ago. This was one reason provided by Daniel Ek, Spotify’s founder and Chief Executive, as the company announced redundancies of 17% of their workforce – the third announcement of its kind within 2023 alone.
“Over the last two years, we’ve put significant emphasis on building Spotify into a truly great and sustainable business – one designed to achieve our goal of being the world’s leading audio company and one that will consistently drive profitability and growth into the future,” said Daniel Ek.
“While we’ve made worthy strides, as I’ve shared many times, we still have work to do. Economic growth has slowed dramatically and capital has become more expensive. Spotify is not an exception to these realities.”
Cutting costs after some misaligned decisions
Despite holding 30% of the music streaming market and being one of the most recognisable brands on Earth, Spotify has consistently struggled to maintain a profit due to high operating costs. In September, they announced the company’s first price increases in the US since launching there over a decade ago, and yet it still wasn’t enough to cover their planned growth trajectory and to keep their investors happy.
Figures show that overall, Spotify reported a rare profit of €65 million for the recent quarter, versus a €166 million loss the year previous. A prioritisation of growth, particularly after riding a post-pandemic spike, has been traditionally favoured over increasing quarterly profits. However, it seems like that strategy has changed for 2023 and beyond.
The 17% headcount reduction is by far the highest layoff announcement for the organisation this year, but they did declare a cut of 6% in January 2023, around 600 staff, and followed that by another 2% in June with a contraction of their podcasting offering. Despite pumping billions into big podcasting names like Megan Markle and Joe Rogan, the move was a sure sign that the investment into this area has not significantly paid off for them in an already saturated podcast market.
Another key concern for Daniel Ek is a rebalancing of the books after the tech boom that took place during the COVID-19 pandemic, a familiar story for many companies in a similar position. Because so many people were cooped up at home, and living their lives virtually online, business was booming for many. And now, tech companies of all shapes and sectors have been seeing steep drops in share prices from their pandemic peak. These include Zoom, Netflix, Peloton and Shopify – and Spotify is no exception. Daniel Ek shared in a blog in January that this is one key reason behind the initial 2023 layoffs.
“Like many other leaders, I hoped to sustain the strong tailwinds from the pandemic and believed that our broad global business and lower risk to the impact of a slowdown in ads would insulate us. In hindsight, I was too ambitious in investing ahead of our revenue growth,” he wrote in a blog published on the official Spotify website.
In a later blog, released just a few days ago, Ek said, “When we look back on 2022 and 2023, it has truly been impressive what we have accomplished. But, at the same time, the reality is much of this output was linked to having more resources. By most metrics, we were more productive but less efficient. We need to be both. While we have done some work to mitigate this challenge and become more efficient in 2023, we still have a ways to go before we are both productive and efficient.”
Spotify is the latest big tech company to significantly slim down its post-pandemic workforce, following Meta, Google, Microsoft and many others in headcount reduction. The company, which is listed on the New York Stock Exchange, starts the new year off on shaky ground, despite 574 million monthly active users, a figure that is up 26 percent over the same period last year.
Is this indicative of global lending as a whole?
Whilst Spotify might seem a world away from the financial toils of UK SMEs, some of the fundamental issues within the market are similar. The cost of living and high borrowing rates have meant that UK businesses have struggled to raise capital that was previously more readily available. After the collapse of Silicon Valley bank and other tumultuous events in the world of venture capitalists, lenders are much tighter with their purse strings than they used to be.
This market has been somewhat filled by a swathe of Fintechs which are somewhat less risk-averse, however, even with their support, data from UK Finance states that lending plummeted to a post-pandemic low of £3.7bn in Q1 2023. This figure is almost half of the £7.6bn recorded two years prior – some sobering statistics for anyone looking to expand and grow through venture capital investment over the next few years.
Despite this limited availability of capital, there is growth to be found within the UK. In our recent Growth report, our algorithm calculated that 507,710 businesses in the UK have the propensity to grow at least 20% within the next twelve months, with total net assets of £597T, a significant number which is ensured to grow larger despite the ongoing economic issues and market turmoil. This is despite the lack of investment packages readily available to support businesses as it has been over the past decade.
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