Spotify has laid off 2,300 employees this year. That’s a shock – but also kind of inevitable. – Music Business Worldwide

This is an enchanting time of year in central Stockholm.

Thanks to annual festive celebrations (made Insta-ready via the #Stockholmsjul hashtag) over a million individual lights are switched on across the city, illuminating ‘Christmas Walks’ that delight tourists and locals alike.

For many employees at Spotify‘s global HQ in Stockholm this evening (December 4), however, the ‘Christmas Walk’ home would have been robbed of any cheer.

There is no good time for any company to announce layoffs – especially when those layoffs affect a significant chunk of their global workforce.

But early December may be about as grim as it gets.

Unfortunately, the demands of a publicly traded company leave little room for sentimentality.

And so it was that this morning, Daniel Ek delivered the news that 17% of Spotify’s worldwide workforce – around 1,500 people – will lose their jobs at the streamer in the weeks ahead.

These 1,500 job cuts arrive in the same calendar year that Ek has already overseen approximately 800 redundancies at Spotify – first in January (cutting around 600 employees) and then in June (cutting around 200 employees).

In total, then, Spotify will have slashed around 2,300 employees from its worldwide payroll by the end of 2023.

Putting that figure into perspective: It’s close to a quarter (22.7%) of the global full-time employee headcount – 10,151 – that Spotify boasted at the end of Q4 2022 (as per a recent company filing).

It’s also actually a slightly smaller figure than the +2,461 net new employees added by Spotify in calendar 2022.

In truth, the writing has been on the wall for a widespread job cull by Ek for some time.

It was all there in the numbers: Particularly long-term business targets confirmed by Ek and his leadership team to investors on two separate occasions: in March 2018 and in June 2022.

These investor-pleasing motivations explain why Spotify’s share price has bounced up by more than 7.4% today in the wake of Ek’s announcement about the latest layoffs.

The reality: Reined in costs in 2023, but perhaps not reined in enough

At the top of this year, MBW ran an article entitled ‘5 numbers that will come to define the music business in 2023’.

Within that article, we pointed to the fact that Spotify’s quarterly operating costs (in Q3 2022) had recently rocketed above the milestone of USD $1 billion (EUR €978m).

These operating costs run across three areas at SPOT: (i) Sales & Marketing expense; (ii) Research & Development expense; and (iii) General/Administrative expense.

Impacted by Daniel Ek‘s announcements of staff reductions this year, this USD $1bn+ quarterly operating cost mountain has, in recent months, reduced.

In Q3 2023 (three months to end of September this year), according to Spotify SEC filings, total operating costs fell to €853 million, down 8% YoY at constant currency (see below).

This reduction in operating expenses, in turn, helped Spotify achieve something unusual in Q3 2023: It posted an operating profit (i.e. gross profit minus operating costs) of EUR €32 million.

The margin of this quarterly operating profit – thanks largely to those remaining €850m+ in operating expenses – was slim: It represented just 1.0% of Spotify’s revenue in the quarter.

Still, a patient investor might suggest that this 1.0% operating margin was evidence of Spotify moving in the right direction; that after years of making losses, and after the ~800 layoffs in January and June (which particularly hit the firm’s margin-gobbling podcasting divisions) SPOT was becoming a leaner entity, capable of building on its new-found profitability.

There was further evidence for this sunny perspective within Spotify’s gross margin in Q3 2023 (i.e. its margin after paying royalties through to music rightsholders, but before operating costs are taken into account).

Spotify’s gross profit margin bounced up to 26.4% in Q3 2023, ahead of the firm’s 26.0% expectations.

Indeed, speaking on Spotify’s latest earnings call on October 24, the firm’s CFO, Paul Vogel, vaunted Spotify’s €32 million Q3 operating profit as an “important inflection point for the business”.

He added that SPOT’s “expectations are now that we will consistently be in the black moving forward“.

“When combined with our [improved] gross profit, we achieved an operating profit of €32 million in [Q3 2023]. We believe this is an important inflection point for the business as we start to see the benefits of our focus on speed and efficiency… and progress towards delivering on the profitability targets we laid out to you at our [2022] Investor Day.”

Paul Vogel, Spotify, speaking in October

Vogel further stated that Spotify had started to “see the benefits of our focus on speed and efficiency” in Q3 2023, and was now looking to “progress towards delivering on the profitability targets we laid out to you at our ‘Investor Day’ last summer”.

The major problem? Spotify is still miles away from those profitability targets.

In fact, it’s still a substantial distance away from profitability targets laid out at its previous Investor Day, in March 2018 – nearly six years ago – shortly before it floated on the New York Stock Exchange.

To give modern investors hope of either of these sets of targets being realized any time soon, the axe today had to fall on one of, if not the, biggest contributors to operating costs at Spotify: its employees.

Spotify’s investor day promises

The music industry doesn’t typically have much of a long memory about these things, so… allow us.

In March 2018, then-Spotify CFO, Barry McCarthy, took the stage at Spotify’s pre-float ‘Investor Day’ in New York to outline the company’s future growth plans.

During a talk that focused on Spotify’s justification for prioritizing growth over margins, McCarthy showed a slide stating that SPOT was aiming for a 30-35% gross profit margin as a “long-term operating goal” (see below).

Said McCarthy: “If the investments we make in R&D and content improve the overall user experience; and if as a result of building our two-sided marketplace we come to own discovery and demand-creation for users and artists; then we expect a long-term margin structure of the business to evolve along the lines summarized [below].”

Nearly six years on, despite deep cuts in 2023 to the operating costs within its podcast division, Spotify’s gross margin remains 360 basis points short of the lower end of this target (26.4% vs. 30.0%).

A follow-up Spotify ‘Investor Day’ four years later, in June 2022, then significantly upped the ante.

First, Daniel Ek discussed the 30-35% gross margin aim highlighted by McCarthy in 2018. Ek argued that Spotify’s gross margin was being artificially suppressed in the short term due to its investment in podcasting.

The standalone gross margin of Spotify’s music business at this time, Ek said, was 28.5%.

The standalone gross margin of podcasting – an unprofitable business – was much lower, but Ek suggested he saw it as having a “40-50% gross margin potential” in the years ahead.

“[What] happened… to our long-term goals of 25-35% revenue growth and a gross margin target of 30-35%?” asked Ek, nodding to the fact Spotify was currently not meeting either expectation.

“It really comes down to this: We saw the potential to be much more than just a music company. By leveraging what we learned, and all of the technology we built, in music and across other verticals, our ambitions became much bigger.”

Seven months after this presentation, in January 2023, Spotify announced it was laying off 600 people.

And throughout this year, significant cutbacks in ‘original content’ and podcasts have appeared to begin re-orientating the core of Spotify’s business back towards being… a music company.

Daniel Ek’s pièce de résistance at the 2022 Investor Day, though – complete with the standout numbers he mentioned that afternoon – came during his closing remarks.

“From everything I see,” said Ek, “I believe that over the next decade, we will be a company that can generate $100 billion in revenue annually, and that we can achieve a 40% gross margin and a 20% operating margin.”

We are now one year and five months into the ‘next decade’ Ek was referring to.

In its latest quarter – dubbed an “inflection point”, remember– Spotify posted a 26.4% gross margin and a 1.0% operating margin.

To recap: Gross margin – 26.4% reality vs. Ek’s 40% target; Operating margin – 1.0% reality vs. Ek’s 20% target.

Spotify’s boss inevitably felt some inorganic acceleration toward his headline vision was required.

And here we are.

JKBX (pronounced “Jukebox”) unlocks shared value from things people love by offering consumers access to music as an asset class — it calls them Royalty Shares. In short: JKBX makes it possible for you to invest in music the same way you invest in stocks and other securities.Music Business Worldwide