Six months in the past, in an electronic mail to workers, Spotify CEO Daniel Ek stated that the corporate would “be a bit more prudent” in its hiring over the subsequent few quarters. That got here every week after Spotify’s June 8, 2022, investor day presentation on its plans to enhance its margins.
The important thing could be podcasts, executives stated, together with a brand new foray into audiobooks. Inside three to 5 years, podcasts might usher in gross margins of 30-35%, which might later rise to 40-50% — excess of the corporate can earn from recorded music.
The corporate’s podcast enterprise hasn’t come low-cost, although. Spotify – which on Monday (Jan. 23) introduced performs to put off 6% of its workforce, in addition to the voluntary departure of chief content material officer Daybreak Ostroff – spent tons of of tens of millions of {dollars} buying podcast start-up and programing. Ostroff spent huge to get unique rights to The Joe Rogan Expertise, in addition to initiatives from Barack and Michelle Obama’s Greater Floor Productions; Kim Kardashian; and Prince Harry, Duke of Sussex, and Meghan Markle.
From a programming perspective, the podcasts labored. Spotify is now the most well-liked podcast platform within the U.S., in addition to many different markets, and the unique programming helps appeal to advertisers. The corporate additionally launched new podcast promoting codecs that helped it develop its podcasting enterprise to $200 million yearly.
The podcasts didn’t remedy Spotify’s monetary points, although. The corporate has at all times grown quick by any measure, together with viewers, subscribers, and income. However because it paid out a big share of its income to labels and publishers, Spotify by no means had the revenue margins of former Wall Road darlings like Fb and Netflix. Podcasts had been supposed to unravel this, however they price a lot up entrance that they induced a $103 million drag on gross revenue, CFO Paul Vogel stated through the June presentation.
Final yr was troublesome for shares on the whole, particularly these of many know-how corporations, however Spotify has suffered greater than most. Using excessive on lockdown-time features, its share value peaked at $364.59 on Feb. 19, 2021. By a yr later, it had fallen 58% to $152.27, after which on Nov. 4, 2022 bottomed out at $69.29 — 81% beneath its all-time excessive closing value. Had it made extra progress on enhancing margins, Spotify’s share value most likely would have weathered the storm a bit higher.
Now, the market will discover out if the adage “to chop is to remedy” applies to the music streaming enterprise. The layoffs Spotify introduced Monday will contain round 600 workers. Not amongst them is chief content material officer Daybreak Ostroff, who selected to depart the corporate. Alex Norström, presently chief freemium enterprise officer, shall be chargeable for product and can share co-president title with Gustav Söderström, presently chief analysis & improvement officer.
Citi analyst Jason Bazinet believes the layoffs are about “attempting to stem the losses in podcasting.” Buyers aren’t satisfied Spotify has a viable enterprise mannequin, he says. “The revenues have performed properly however there’s not numerous money movement. Loads will get paid again to the labels.”
The market’s response to the information was constructive, however muted. Spotify shares closed on Monday at $99.94, up 2.1%, after spiking to $104.00 that morning.
General, podcasting doesn’t appear to be working as properly, or as rapidly, as Spotify had hoped. Whereas Spotify beat expectations for subscribers and month-to-month lively customers within the third quarter, its gross margin and working loss had been beneath earlier steerage.
The podcast enterprise is an apparent place for Spotify to begin slicing. The corporate started paring bills in October by eliminating some authentic podcasts and slicing “a minimum of” 37 positions at its Parcast and Gimlet studios.
“I feel it’s the suitable technique,” says Bazinet. “It’s going to be troublesome to shift the stability of energy with report labels.”
Now, the aim is to make Spotify extra environment friendly, in keeping with CEO Daniel Ek’s open letter launched on Monday. “In hindsight, I used to be too bold in investing forward of our income progress,” Ek wrote – which means investing in personnel, not corporations. The layoffs, in addition to an organizational restructuring, will each management prices and quicken decision-making, he defined. Ek isn’t alone in highlighting effectivity currently. Fb CEO Mark Zuckerberg has taken a tough line on underperforming workers. New Twitter CEO Elon Musk expects no matter employees stay on the firm to be “extraordinarily hardcore.”
Spotify’s numbers recommend that the corporate might have room for enchancment. Bazinet factors out that in 2016 Spotify’s roughly 2,100 workers generated a mean of 1.41 million euros per particular person whereas in 2021 its 6,600 workers’ per-head income was 1.46 million euros. That means that Spotify failed to attain the sort of working leverage that will create further worth because it added workers.
As for Ostroff, her departure might mark the top of the primary chapter of Spotify’s podcast enterprise. Neither Spotify nor buyers appear to have a lot urge for food for writing huge checks today. And unique content material appears to have an inherently restricted life span. Obama’s Greater Floor Productions left for Amazon. Brené Brown’s two unique podcasts, Unlocking Us and Dare to Lead, have come to an end.
Ostroff definitely made her mark on the corporate, although. The Joe Rogan Expertise has battled by way of controversies to grow to be the platform’s hottest podcast, heard by 1 / 4 of Spotify customers; and 19% of all podcast listeners within the U.S. hearken to TJRE, in keeping with a current Morgan Stanley survey. Kardashian’s true crime podcast received off to a great start in October by beating TJRE and Markle’s Archetypes. Spotify’s foray into spoken-word audio might have been expensive, nevertheless it was efficient.
Now, Spotify enters a brand new section of price conscientiousness. With the layoffs and reorganization, it has given buyers a tangible dedication to ship on the aggressive objectives it specified by June. That heightens expectations, although. If Spotify can’t preserve its progress with a barely smaller headcount, will probably be laborious for it to ship higher margins – and the market is unlikely to be forgiving.
