While Spotify users are sharing their musical summaries of the year 2023, the company itself is experiencing a deepening crisis. What's happening at Spotify?
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On Monday, December 4, Spotify's authorities informed the public about the third round of mass layoffs this year. After the January and June reductions, which affected a total of eight hundred people, by the end of 2023, 17% of the remaining staff will lose their jobs. This is as many as 1.5 thousand employees. The company's CEO Daniel Ek explained in a press release that this decision was made due to the need to optimize costs and adapt to a new, more difficult economic environment.
"Economic growth has dramatically slowed down, and capital has become more expensive. Despite our efforts to reduce costs last year, our structure is still too large compared to the required level" - Ek wrote in the statement.
Indeed, Spotify - like other global tech giants - significantly increased its workforce during the pandemic - from 4 to 9 thousand people. At that time, this move was a logical consequence of the huge growth of the platform itself. In 2015, the number of users paying a monthly subscription for Spotify services was 18 million. By the end of 2023, it is already 226 million subscribers. It is also worth remembering about over 350 million people who use the service for free, but with ads. In total, this is almost 600 million active users per month.
"The company's business model has been focused on user and subscriber growth from the very beginning. So this year is not particularly different from previous ones in this respect" - notes in a conversation with Digitized Krzysztof Ulicki, Vice President Consulting Services at CGI Polska.
So why, despite the apparent lack of changes, did the company lay off over 2 thousand people? And how did it happen that despite stable user growth and a huge stream of revenue, according to financial reports the entire company recorded losses of $462 million in just the first nine months of 2023?
The answers to these questions should indeed be sought in the company's economic environment. But not only.
"In the case of Grow-type companies, the market values the company based on potential profits in the future and this is mainly the basis of Spotify's business model" - notes Ulicki.
– In times of crisis and recession, investors will naturally be more restrictive towards these types of investments, which are associated with risk – after all, they are investing real money in a company that promises to bring profits only after some time. In my opinion, this is where the difference between the current situation of Spotify and the one we observed in previous years should be sought – he adds.
The second factor determining the company's troubles is the structure of its content. Spotify allocates even 70% of its annual revenue from subscriptions and ads to fees for copyright holders of the music on the platform. Music, without which the service could not exist, and which is also available on competing platforms such as Apple Music, Tidal or Amazon Music.
The obvious solution to this situation is therefore the production of its own content and the expansion of the offer with original productions not available anywhere else. And Spotify really came up with this idea. The problem is that it most likely bet on the wrong horse.
This horse were podcasts. In 2019, the company's board allocated one billion dollars for a wide-ranging investment in this industry. The platform first acquired Gimlet studio for 230 million dollars, and a year later – the service The Ringer for another 200 million dollars. At the same time, it signed lucrative contracts for the production of podcasts with Michelle and Barack Obama, British Prince Harry and his wife Meghan Markle and the controversial internet star Joe Rogan. The latter, despite numerous voices of outrage, was supposed to earn even 200 million dollars from a 3-year collaboration with Spotify.
None of these investments, however, brought the expected results. The program of the former American presidential couple turned out to be a small success and Spotify did not decide to continue it. Meanwhile, Harry and Meghan, in the atmosphere of scandal, resigned from further cooperation with the service in 2023. In total, more than ten popular productions have been removed from the platform in the last three years.
And although Joe Rogan's show is still on Spotify's podcast offer, few believe that the star will want to extend the contract expiring in 2024. A much more likely scenario assumes Rogan's departure and the start of his own media project. This would be a logical move, as his show gathers about 11 million people on all channels, and such an audience would guarantee him even twice as much earnings as under the contract with Spotify. However, this would mean further losses for the platform.
What's worse, Spotify's problems don't end with failed investments in original content. In August of this year, the service's problems with so-called white noise came to light. These productions, treated by the platform's algorithms as podcasts, in reality contain no conversations, only loops of relaxing sounds, such as the sound of the sea or gusts of wind. According to a Bloomberg report, in January 2023, white noise even accounted for 3 million hours of daily content consumption on Spotify and contributed to the platform's annual losses of $38 million.
When the company noticed the problem, it reportedly tried to remove white noise from the service and ban its upload and distribution in the future. However, these plans were not ultimately implemented. Instead, in November, Spotify announced a new payment model for artists, which also included changes related to white noise. From the beginning of 2024, such productions must be at least two minutes long, and each play will be paid for by Spotify at one fifth of the amount intended for creators. This invariably amounts to $0.003 per stream.
From 2024, however, it may be zero. The platform has decided to stop paying royalties to creators, whose tracks do not exceed the threshold of a thousand plays in a year. Instead, the money will be distributed among more popular artists. According to a Billboard magazine report, changes in payments may affect even two thirds of the entire Spotify song catalog. However, platform representatives assure that
"99.5% of all tracks streamed on Spotify will still earn. These changes will affect a very small percentage of tracks".
However, these assurances do not reassure independent artists, who fear losing their already small income. Meanwhile, the image crisis and accusations against Spotify of spoiling the music market are only gaining momentum.
So Spotify is in an enviable situation. On the one hand, missed investments, changes in payment policy, and image crises could lead to an exodus of artists, without whom the entire platform makes no sense. On the other hand, the company needs to start generating profits for investors in the coming years, which could mean a wave of further cuts and layoffs.
– The company is certainly facing a time of belt-tightening and reducing operating costs, but this is not synonymous with exhausting the business model. Spotify, colloquially speaking, "has something to go down" in this area – argues Krzysztof Ulicki.
In his opinion, the company should still focus on producing its own content, but this time music.
– Spotify still has the area of record labels and music studios to exploit. It can easily create its own stars and take over the entire value chain in this industry – the expert believes.
The second area, according to Ulicki, where Spotify should focus is analytics. After all, the platform has nearly 600 million active users per month and access to their music listening habits.
– Adding environmental data to this model provides the company with a vast amount of knowledge with even greater potential for real monetization – Ulicki summarizes.
However, there is little room for further missteps here. Especially since the competition has a huge margin of error and even more room for experiments. Unlike Spotify, services such as Apple Music or Amazon Music are not independent entities, but merely services in the offer of the two largest companies in the world.
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