Spotify Is Screwed

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Spotify is the world’s biggest music streamer but rarely turns a profit and just cut 17 percent of its workforce. Its business model looks increasingly precarious.

 

Just days after people gleefully posted their Spotify Wrapped, bad news came for the music streaming giant. Spotify announced today that it would cut 17 percent of its workforce, a chunk that equates to an estimated 1,500 people. It’s the third time the world’s largest music streamer has cut jobs this year.

 

The news came after Spotify posted its first profitable quarter since 2021. In a memo to staff, CEO Daniel Ek said the company had expanded its workforce and offerings significantly throughout 2020 and 2021, thanks to lower-cost capital, but is now bumping up against the same problems startups across industries are facing, like high capital costs and slowed economic growth.

 

Ek said the cuts may seem “surprisingly large given the recent positive earnings report and our performance,” but due to “the gap between our financial goal state and our current operational costs,” Spotify would take “substantial action.”

 

Despite its popularity (Spotify held 30 percent of the music streaming market by late 2022), the company has long struggled to turn consistent profits. The layoffs wrap up a bad year: Spotify cut 6 percent of its workforce last January, followed by another 2 percent in June as it slimmed down its podcasting business. Even as the world’s most recognizable music streaming service, Spotify is plagued by an unreliable business model, one in which record companies sit back and rake in royalty payments while artists can struggle to bring in enough cash.

 

“Investors are increasingly impatient in 2023 for tech firms to start making money,” says Phil Bird, head of rights at royalties at software development company Vistex. Spotify isn’t alone—tech companies have slashed jobs throughout the year, with more than 250,000 people losing jobs worldwide in 2023, according to layoffs.fyi, a site that tracks job cuts in tech.

 

Many major tech companies that overhired during the pandemic have taken steps to right-size—and that’s what Ek says Spotify is doing now. But Spotify’s high cost to license music adds to its financial strain. “The cost of doing business is huge for streaming companies,” Bird says.

 

Spotify gained momentum in the third quarter of 2023, earning €32 million ($34.6 million) in operating income. It now has 226 million subscribers and 574 million monthly users. “On the surface, it looks great,” says Simon Dyson, senior principal analyst of music and digital audio at consultancy firm Omdia. “It’s [those] nagging costs that it can’t get on top of.”

 

Spotify and the recording industry have a deeply entwined and sticky relationship: Spotify is seen by some as a savior of the music industry, which flailed after Napster upended music downloading in 1999, but artists earn wildly different incomes based on how Spotify pays. According to a calculation from Billboard, Taylor Swift may have earned nearly $100 million from streaming on Spotify alone so far this year. Smaller artists earn far less, and music streaming models have long been accused of exploiting them.

 

Like Spotify, Apple Music and Amazon Music are each charging $10.99 per month for premium subscriptions, and each give access to 100 million songs. But unlike Spotify, Apple and Amazon have massive streams of revenue elsewhere to fall back on. So Spotify has spent the past few years looking for that standout content. It spent more than $1 billion building its podcast world and acquiring exclusive deals to shows like The Joe Rogan Experience. This fall, it began offering paying subscribers in the UK and Australia free audiobook access for 15 hours each month.

 

The music streaming fight isn’t like the streaming wars, where Max, Netflix, Hulu, and others can each lure in subscribers with a combination of classic and original movies and shows. If Spotify were to charge more for music (it already increased monthly prices from $9.99 to 10.99 in the US this summer), it would risk losing people to comparable services, where people can find the same songs. But unless it can convince people to pay more for music, it might continue to struggle.

 

“It’s too cheap,” says Dyson. “To have access to every single piece of music that’s ever been released—and ever will be released—for $10 a month is just astounding.” The same is true of Spotify today as was true when it was founded 17 years ago: It’s a business that’s good for listeners and labels but bad for both streamers and artists.

 

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