MBW Reacts is a collection of analytical commentaries from Music Business Worldwide written in response to main latest leisure occasions or information tales. MBW Reacts is supported by JKBX, a know-how platform that gives shoppers entry to music royalties as an asset class.
That is a fascinating time of 12 months in central Stockholm.
Due to annual festive celebrations (made Insta-ready through the #Stockholmsjul hashtag) over 1,000,000 particular person lights are switched on throughout town, illuminating ‘Christmas Walks’ that delight vacationers and locals alike.
For a lot of workers at Spotify‘s world HQ in Stockholm this night (December 4), nonetheless, the ‘Christmas Stroll’ residence would have been robbed of any cheer.
There isn’t a good time for any firm to announce layoffs – particularly when these layoffs have an effect on a major chunk of their world workforce.
However earlyDecember could also be about as grim because it will get.
Sadly, the calls for of a publicly traded firm depart little room for sentimentality.
And so it was that this morning, Daniel Eok delivered the news that 17% of Spotify’s worldwide workforce – round 1,500 individuals – will lose their jobs on the streamer within the weeks forward.
These 1,500 job cuts arrive in the identical calendar 12 months that Ek has already overseen roughly 800 redundancies at Spotify – first in January (chopping around 600 employees) after which in June (chopping around 200 employees).
In complete, then, Spotify could have slashed round 2,300 workers from its worldwide payroll by the top of 2023.
Placing that determine into perspective: It’s near 1 / 4 (22.7%) of the worldwide full-time worker headcount – 10,151 – that Spotify boasted on the finish of This fall 2022 (as per a recent company filing).
It’s additionally really a barely smaller determine than the +2,461 web new workers added by Spotify in calendar 2022.
In reality, the writing has been on the wall for a widespread job cull by Ek for a while.
It was all there within the numbers: Notably long-term enterprise targets confirmed by Ek and his management staff to buyers on two separate events: in March 2018 and in June 2022.
These investor-pleasing motivations clarify why Spotify’s share value has bounced up by greater than 7.4% as we speak within the wake of Ek’s announcement in regards to the newest layoffs.
The fact: Reined in prices in 2023, however maybe not reined in sufficient
Inside that article, we pointed to the truth that Spotify’s quarterly working prices (in Q3 2022) had just lately rocketed above the milestone of USD $1 billion (EUR €978m).
These working prices run throughout three areas at SPOT: (i) Gross sales & Advertising expense; (ii) Analysis & Growth expense; and (iii) Basic/Administrative expense.
Impacted by Daniel Ek‘s bulletins of employees reductions this 12 months, this USD $1bn+ quarterly working price mountain has, in latest months, diminished.
In Q3 2023 (three months to finish of September this 12 months), based on Spotify SEC filings, complete working prices fell to €853 million, down 8% YoY at fixed foreign money (see beneath).
This discount in working bills, in flip, helped Spotify obtain one thing uncommon in Q3 2023: It posted an working revenue (i.e. gross revenue minus working prices) of EUR €32 million.
The margin of this quarterly working revenue – thanks largely to these remaining €850m+ in working bills – was slim: It represented simply 1.0% of Spotify’s income within the quarter.
Nonetheless, a affected person investor would possibly counsel that this 1.0% working margin was proof of Spotify transferring in the suitable route; that after years of creating losses, and after the ~800 layoffs in January and June (which notably hit the agency’s margin-gobbling podcasting divisions) SPOT was turning into a leaner entity, able to constructing on its new-found profitability.
There was additional proof for this sunny perspective inside Spotify’sgross margin in Q3 2023 (i.e. its margin after paying royalties via to music rightsholders, however earlier than working prices are taken into consideration).
Spotify’s gross revenue margin bounced as much as 26.4% in Q3 2023, forward of the agency’s 26.0% expectations.
The important thing profitability numbers in Q3 2023 for Spotify (post-laying off 800 employees): Gross margin at 26.4%; working bills down 8% YoY at fixed foreign money; Working revenue of €32m reflecting a 1.0% gross margin
Certainly, talking on Spotify’s newest earnings name on October 24, the agency’s CFO, Paul Vogel, vaunted Spotify’s €32 million Q3 working revenue as an “necessary inflection level for the enterprise”.
He added that SPOT’s “expectations at the moment are that we are going to persistently be within the black transferring ahead“.
“When mixed with our [improved] gross revenue, we achieved an working revenue of €32 million in [Q3 2023]. We imagine this is a crucial inflection level for the enterprise as we begin to see the advantages of our concentrate on pace and effectivity… and progress in the direction of delivering on the profitability targets we laid out to you at our [2022] Investor Day.”
Paul Vogel, Spotify, talking in October
Vogel additional said that Spotify had began to “see the advantages of our concentrate on pace and effectivity” in Q3 2023, and was now trying to “progress in the direction of delivering on the profitability targets we laid out to you at our ‘Investor Day’ final summer season”.
The most important drawback? Spotify continues to be miles away from these profitability targets.
The truth is, it’s nonetheless a considerable distance away from profitability targets laid out at its earlier Investor Day, in March 2018 – practically six years in the past – shortly earlier than it floated on the New York Inventory Trade.
To offer fashionable buyers hope of both of those units of targets being realized any time quickly, the axe as we speak needed to fall on one in all, if not the, largest contributors to working prices at Spotify: its workers.
Spotify’s investor day guarantees
The music trade doesn’t usually have a lot of an extended reminiscence about these items, so… permit us.
In March 2018, then-Spotify CFO, Barry McCarthy, took the stage at Spotify’s pre-float ‘Investor Day’ in New York to stipulate the corporate’s future progress plans.
Throughout a chat that targeted on Spotify’s justification for prioritizing progress over margins, McCarthy confirmed a slide stating that SPOT was aiming for a30-35% gross revenue margin as a “long-term working aim” (see beneath).
Stated McCarthy: “IftheinvestmentswemakeinR&Dandcontent material imshowthetotalconsumerexpertise;andifasaoutcomeofconstructingourtwo-sidedmarket wecometopersonaldiscoveryanddemand-creationforcustomersandartists; thenweanticipatealong-termmarginconstructionoftheenterprise toevolvealongsidethetracessummarized [below].”
Almost six years on, regardless of deep cuts in 2023 to the working prices inside its podcast division, Spotify’s gross margin stays 360 foundation factors in need of the decrease finish of this goal (26.4% vs. 30.0%).
A slide proven by then-Spotify CFO, Barry McCarthy, on the agency’s Investor Day in 2018
A follow-up Spotify ‘Investor Day’ 4 years later, in June 2022, then considerably upped the ante.
First, Daniel Ek mentioned the 30-35% gross margin goal highlighted by McCarthy in 2018. Ek argued that Spotify’s gross margin was being artificially suppressed within the quick time period as a result of its funding in podcasting.
The standalone gross margin of Spotify’s music enterprise right now, Ek mentioned, was 28.5%.
The standalone gross margin of podcasting – an unprofitable enterprise – was a lot decrease, however Ek recommended he noticed it as having a “40-50% gross margin potential” within the years forward.
“[What] occurred… to our long-term objectives of 25-35% income progress and a gross margin goal of 30-35%?” requested Ek, nodding to the very fact Spotify was presently not assembly both expectation.
“It actually comes right down to this: We noticed the potential to be far more than only a music firm. By leveraging what we discovered, and the entire know-how we constructed, in music and throughout different verticals, our ambitions turned a lot greater.”
Seven months after this presentation, in January 2023, Spotify introduced it was shedding 600 individuals.
And all through this 12 months, important cutbacks in ‘unique content material’ and podcasts have appeared to start re-orientating the core of Spotify’s enterprise again in the direction of being… a music firm.
Daniel Ek’s pièce de résistance on the 2022 Investor Day, although – full with the standout numbers he talked about that afternoon – got here throughout his closing remarks.
“From every little thing I see,” mentioned Ek, “I imagine that over the subsequent decade, we will likely be an organization that may generate $100 billion in income yearly, and that we will obtain a 40% gross margin and a 20% working margin.”
We at the moment are one 12 months and 5 months into the ‘subsequent decade’ Ek was referring to.
In its newest quarter – dubbed an “inflection level”, keep in mind– Spotify posted a 26.4% gross margin and a 1.0%working margin.
To recap: Gross margin – 26.4% actuality vs. Ek’s 40% goal; Working margin – 1.0% actuality vs. Ek’s 20% goal.
Spotify’s boss inevitably felt some inorganic acceleration towards his headline imaginative and prescient was required.
