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Spotify has a new activist investor seemingly focused on cost efficiencies

By | Published on Monday 13 February 2023


An ‘activist investor’ has confirmed that it has bought a stake in Spotify, with the investment firm’s boss indicating he is in support of the streaming firm cutting its costs.

According to the Financial Times, Mason Morfit from San Francisco-based investment outfit ValueAct confirmed on Friday that his company now has an interest in Spotify at an event at Columbia University.

He then observed: “Spotify’s superpower was combining engineering breakthroughs with organisational abilities – it organised creators and copyright owners to build an entirely new economic model that benefited everyone involved”.

“During the boom”, he added, “it applied these powers to new markets like podcasts, audiobooks and live chat rooms. Its operating expenses and funding for content exploded. It is now sorting out what was built to last and what was built for the bubble”.

That latter point refers to Spotify’s recent announcement that it is in the process of cutting its running costs, including by reducing its workforce by around 6%.

When confirming those cutbacks, Spotify boss Daniel Ek said: “In hindsight, I was too ambitious in investing ahead of our revenue growth. And for this reason, today, we are reducing our employee base by about 6% across the company”.

“It’s my belief that because of these tough decisions, we will be better positioned for the future”, he added. “We have ambitious goals and nothing has changed in our commitment to achieving them”.

It’s no secret that Spotify’s bid to be as dominant in podcasting as it is in music was an expensive strategy, with the company spending a stack of cash acquiring various podcasting companies and securing the exclusive rights to various podcasts.

The push into podcasting – and more recently audiobooks – was ultimately about improving Spotify’s profit margins. In music, 65-70% of revenue is shared with the music industry. By moving into podcasts and audiobooks, Spotify aimed to keep a bigger cut of its revenues.

Though that strategy relies on the company generating significant income from podcasts and audiobooks, which it is yet to really do. Which means that Spotify’s bid to be more profitable in the long-term has prevented it from being profitable in the short-term.

Which, given the wider economic turmoil at the moment, has motivated the cost cutting measures that, it seems, ValueAct will be very much backing.

Making podcasts a cash cow requires Spotify to significantly ramp up its advertising and sponsorship business, and also possibly enhance its monetisation tools for podcast makers, generating new income for both the podcasters and Spotify itself.

Though, one way to increase the company’s overall income more quickly would be to simply put up the prices of what is currently Spotify’s core product, premium subscriptions for accessing music. The music industry also wants the subscription fees to go up, of course, as its cut of that income would increase too.

ValueAct would probably back that proposal as well. Many commentators have noted how, after buying a stake in the New York Times, the investment outfit pressured management there to seek to shift more subscribers to higher-cost premium packages.

For its part, Spotify said of ValueAct becoming a shareholder: “We welcome ValueAct as an investor in Spotify”. If Morfit can help fast track an increase of Spotify’s main subscription price, the music industry will be welcoming the investment firm’s shareholder status too.