Spotify confirmed to its investors earlier this week that the significant downsizing that is now underway at the company will cost the business up to €145 million. However, the cutbacks will "generate meaningful operating efficiencies going forward".
The update to investors followed the announcement made by Spotify boss Daniel Ek on Monday that the company is instigating its third and most dramatic round of redundancies this year. Around 17% of the firm's global workforce - about 1500 people - will lose their jobs this time amid ongoing efforts to cut costs.
In the investor update, Spotify said that, as a result of the cutbacks, "the company estimates that it will incur approximately €130-145 million in charges” in the final quarter of this year. These charges will primarily consist of redundancy payments and costs related to reducing the company’s requirement for office space.
As a result of these charges, Spotify has updated its expected losses in this quarter to between €93 million and €108 million.
Despite declaring a small profit in its quarter three earnings, Spotify had - by the end of Q3 - lost a combined €462 million this year. If it’s going to lose another €108 million in the final quarter, that puts it on course for potential losses of €570 million this year, a substantial increase on the €430 million it lost in 2022.
However, despite the increase in losses in the short term caused by the downsizing, Spotify stresses that it “anticipates that these actions will generate meaningful operating efficiencies going forward”.
Headcount at the company has rocketed since 2020 from 5584 employees to 8359 at the end of 2022. Many tech companies “over-hired” in recent years as a result of “ZIRP” - zero interest rates policy - which allowed them to borrow money a 0% interest, running at a loss for years - and in many cases using debt to finance risky “moonshot” bets.
Despite the costs associated with the downsizing, Spotify's share price has risen since Ek's announcement on Monday. Though at around $200 per share, it remains a long way from its $364 peak in February 2021.
Of course, with investors wanting a solid strategy for how Spotify will ultimately become a profitable business, any moves to make the company more efficient will generally be welcomed by the investor community.
However, long term concerns about Spotify’s business model remain, with one analyst recently downgrading the company’s stock highlighting concerns about whether the streaming platform will be able to continue to grow its subscriber numbers and increase ARPU - ie average revenue per user.
Some investors will also be questioning whether Spotify’s executives are making the right bets for the company, having seen other significant write-offs in recent times, including the company’s extravagant spending in the podcast market. And, of course, if Spotify continues to make losses through 2024 it may need further debt financing to remain operational.
This debt is unlikely to be on the 0% terms of its last €1.2 billion debt raise, meaning continuing losses and consequent interest payments on debt to offset those losses may create an additional strain on the company’s finances.
These concerns come at a time when Spotify has also decided to demonetise a significant number of music-makers who use the platform. Spotify itself doesn’t financially benefit from that move - which is being made under pressure from the major record companies - and it has only increased criticism of the streaming business within much of the artist community.
As the specifics of the cutbacks become clearer, Spotify has also confirmed that two acclaimed podcasts made by its in-house production division will come to an end. 'Heavyweight' and 'Stolen' were both made by Gimlet Media, which Spotify acquired in 2019 and then merged into Spotify Studios as part of a downsizing of its podcasting operations earlier this year.
Both shows will complete their current series, Spotify said earlier this week, after which their makers will be free to take the podcasts elsewhere.
