Spotify, the renowned music streaming service, has announced a significant reduction in its workforce. Approximately 1,500 employees, or 17% of its total staff, will be let go. This decision follows two previous layoffs earlier this year, with 600 employees released in January and an additional 200 in June.
Shares surge following announcement
Following this announcement, Spotify's shares in the US market experienced a notable increase, rising about 11% to trade near a two-year peak of US$200.46. This surge in share price came amidst a trend of job cuts across the tech industry, with major companies, from Amazon to LinkedIn, a Microsoft subsidiary, also reducing their workforces.
CEO's explanation and cost implications
In a letter to employees, Daniel Ek, Spotify's CEO, explained that the company expanded its workforce in 2020 and 2021 due to favourable capital costs. However, he noted that while the company's output increased, it was attributed mainly to the expansion of resources rather than improved efficiency.
The layoffs are expected to incur charges between €130 million and €145 million in the fourth quarter. These charges will predominantly affect the first and second fiscal quarters of 2024. Spotify revised its financial forecast, predicting a fourth-quarter operating loss between €93 million and €108 million, starkly contrasting its earlier projection of a €37 million operating profit.
Investments and future prospects
Spotify has heavily invested in its podcast business, spending over a billion dollars. It has attracted high-profile figures like Kim Kardashian, Prince Harry and Meghan Markle and expanded globally. These efforts are part of its ambition to reach a billion users by 2030.
In the third quarter, Spotify turned a profit, bolstered by increased subscription prices and growth in subscribers across all regions. The company expects monthly listeners to hit 601 million in the holiday quarter.
The path ahead
Ek stated that reducing the workforce was challenging, especially considering the company's recent positive earnings report and overall performance. He emphasised the need for Spotify to be productive and efficient.
Affected employees will receive approximately five months of severance pay, vacation pay, and healthcare coverage. Ek expressed that while smaller reductions could have been made over the next two years, a significant cost reduction was necessary to align operational costs with financial goals.
