In a decisive move to streamline its operations, Spotify, the renowned music streaming service, announced a significant reduction of its workforce. CEO Daniel Ek informed staff that approximately 17% of the company's employees, equating to roughly 1,500 jobs, will be let go. This decision, revealed in an internal memo, aims to address the slowdown in Spotify's growth and the heightened cost of capital in recent economic conditions.
Ek's announcement comes after Spotify, like many other tech firms, experienced rapid expansion in 2020 and 2021, a period characterized by abundant capital and opportunities for growth. However, the changing economic landscape has prompted a reassessment of this approach. "Economic growth has slowed dramatically, and capital has become more expensive. Spotify is not an exception to these realities," Ek stated.
Spotify's shares responded positively to the news, with a 4% increase in U.S. premarket trading. This workforce reduction follows previous cuts earlier in the year, including a 6% reduction in January and a further 2% in June. The company has been navigating a challenging macroeconomic environment marked by higher interest rates and economic uncertainties.
The costs associated with these layoffs are substantial, with Spotify anticipating charges of 130 to 145 million euros in the fourth quarter. The majority of these expenses are expected to be cash components, to be recorded primarily in the first and second fiscal quarters of 2024. As a result, the company now forecasts a fourth-quarter operating loss of 93 to 108 million euros, a significant departure from its prior profit projection.
Despite these challenges, Spotify has continued to invest heavily in its platform. Over a billion dollars have been allocated to expanding its podcast business, attracting high-profile names such as Kim Kardashian, Prince Harry, and Meghan Markle. The company has also raised prices for its streaming services and aims to reach a billion users by 2030.
In the third quarter, Spotify reported a profit, bolstered by these price hikes and subscriber growth across all regions. The company expects its monthly listener count to reach 601 million in the holiday quarter. Yet, Ek emphasized the importance of not just increasing productivity but also enhancing efficiency. "By most metrics, we were more productive but less efficient. We need to be both," he explained.
Affected employees will receive about five months of severance pay, vacation pay, and healthcare coverage for the severance period. Ek conveyed the difficult decision, noting that smaller reductions could have been made throughout 2024 and 2025. However, he believed that a substantial action was necessary to align operational costs with the company's financial goals.