Spotify Facing Music Industry Backlash

Spotify has been spending a lot of money on talk lately. This is in addition to all of the other expenses the company has been facing.

Spotify's fourth-quarter results showed both the costs and benefits of the company's recent investments. A record 33 million new users joined the platform during the quarter, while 10 million new paid subscribers surpassed Wall Street's expectations. This helped to boost Spotify's stock price by more than 10% in early trading Tuesday.

Spotify's growth has come at a cost. Operating expenses for 2022 represented 31% of revenue for the year, compared with an average of 27% for the three years prior. This is a problematic trend for a business model that takes about 75 cents of every revenue dollar off the top for items like royalties to music labels. As a result, Spotify generated a record operating loss of €659 million ($715 million) during the year, after turning a €94 million operating profit the year before.

Spotify has announced a restructuring move that will reduce its employee head count by about 6% and reshuffle some of its top executive ranks. The latter moves include the departure of Chief Content Officer Dawn Ostroff, suggesting Spotify may be backpedaling on its ambitious podcast strategy.

But on Tuesday's earnings call, CEO Daniel Ek denied that this was the case, claiming that the move is "more about increasing the speed of decision making and increasing the focus on efficiency across the board." Chief Financial Officer Paul Vogel added that the recently ended year represents "peak drag from podcasts" on the company's financial statements.

There are still some tough choices ahead for Spotify. Unlike video-streaming services, the pandemic had a more modest impact on Spotify’s audience. New paid subscribers added in 2020 were up only 11% from the previous year compared with 32% growth Netflix saw in its paid user base for the same period. But Spotify also used the time to make its hard pivot into podcasts, paying vast sums to land exclusive deals with major podcast stars such as Joe Rogan and Dax Shepard.

The company also invested heavily in what it deemed to be future growth opportunities. Spotify’s employee head count at the end of last year was up 130% from the end of 2019, compared with a 49% rise for Netflix in that period. Spotify also generated less than half the revenue per employee in 2022 that Netflix managed for the year.

The reduction of 600 employees announced last week represents only half of what Spotify added in the past two quarters. Analysts expect Spotify to raise its prices, following similar moves by Apple and Amazon for their rival music-streaming services. Mr. Ek was noncommittal on that point, noting only that the company did raise its prices in 40 markets around the world in 2022 and that "we're constantly discussing with our rightsholder partners around various price increases that we would be doing." With Spotify's stock still down by nearly half over the past 12 months, improvements to both the top and bottom lines would be music to investors' ears.