Did Spotify screw up? ‘No… and yes,’ says its CEO

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Hi, everyone, I’m here today while Ariel is off for the week. I’ve really been enjoying the new Rian Johnson / Natasha Lyonne show Poker Face, with its oddball characters and unusually extended murder-of-the-week introductions. The first four episodes are already out, and two of them have a fun audio tie-in. (See, I made this relevant to the newsletter!) There’s a big plot point around a radio broadcast in one episode, and another features a true crime show called Murder Girl, whose host is played by a former podcaster (and Verge alum). Gotta respect its commitment to the Podcast Voice.

Today, I dive into Spotify’s earnings and where the company is headed in 2023. But first, a quick announcement…

Want to come work with us? Hot Pod has an opening coming up this spring for a full-time writer to join us for around six months. We’re looking for someone who knows their stuff when it comes to the business of audio — and, obviously, being a diehard podcast fan helps, too. If you know anyone who’d be a perfect fit, please pass the job listing along!

I could have run with a lot of headlines here, but this quote from Spotify’s earnings call felt like the moment that best encapsulated the company’s current situation. 

Spotify reported its Q4 2022 earnings this morning, and the results were strong in some key areas. Spotify became the first music streaming service to pass 200 million paid subscribers (not that the others are regularly sharing), and it’s closing in on 500 million monthly users, a target it’s likely to reach this coming quarter. Revenues from subscriptions and ads were both up double digits year over year as well.

But at the same time, those numbers weren’t enough to stave off last week’s layoffs, which saw Spotify cut 6 percent of its staff. There was a big reorg, and the company’s operating loss jumped to €231 million (about $250 million); it was €7 million for the year-ago quarter. This all follows several years of big investments in hiring, content, and acquisitions. (The Chartable and Podsights purchases were announced nearly a year ago.) And it comes just months after we saw Spotify cut back on some of its original content plans via… even more layoffs at Gimlet and Parcast.

So the question on the minds of a lot of investors — and evidently one that Spotify CEO Daniel Ek knew was coming — was: were Spotify’s substantial investments in 2022 a mistake? And to that, Ek answered, “No… and yes.”

His argument for no: user growth is way up, new features helped set the app apart from competitors, and long-term investments are already having a short-term impact.

His argument for yes: “In hindsight, I probably got a little carried away and overinvested relative to the uncertainty we saw shaping up in the market.”

All of this context is to explain Spotify’s priorities going forward. Ek reiterated again and again that the company would be reorienting around “speed and efficiency.” The reorg? Speed and efficiency. The goal for 2023? Speed and efficiency. The biggest thing holding Spotify back? Speed and efficiency. (I counted 12 “efficiency” drops between Ek and CFO Paul Vogel just in my notes from the call.)

Now, I don’t know exactly how this restructure will enable some dramatic improvements in Spotify’s efficiency, but Ek said he’s in need of more help at the top. Moving Alex Norstrom, Spotify’s chief business officer, and Gustav Söderström, Spotify’s chief product officer, into more centralized roles will “materially mean we’ll have more brains thinking about these things … to make decisions faster because that’s honestly one of the biggest blockers.”

It’s not just about making decisions faster, though. Ek was also clear that 2023 is more about investments paying off than making new ones. There’ll be “more efficient spending” in podcasting, making it less of a drag on gross margins. Same deal with spending around benefits for Premium subscribers. “You’ll see the incremental investment slow and the benefits kind of hit in ’23,” Vogel said.

The TL;DR for 2023: after years of big investment, Spotify’s finally being asked to show what it’s all amounted to — or at least that it can constrain the losses until it all pays off.

There are a handful of other moments I wanted to highlight from the earnings call.

Ek knows Spotify’s audiobook product needs work:

• “There’s two types of companies: there’s the company that waits until it gets it perfect the first time … and then the company that releases something it knows needs work and rapidly improves from there. We’re definitely the latter.”
• He promised “a lot of new things” in audiobooks rolling out this year.
• For what it’s worth, “audiobook” shows up two times in Spotify’s slide deck for shareholders; “podcast” shows up 18.

What Dawn Ostroff’s departure means for Spotify’s original content:

• “I don’t think from a strategy point of view that it’ll differ all that much,” Ek said.
• One thing that could have an impact, though: marketing, advertising, and content will be on a combined P&L under Norstrom. That’s meant to help Spotify with “driving resources to where it’s most needed.”

Some changes to podcast spending are in the works:

• Investors (and Ek) mentioned multiple times that podcast investments had been a “drag” on gross margins.
• That’s expected to fall off this year, in part because the investments were already made but also because of a change in spending strategy for 2023.
• “We’ve been making many investments. Some have been working greatly and you should expect us to double down on those, and some have not worked out.”
• My read: more Batman Unburied, less Gimlet and Parcast. I’d bet Joe Rogan — whose contract supposedly runs through roughly the end of 2023 — is on that “double down” list, too.

Pushkin laid off “a handful of employees” last week, Ashley Carman reported at Bloomberg. The cuts came in response to falling revenue and the difficult economic environment. Pushkin spokesperson Nicole Morano confirmed the cuts to Hot Pod; Morano said that no shows were being canceled as a result.

The layoffs follow similar cutbacks across the industry: Spotify with around 600 roles last week, Vox Media with several audio roles the week before, NPR with the cancellation of its internships and fellowships, plus the earlier cuts at Gimlet and Parcast. It’s clear the entire industry is feeling the tighter ad market right now.

Today was really a Spotify extravaganza. I’ll be back with you Thursday and Friday with SiriusXM’s earnings, some hiring news, and whatever else breaks between now and then. And if you’re not already a subscriber, you can sign up here.