PRO.015 The Streaming Industry's Dilemma
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Words by Nyshka Chandran
On paper, it appears the music streaming business is going gangbusters. Paid subscriptions to digital platforms such as Spotify, YouTube Music, Amazon Music and Apple Music are now the single-largest driver for recorded music revenues globally, so why are so many streaming players cutting costs?
In December, Spotify axed 17 percent of its workforce–its third round of job cuts last year. A few days later, TIDAL followed suit by letting go of ten percent of its staff. In November, Amazon Music began cutting jobs. Layoffs hit the entire tech sector last year but it surprised many that music streaming was affected given the market's seemingly blockbuster growth. Streaming now makes up 87.7 percent of the UK music market, compared to 63.6 percent in 2018, new data from the British Phonographic Industry shows. In the US, paid subscriptions jumped by more than $550 million during the first half of 2023, according to the Recording Industry Association of America.
Right before announcing layoffs, Spotify reported that net growth in monthly active users from July through September was the second-largest increase in its third-quarter history. In a statement, CEO Daniel Ek said, positive earnings aside, "a substantial action" was still needed to bridge the gap between the company's financial goals and operational costs. TIDAL, once owned by Jay-Z and now owned by Jack Dorsey's digital payments company Block, Inc., saw gross profit surge 21 percent in the third quarter of last year. It's a similar story for Amazon, which reported third-quarter net income that outperformed expectations.
Despite healthy subscription rates, experts say the business fundamentals of major DSPs (digital streaming providers) aren't up to par. Platforms are struggling to make more revenue per stream, Goldman Sachs pointed out in a 2023 report. The consumption of music streams has increased two and a half times since 2017 but "revenue per stream has fallen by 20 percent over the same time span," the bank noted. In other words, average revenue per user on paid streaming music services has fallen by 40 percent since 2016, it explained.
In light of ongoing tensions over artist royalty payments, algorithmic bias and higher fees, cost-cutting measures like layoffs don't bode well for the relationship between streaming providers and users. But given the lack of alternatives to major DSPs, it looks like all these issues are here to stay.
Perspectives on the ground
When asked what these layoffs meant for the streaming industry, Andrew Wallenstein, president and chief media analyst of Variety Intelligence Platform, focused on Spotify as an example.
"Spotify is cutting costs because despite subscription growth they made a number of costly miscalculations," he told Resident Advisor via email. "First, the company made a big bet on podcasts and lost big. After spending way too much on multiple acquisitions on podcast companies and podcast talent deals, these investments didn't yield much of a return. That expense also compounded the financial stress that way too much hiring has put on the company over the past few years; this layoff has essentially undone all that."
"Spotify held out from raising its prices until relatively recently after many years, and that also added to this financial stress," Wallenstein continued. "Again, the relief had to eventually come from somewhere, hence, layoffs. The company laid out aggressive, ambitious goals of 40 percent gross margins and 20 percent operating margins last year; the easiest way to reach those goals is to make significant cuts to its staff."
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This is an excerpt from our fortnightly RA Pro Newsletter: A bite-sized look at the trends and themes impacting businesses in the electronic music industry.