The music industry is seeing the results of doing more with less.
Earnings reports over the past two weeks revealed that companies achieved better margins and greater profitability — even in the face of lower revenue or disappointing growth in some sectors. And nearly all of these companies share one major commonality that has fueled their latest earnings results: layoffs.
Universal Music Group's share price fell 24% on the day after second-quarter earnings showed growth in recorded music subscriptions had slowed to 6.9%, from 12.5% in the previous period. Investors are interested in music companies because streaming has transformed the industry, bringing growth after declines in CD and download sales and opening up new markets around the world. So when the industry's most attractive revenue stream stumbles, investors will take notice.
But despite the hiccup that wreaked havoc on its share price, many of UMG's financial metrics showed that the company is headed in the right direction. Revenue increased by 9.6%. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose 11.3%. and adjusted earnings per share rose to 0.44 euros ($0.47), up from 0.42 euros ($0.45) last year. Putting aside the main reason investors want to own shares of UMG — the global music subscription business — UMG's earnings had plenty of positives, some of which no doubt had to do with the layoffs that took place in February. According to the company's 2023 investor presentation, this round of job cuts is expected to save 75 million euros ($81 million) in 2024 alone.
In other earnings news, Spotify – which has cut about a quarter of its global workforce in three rounds of layoffs in 2023 – had a remarkable turnaround in the second quarter, posting operating income of 266 million euros ($286 million) – 513 million-euro ($552 million) improvement from the second quarter of 2023. Despite a much smaller staff, the streaming giant's revenue rose 19.8% to 3.81 billion euros ($4.1 billion) while gross margin grew to 29.2% from 24.1%. Spotify's share price jumped 12% after the release and was almost up 2% by Thursday (August 1).
Spotify's latest layoffs in December, which affected 17% of its staff, prompted criticism — “Spotify is broken.” Wired was proclaimed — but they had a large and immediate impact. In the second quarter, total operating expenses fell 16.5% as each item posted double-digit declines (G&A decreased 23%, sales and marketing decreased 16.3%, and research and development expenses decreased 16.5%). When Spotify announced the layoffs, the CEO Daniel Ek he admitted that the range of layoffs would seem “surprisingly large” but was adamant about the need to become “relentlessly resourceful”. At the time, he said, “We still have too many people dedicated to supporting work and even doing work around work instead of contributing to real impact opportunities.”
Recent staff cuts also appear to have benefited SiriusXM, which laid off 8% of its workforce in 2023 and another 3% in February. Although the satellite radio giant's share price fell 6.4% on Thursday after the company said it lost 173,000 satellite radio subscribers and 41,000 Pandora subscribers in the second quarter, net income rose 1.9% to $316 million , even though revenue fell 3% to $2.18 billion. Thanks to cost reduction efforts, general and administrative expenses were reduced by 31% and engineering, design and development expenses were reduced by 14.5%.
Not all companies that reported earnings in the past two weeks had to lay off workers to improve their margins. French music streaming company Deezer, citing improved cost control and improved margins on more favorable terms with record labels, improved first-half adjusted EBITDA by 8 million euros ($8.7 million). The company also raised its full-year adjusted EBITDA target by 5 million euros ($5.4 million).
Reservoir Media, which reported earnings on Wednesday (July 31), similarly improved operating efficiency with no layoffs. The company's share price fell 8.8% in the two days after it said quarterly recorded music revenue fell 7% but the company's publishing revenue improved 15% Total revenue rose 8% and adjusted EBITDA increased 25%. While investors found cause for concern, CEO Golnar Khosrowshahi struck an upbeat note on Wednesday's earnings. “We are off to a good start in fiscal 2025 and remain on track to again meet our annual targets,” he said.
In addition to cost reductions, streaming companies are also reaping the benefits of price increases. Not only did Spotify grow its subscribers by 26 million in the previous 12 months, but price increases pushed average revenue per user (ARPU) up 8.2%, or €0.35 ($0.38 ) per month. Although Deezer did not gain subscribers last year, its ARPU rose 6% for direct subscribers and 3.5% for subscribers acquired through partnerships due to the price increases it introduced last year.
Of course, music companies have their share of challenges that cutting costs can't solve. Streamers can't increase prices very often and face constant sluggishness in ad-supported streaming. Labels need to redefine expectations for their subscription businesses and continue to see sluggish ad-supported streaming revenue. And music publishers are taking a pay cut from Spotify's decision to treat its premium service as a bundle in the U.S. Considering all of this, their decisions to cut costs and focus on operational efficiency couldn't have come at a better time.
