Spotify CEO cites “expensive” capital as factor in layoffs. What does that mean?

The music streaming service just announced its third round of layoffs this year after previous years of intensive borrowing.

Spotify announced today that it’s cutting another 1,500 jobs, which is about 20% of its workforce. This is the third round of layoffs at the company this year.

In a letter to employees, CEO Daniel Ek wrote, “economic growth has slowed dramatically and capital has become more expensive. Spotify is not an exception to these realities.”

Let’s take a look at what that phrase, “capital has become more expensive” really means, and what it means for companies.

When interest rates are low and money’s cheap, companies — like people — tend to borrow a lot. Because, why not? 

“The cost of capital itself influences corporate behavior,” said Mark Williams at Boston University’s Questrom School of Business.

He says we saw that early on in the pandemic when the Fed dropped interest rates way down to almost zero.  

“You saw large corporations, including Spotify, get big on borrowing,” he said. “Spotify increased its debt threefold in a matter of months in 2021.”

Spotify also went on a hiring spree, almost doubling the number of people on staff in just a few years. 

Veronique de Rugy at the Mercatus Center at George Mason University says plenty of other companies did the same thing — especially in tech. 

“A lot of tech companies have prioritized growth over profit,” she said. That’s been true for years now. 

“There are a lot of tech companies that were born in an environment where they didn’t have to think about the cost of borrowing, the cost of capital, because interest rates were so low,” de Rugy said.

Spotify has been around for 15 years. For almost that whole time, interest rates barely rose above 2%. For about 10 of those years, they were very close to zero. 

Doug Clinton, managing partner at Deepwater Asset Management, said lots of tech companies were operating like that would be true forever.

“Most of these companies, that’s all they knew,” he said. “All they knew was this zero-rate environment, and as a consequence of that, all they knew was an investor demand for, sort of, growth at all costs.”

But once the Fed started aggressively hiking interest rates, all that borrowing and debt suddenly got a lot more expensive. 

“Investors started to say profitability matters now,” Clinton said. “And every tech company is kinda going through this and returned to the idea that businesses should actually make money, not just generate revenue.”

And for many, the quickest way to make money is to cut costs: Scale back on investments and new projects, and lay people off.