Leading music streaming platform Spotify recently announced major layoffs affecting 17% of its workforce. It’s a surprise decision by CEO Daniel Eck to ease the company’s financial woes and align operating expenses with its financial goals ahead of the holiday season.

Spotify grew sharply in 2020 and 2021 thanks to falling capex

Despite the strong performance and positive earnings report, Eck explained that the company faces a difficult choice between making smaller cuts over the next two years or taking drastic steps now. Opting for the latter, Eck emphasized that significant adjustments would be needed to right-size the company’s spending to achieve its goals, and acknowledged the pain this decision would cause the team.

This decision is due to Spotify’s rapid growth in 2020 and 2021 due to low capital expenditures. These investments paid off and contributed to the growth of the company. But even after early layoffs in early 2023 and May that reduced the workforce by about 8%, Eck said the company’s cost structure was too large for future needs.

The latest layoffs will affect approximately 1,500 employees. To ease the transition, Spotify plans to offer an average of five months of severance pay, along with health insurance, immigration and career support during that period.

Eck’s announcement underscores the need for Spotify to adopt a smaller operating model next. This follows the introduction of a revamped royalty model aimed at increasing payments to working artists while reducing fraud flows.

Spotify has been steadily expanding its user base and now has 574 million monthly active users, up 26% from last year. Despite this growth, profitability remains elusive as recent quarters have seen rare gains. The supplement promises more details about the effects of these changes in the coming weeks.