Is Music Really Recession-Proof? Some Sectors Are Showing Signs of Stress

The economic storm clouds that have triggered layoffs and deep cuts to investment budgets at companies like Netflix, Snap and Apple are coming to the music business.

In recent months, Spotify said it would cut hiring by 25%, SoundCloud laid off 20% of its staff and BMI said it was cutting just under 10% of its total workforce, through a combination of letting 30 people go and leaving certain jobs unfilled.

In memos to staff, the companies cited uncertain economic times and challenging conditions in financial markets. Fears of a recession in the United States have been hovering over capital markets and investors since the Federal Reserve began aggressively raising interest rates earlier this year. The effort to rein in inflation, which hit a 40-year high in June, has cooled markets as intended but has also proved difficult to control.

Investors are hoarding cash and insiders at song-catalog holding companies say it’s difficult to raise capital, as the U.S. stock market had its weakest August in seven years.

These dour economic factors have been upended somewhat by record hiring and wage increases — signs of a strong labor market. A slight uptick in unemployment in August is one sign the labor market may be cooling, and it could give the Federal Reserve room to raise interest rates at a less aggressive pace. But many companies have already braced for the worst.

“Making changes that affect people is incredibly hard,” SoundCloud chief executive Michael Weissman wrote in a memo to staff announcing layoffs on Aug. 3. “Today’s change positions SoundCloud for the long run and puts us on a path to sustained profitability.”

SoundCloud previously cut around 40% of its workforce in 2017, but hired hundreds more in the years following. Between 2017 and 2022, it also raised nearly $250 million from investors including The Raine Group, Temasek and Pandora parent company SiriusXM.

Spotify, meanwhile, grew its employee base by 50% just in the last two years, going from 4,405 workers at the end of 2019 to 6,617 at the end of 2021.

Representatives for SoundCloud, BMI and Snap declined to comment. Spotify did not respond to requests for comment.

Industry executives and bankers said staff and hiring cuts helped them address two matters: a bloated workforce and investor pressure.

Many companies expanded during the pandemic, or just didn’t let go of workers because of a moral imperative to keep them employed through the health crisis. In a staff memo about the job cuts at BMI, chief executive Mike O’Neill cited “a concerted effort to maintain headcount as COVID took hold” as one reason why the performing rights organization (PRO) was now letting go of staff.

It is also usually the case that, if investors are anxious about a recession, the companies they invested in feel more pressure to prove their worth.

Carlos Jimenez, managing director at investment bank Moelis & Co., says that companies like Spotify likely looked at what their competitors felt and saw this as a time to prepare for scrutiny.

“It’s the Netflix problem. Saturation of streaming is going to happen, and then the attention will go from growth at all costs to profitability,” Jimenez says.

That point held true when Wall Street reviewed Spotify’s investor day this summer.

Goldman Sachs analyst Eric Sheridan wrote in a research note in July that, while it was heartening to see management focused on long-term opportunities as opposed to optimizing margins in the next 12 to 18 months, investors want more evidence that it can handle the high-inflation environment.

“We expect the key investor debates to remain focused on more evidence as to how recession-resilient the streaming audio industry is in a challenged consumer environment,” Sheridan wrote.

Justin Kalifowitz, founder and executive chairman of Downtown Music Holdings, points out that the companies that have announced plans to cut staff are also undergoing shifts in strategy.

“There are a lot of businesses where the fundamentals and the long-term growth prospects haven’t changed, but they’re conscious of what has happened in the public markets,” says Kalifowitz.

Case in point, news of BMI’s layoffs coincided with reports that the company had moved on from the possibility of a sale.

The PRO, which brings in over $1 billion in annual revenue, hired Goldman Sachs in March to explore strategic opportunities, including a potential sale. In 2022, the company posted a record-high $1.573 billion in revenue, nearly 16% higher than the year prior, and distributed or administered $1.47 billion to songwriters, composers and publishers, up 10% from the year prior.

In a public statement, the company said that a sale “is no longer an avenue” it is considering.

Strategic shifts are also playing out at Snap, an online camera company that is positioning itself as the augmented reality app for concerts. In August, Snap announced it was laying off around 20% of staff, some 1,200 employees. The company, which has struggled with declining ad revenue, reported a $422 million net loss in the second quarter, roughly 178% higher than the year-ago period, when Snap reported a $152 million net loss. The company’s stock also declined, falling to a low of $9.54 on Aug. 1 from an all-time high of $83.11 last September, despite revenue and community growth.

Even while there are layoffs hitting some businesses, there are companies that are going the other way. Amazon Music, part of the retail giant that has been one of the biggest corporate winners of the pandemic, is hiring for nearly 600 open jobs, according to LinkedIn.

Amazon did not respond to a request for comment.

Downtown’s Kalifowitz says that while it has become a cliché that the music industry is recession-proof and uncorrelated to downturns in the overall market, there is some truth to the maxims.

Major labels and live-music companies are having banner years. Universal Music Group’s second-quarter revenue grew by more than 17% to $2.7 billion, while smaller labels like BMG reported that revenue jumped 25% to $405.7 million in the second quarter.

Says Kalifowitz: “That’s pointing in the right direction.”

This story appears in the Sept. 17, 2022, issue of Billboard.