ValueAct Backs Spotify to Reduce Costs, Taking a Stake in the Company

ValueAct has taken a stake in Spotify, as a support for the company to reduce costs in these trying times with the economy. CEO Mason Morfit described this move as the company's newest investment.

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NEW YORK, NEW YORK - FEBRUARY 01: The Spotify company logo is diaplayed as traders work on the floor of the New York Stock Exchange (NYSE) during morning trading on February 01, 2023 in New York City. Stocks opened low this morning amid news of another interest rate increase by the Federal Reserve in its continued effort to slow inflation.

Backing Spotify

Investment company Valueact Capital Management supported Spotify's strategy to cut costs, led by Chief Executive Officer Daniel Ek. According to a report from Reuters, the company took a stake since the operating expenses and content funding exploded.

ValueAct Chief Executive Officer Mason Morfit announced this news during an event presentation at Columbia University in New York. He stated that this became the company's newest investment, praising the music streaming service's innovative business model.

Morfit stated, "Spotify's superpower was combining engineering breakthroughs with organizational abilities - it organized creators and copyright owners to build an entirely new economic model that benefited everyone involved."

He added that during Spotify's peak, the company applied its powers to new markets like podcasts, audiobooks, live chatrooms, and more. The company is now sorting out what was built to last and what was built for the bubble.

The CEO also described the company as the inventor of music streaming. Spotify Spokesperson Adam Grossberg stated that the company happily welcomes ValueAct as an investor in the company.

Aside from the taken stake, Bloomberg reported that Morfit also discussed how valuations are becoming more rational, especially since businesses emerge from a venture capital-fueled bubble. He said that a regime change is happening as he sees the world shifting to a rule-driven approach.

Spotify committed in 2019 to podcasting by spending billions of dollars to acquire podcast networks, hosting services, and rights to popular shows like The Joe Rogan Experience and Armchair Expert. These costs tested investors' patience as shares decreased last year and the company is uncertain when will it return.

In Spotify's response, the company predicted that the podcast business would just become profitable in the next one to two years from now.

Previous Investment

Last year, ValueAct also had a similar thesis when they took a stake with New York Times. They urged the company to raise prices and improve margins to earn more profit from its subscription services. The company brought 7% common stock and pushed changes to some of the operations.

Media Analyst Geetha Ranganathan noted that ValueAct's stake in Spotify gives the company confidence in its profitability turnaround efforts. "A moderation in podcasting investments could expand gross margin, while a reduction in headcount and other cost cuts should pare operating losses and help the company reach break-even in 2024," the analyst added.