Transcript: Spotify grows up

This is an audio transcript of the FT News Briefing podcast episode: ‘Spotify grows up’

Sonja Hutson
Good morning from the Financial Times. Today is Wednesday, April 24th. And this is your FT News Briefing. Tesla shares jumped yesterday despite a rough earnings report. And Spotify looks like it’s entering a new era. Plus, Egypt was thrown a lifeline to deal with its debt crisis.

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Heba Saleh
Nobody has an interest in seeing Egypt collapse, and I think that’s why there has been this rush to salvage the economy.

Sonja Hutson
I’m Sonja Hutson, and here’s the news you need to start your day.

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Tesla put out a pretty brutal earnings report yesterday. The company outlined a 9 per cent decline in revenue last quarter. That was its first year-on-year quarterly drop since the beginning of 2020. The electric carmaker is dealing with a slowdown in vehicle deliveries. It’s had to slash prices as a result. And Tesla announced earlier this month that it would cut more than 10 per cent of its workforce. But despite all the bad news, Tesla’s shares jumped more than 10 per cent in after-hours trading. That’s because the company took the moment to announce that it’s speeding up the launch of cheaper models. The boost yesterday was a gift for the company. Its shares have fallen about 40 per cent since the start of the year.

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Spotify CEO promised a new phase for the streaming service, and based on yesterday’s earnings report, Daniel Ek is starting to make good on that promise. The company turned its largest quarterly profit ever. Investors were singing the company’s praises. Shares in Spotify ended the day up more than 11 per cent. I’m joined now by the FT’s Anna Nicolaou. Hi, Anna.

Anna Nicolaou
Hi, there.

Sonja Hutson
So why is Spotify doing so well?

Anna Nicolaou
Spotify is doing really well because they’ve pivoted their business effectively to start making money — which doesn’t sound that revolutionary — but in this world, it kind of is. So they yesterday reported their biggest quarterly profit they’ve ever had. They made about €200mn in net income, which again, it’s all relative. Of course, that’s not a massive amount of money for a company that big. But it’s kind of symbolic, I would say, in a sense, because they have entered this new era where their focus is on actually making a profit. So before this, the focus was not on saving the money they were making. It was on investing and spending it. So they were losing money, but still had this kind of shine on Wall Street because they were growing so quickly. And it was very clear that they were, you know, the future. And that patience ran out. And now we’re seeing more of a maturing of the business model.

Sonja Hutson
Yeah. So tell me a little bit more about this new phase for the company. What was its strategy?

Anna Nicolaou
So his strategy has been cutting costs. They fired more than 2,000 people last year, about a quarter of their workforce. They’ve been raising prices for consumers. So in the US, they raised prices last year for the first time since they had launched here. And it’s just paying off.

Sonja Hutson
OK, so Spotify, big cost-cutting that’s helped its bottom line. Was it all good news in the earnings report?

Anna Nicolaou
It was not all good news. So the one thing that was quite interesting that the CEO, Daniel Ek, said on the earnings call was Spotify missed its forecasts for monthly active users. And that’s pretty unusual for them. There were two reasons they cited. And the first, which was interesting, was they said that because of all those lay-offs they had, operations were just a little bit messier, and the impact was bigger than they had expected. And the second was that they were spending less money promoting their app to people. The big picture is still, you know, efficiency, making a profit. But there was a wrinkle in it, I would say with that, although Wall Street does not seem to mind.

Sonja Hutson
How worried is Spotify? I mean, are they gonna make any changes in light of that active users number?

Anna Nicolaou
They say that they’re already making changes. They didn’t go into detail about what that means, but I would guess that they’ll, you know, increase their budgets a little bit on marketing again, and try to see what the right amount is. Even when they announced this new era and all these cuts, they kind of acknowledged that it was a pretty extreme move. And so I think it’s very much start-up culture to say, you know, we’re gonna make big swings and changes, and then we will adjust them and we’ll keep making changes until we figure it out. Right. So I think there’s a bit of experimentation here in terms of figuring out what is the right formula for them.

Sonja Hutson
Anna Nicolaou is the FT’s US media correspondent. Thanks so much.

Anna Nicolaou
Thank you.

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Sonja Hutson
The Federal Trade Commission banned noncompete agreements in the US yesterday. These are clauses in contracts that stop someone from working for a competitor for a set amount of time. The FTC says 30mn workers are currently subject to them. The agency argues that noncompetes undermine competition and impact workers’ personal freedoms. Industry groups that oppose the rule say it’ll increase business costs and put trade secrets in jeopardy.

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Egypt has sidestepped a major debt crisis. President Abdel Fattah al-Sisi’s government recently got access to billions of dollars in bailout loans and investments from abroad, all in an effort to shore up the country’s shaky economy. Here to talk to me about it is the FT’s Heba Saleh. Hi. Heba.

Heba Saleh
Hello.

Sonja Hutson
So, get us up to speed here. Why is Egypt’s economy struggling? And how big of a debt problem does it have?

Heba Saleh
Egypt’s economy has been struggling for two years since Russia’s full-scale invasion of Ukraine, which prompted short-term debt investors to pull out $20bn in weeks. And what this has done is that it has revealed the weakness of the economic model that Egypt relied on. It borrowed a lot from short-term debt investors and used a lot of money to fund major infrastructure projects, which produced very little for export, produced very little revenue in dollars. So you end up with Egypt being heavily indebted. So it was a crippling crisis.

Sonja Hutson
What about this support package that the country recently received? Where does it come from and what’s included?

Heba Saleh
So Egypt’s received a very big bailout. Most of it is loans and investments from the International Monetary Fund, from the World Bank and from the Emirates, from an Abu Dhabi state investment vehicle. It has bought development rights to a huge piece of land on Egypt’s northwestern Mediterranean coast, which will be turned into hotels, resorts, tourism. So it’s a big bailout. It’s a reset and breathing space for the Egyptian economy.

Sonja Hutson
How about why is this happening now? Why are we seeing such a big influx of money at this particular moment?

Heba Saleh
I think it has a lot to do with the Gaza war. The war has had a negative impact on the Egyptian economy. We’ve seen Houthi attacks on Red Sea shipping/Suez Canal revenue also impact the growth of tourism. And because Egypt has been in crisis for two years, I think there are fears of an economic collapse in Egypt, a country of 106mn people. The Europeans are afraid of a migration crisis. Egypt plays a key role due to its geographic location right next to Gaza, due to its ability to mediate between Hamas and Israel. Nobody has an interest in seeing Egypt collapse, and I think that’s why there has been this rush to salvage the economy.

Sonja Hutson
And how has Egypt’s economy responded to this influx of cash, at least in the short term? From what we’ve been able to see.

Heba Saleh
It’s too soon to tell. But what we’re seeing is confidence from short-term portfolio investors who buy Egyptian debt. They’ve been flocking back to Egypt and in the past few weeks. I mean, last month, Egypt attracted something like $8.5bn in short-term debt investment. And that, of course, is an influx of dollars, which further helps the economy.

Sonja Hutson
Do you think, then, that this latest round of bailouts and investments could mark a turning point for Egypt’s economy?

Heba Saleh
It could mark a turning point, but it is not certain. Egypt has been granted a second opportunity. But will it use these flows to support reforms to promote the private sector, or will it revert to old policies? The problem in the past has been that Egypt is not creating enough space for the private sector to flourish. What economists are saying is that Egypt needs to invest in the real economy, in agriculture, in manufacturing, in services, in exports, and perhaps less in the kinds of infrastructure investments that it has focused on up to now.

Sonja Hutson
Heba Saleh is the FT’s Cairo correspondent. Thanks, Heba.

Heba Saleh
Thank you.

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Sonja Hutson
Before we go, here’s something a little bitter to chew on. The global supply of cocoa is shrinking, and it’s making chocolate more expensive. You can blame sick crops, poor weather and government price fixes in west Africa. As a result, South American farmers are stepping up to fill this cocoa void. In places like Ecuador, analysts predict that cocoa yields will actually surpass Ghana, which is one of the world’s biggest producers.

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You can read more on all these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.