Music startup Utopia just announced a round of layoffs that fit into a much larger dynamic that could reshape the entertainment landscape. There are many reasons why the coming global recession will be unique, but the most relevant to the digital entertainment sector is that it will be the first since modern consumer technology is truly mainstream. This is important not only because of the new territory this reflects, but also because tech companies (even the largest) operate differently than traditional companies and place much larger bets on future growth. A strategy that works well in times of plenty, but is quickly reassessed in the face of a looming recession. Big tech firms are cutting headcount, especially in the bets looking to make profits in the future, but not yet. Most forms of digital entertainment fall into this category. Streaming music and video has long been a loss-maker for the tech majors, but can it stay that way in a recession?
2007 was the year the last recession hit, and the consumer tech world looked very, very different than it is today. The first iPhone was only sold in June 2007; Facebook started the year with 14 million users; Netflix launched its streaming service; but Spotify was a year away from launching; Instagram wouldn’t launch for another three years; and Snapchat for another five. So when the next recession most likely hits in 2023, it will be the first where consumer technology has become mainstream.
All of these companies, and most others that fueled the consumer technology revolution, have grown rapidly because they’ve aggressively invested in future potential rather than waiting to fund it organically. It’s a mindset that originated in the VC worldview: build product and customer base first, worry about profit later. Without this approach, the consumer tech sector probably wouldn’t be nearly as big and developed as it is today. But the strategy requires the basic premise of delivering more growth next year or the model fails. Because of this, we’re now seeing pullbacks at Big Tech. Meta laid off 11,000 employees, many from its VR Labs division; Stripe cut 1,000 jobs for overexpanding during its lockdown boom; Apple has frozen hiring outside of R&D; and 10.00 layoffs are in the hands of Amazon.
Out of all this redundancy chaos, one particularly interesting number has emerged: Amazon is on track to lose $10 billion a year from its “Worldwide Digital” team, which includes Alexa, Echo, and its streaming companies. Amazon makes its money from cloud services, and commerce, devices, and content are growth categories it’s investing in, both for future growth and because they help its core business. Very similar arguments can be made for Apple’s streaming businesses (video and music) and at least for YouTube Music and YouTube Premium.
Which begs the question, once the tech majors start ruling their non-core spend, where’s the streaming? In practice, it’s highly unlikely that the tech majors will face such hardships that they’ll have to consider shutting down their streaming services, but they may need to cut spending. And when that happens, video is at far greater risk than music, since streaming video requires a large investment in original content while music rights costs are fixed. All in all, any music rights deals to be negotiated with tech majors from this point forward will almost certainly see licensees pushing for reductions wherever they can find them.