December 4, 2023
Marketplace recently published an article featuring Mark Williams, Master Lecturer of Finance, discussing Spotify’s third round of layoffs in light of slowed economic growth and high capital costs.
“The cost of capital itself influences corporate behavior” Williams explained. In addition, he reflected on the pandemic around the time the Federal Reserve cut interest rates to zero. “You saw large corporations, including Spotify, get big on borrowing. Spotify increased its debt threefold in a matter of months in 2021” he said.
Many tech companies were born during an era when interest rates were so low that they didn’t have to worry about borrowing costs. All that borrowing and debt suddenly became much more expensive once the Fed started aggressively hiking interest rates my 2022. For many, cutting costs is the fastest way to improve profit: Cut borrowing, advertising, new projects, and lay off employees.