The Case For SoundCloud

SoundCloud’s mission has been to offer a free-to-register music platform with little or no advertising. It has gained a reputation since its foundation in 2007 as a safe haven where upstart musicians, including Skrillex and the EDM crowd, could easily upload, share, and discuss their work. Now, the platform is running into the business limitations of its own philosophy.

SoundCloud has seen unprecedented growth. The company swelled from fifteen million users to 200 million in the last four years, and claims that roughly twelve hours of audio are uploaded every minute.¹ Approximately five billion streams were estimated to run through the platform in May 2015.² But hardly any revenue and a wave of foreseeable headaches over copyright clearances have taken their toll. Publishers and their songwriters have not been forgiving, even when new paid subscription tiers and advertising was added after 2014 to prepare SoundCloud as a more commercial operation. The latest financials, released in February of this year, show losses of almost $85 million in 2012- 2014, almost half of them coming in 2014.³

Now, the company is pinning its hope on a new paid streaming service, which will be subscription based.  It intends to launch the service by the end of the year using licensed music as well as promotional uploads. Yet there is much drama in the story of SoundCloud, and success could be elusive.

The value of SoundCloud was based on it becoming a sort of digital business card for the work portfolio of, mostly, independent musicians.  They could direct fans, employers, media, and followers to a single location from which they could easily distribute their music. In EDM circles, SoundCloud became a cornerstone.  Features like the ability to create playlists and discuss a song in-depth made it a valuable promotional tool, and essential for top artists like Skrillex and Deadmau5. Paid subscriptions were justified later with extra hours of audio upload, metrics on how many plays a song was getting and from where, and an ad-free environment. A new app named SoundCloud Pulse ensured more connectivity. It all added up to create a large community of loyal users.

Some publishers benefitted too. SoundCloud’s average revenue per user may have been a paltry ¢11, compared to Pandora’s $11 and Spotify’s $27.⁴ But its users came from the same talent pool that those publishers sought to recruit from, the platform was sufficiently large to create a promotional first wave that brought attention to similar songs in their catalogs at no cost, and, finally, various remixes and mash-ups created interest for derivative works of already existing licensed music.

Underlying it all, however, was a rogue mentality over the use of intellectual property. For years, SoundCloud built its business model without consideration for licensing fees. The industry finally caught on. A string of lawsuits and eventual compromises followed in 2014-16. Notable among them were the deals with (i) Warner Music Group (believed to have received in exchange a 5% ownership stake)⁵; (ii) Universal Music Group (terms undisclosed, but likely against an ownership stake too)⁶;  (ii) the National Music Publishers Association (for 11% of SoundCloud’s annual revenue)⁷; (iii) with the indie trade group Merlin, which represents over 20, 000 labels (for undisclosed ad money and access to metrics)⁸; and (iv) the UK’s performing right’s society PRS (terms undisclosed, except to say that in future its 115,000 composers, songwriters, and publishers will be ‘fairly compensated’)⁹. Currently, Sony Music, the remaining major in the U.S. is suspected of holding out for its own equity deal.¹⁰

Trading ownership shares to secure the future of the company is a poor man’s strategy, but the only one really open to SoundCloud right now. Cash is in short supply. The latest information puts receipts at $18 million (2014), with cost overruns driven by a headcount growth of one-fifth, a two-thirds increase in administrative and staffing expenses, and a total wage and salary bill nearly a half above the total of 2013.¹¹ Losses are bound to grow too as SoundCloud redirects its business model. New and higher licensing costs and the research and development of its new streaming service, which has had a history of delay, will likely weigh on the books for times to come. CEO, Alexander Ljung may insist that the company is here to stay and that their current tight spot is only the result of a hard transition, but arguably the end of 2016 could be its desperate last stand.¹²

The case for SoundCloud is that it may be doing in the streaming space what hardly any one else can for music makers.   First, it offers a vast collection of user generated music that Spotify and Apple Music do not. Second, the platform is the most interactive, and marries social media and marketing probably better than any, including the provision of quantitative usage data. Third, it is certainly well prepared to offer a central location for an artist or band, including, just like Bandcam and MySpace, bios and tour dates. Finally, by offerings legally recorded music from the major labels it can attract a wider audience and better leverage its own advantages at a time when music making is not just the province of dedicated professionals. If so, we may be looking at the future of music streaming. In fact, as we went to press, Apple announced a new partnership with Dubset Media to stream remixed songs and DJ mixes that have copyright clearance. Apple, therefore, could become an important competitor.

By Michael Kostaras

Endnotes:

1. Karp, SoundCloud’s Valuation Could Top $1.2 Billion With New Fundraising. Wall Street Journal. December 9, 2015. 3/14/16 http://blogs.wsj.com/digits/2014/12/09/soundclouds-valuation-could-top-1-2-billion-with-new-fundraising/

2. Ingham, Tim. SOUNDCLOUD’S POPULARITY HAS DOUBLED IN THE PAST YEAR. Music Business Worldwide. August 12, 2015. 3/14/16. http://www.musicbusinessworldwide.com/soundclouds-popularity-doubled-past-year/

3. Ingham, Tim. OUCH: SOUNDCLOUD LOSSES SHOW A BROKEN BUSINESS MODEL IN DESPERATE NEED OF A FIX. Music Business World Wide. February 9, 2016. 3/14/16. http://www.musicbusinessworldwide.com/ouch-soundcloud-losses-show-a-broken-business-model-in-desperate-need-of-a-fix/

4. People, Glenn. SoundCloud Earnings: Burning Cash While Building For Future. Billboard. February 9, 2016. 3/14/16. http://www.billboard.com/articles/business/6873893/soundcloud-earnings-2014-19-7-million-burning-cash-building-future

5. Music Business Worldwide. FINALLY… SOUNDCLOUD LICENSED BY A MAJOR LABEL. Music Business Worldwide. November 4, 2014. 3/14/16. http://www.musicbusinessworldwide.com/finally-soundcloud-licenses-a-major-label/

6. Ingham, Tim. OUCH: SOUNDCLOUD LOSSES SHOW A BROKEN BUSINESS MODEL IN DESPERATE NEED OF A FIX. Music Business World Wide. February 9, 2016. 3/14/16. http://www.musicbusinessworldwide.com/ouch-soundcloud-losses-show-a-broken-business-model-in-desperate-need-of-a-fix/

7. Ingham, Tim. SOUNDCLOUD SIGNS LANDMARK DEAL WITH PUBLISHERS – AS SONY PULLS TRACKS. Music Business Worldwide. May 6, 2015. 3/14/16. http://www.musicbusinessworldwide.com/soundcloud-signs-landmark-deal-with-publishers-as-sony-pulls-catalogue/

8. Flanagan, Andrew. SoundCloud Signs Deal with Indie Giant Merlin. Billboard. June 4, 2015. 3/14/16. http://www.billboard.com/articles/business/6589965/soundcloud-merlin-deal-on-soundcloud

9. PRS for Music and SoundCloud reach a multi-territory licensing agreement ending legal proceedings. PRS for Music. December 21, 2015. 3/14/16. http://www.prsformusic.com/aboutus/press/latestpressreleases/pages/prs-for-music-soundcloud-reach-multi-territory-licensing-agreement.aspx

10. Flanagan, Andrew. SoundCloud’s Prickly Position: Under Fire from Sony and Still In Talks With Universal. Billboard. August 17, 2015. 3/14/16. http://www.billboard.com/articles/business/6664061/soundclouds-prickly-position-under-fire-from-sony-and-still-in-talks-with

11. Ingham, Tim. OUCH: SOUNDCLOUD LOSSES SHOW A BROKEN BUSINESS MODEL IN DESPERATE NEED OF A FIX. Music Business World Wide. February 9, 2016. 3/14/16. http://www.musicbusinessworldwide.com/ouch-soundcloud-losses-show-a-broken-business-model-in-desperate-need-of-a-fix/

12. Lunden, Ingrid. As SoundCloud Signs UMG, CEO Ljung Says Subscriptions Are Coming This Year. Tech Crunch. Jan 13, 2016. 3/14/16. http://techcrunch.com/2016/01/13/soundcloud-universal-music-interview/

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