German music streaming service SoundCloud was originally conceived not as a streaming service but as a social media platform for musicians to share and promote their music over the internet. However, under pressure from the major rights holders, SoundCloud had to mutate into a fully licensed music streaming service, which then ran into economic turmoil. It was only by returning to its roots as a social media platform that the business model was stabilized and a positive annual result was achieved for the first time. This blog post traces SoundCloud’s journey from social media platform to streaming service and back again.
The Music Streaming Economy – Part 6: SoundCloud
SoundCloud has two things in common with Spotify: Both were founded by young Swedish entrepreneurs, and both launched in 2008. But that’s where the similarities end. Unlike Spotify, SoundCloud was not conceived as a music streaming service, but rather as a challenge to the social media portal MySpace. SoundCloud was founded by Swedish sound engineer Alexander Ljung and his fellow student at the Royal Institute of Technology in Stockholm, Eric Wahlforss. The two amateur musicians had developed a tool to share audio snippets in a digital network community for further processing. When Ljung and Wahlforss realised that there was a market gap due to the immense demand, they decided to monetise their software. They bought the existing SoundCloud.com website for US $400 and registered a company of the same name in Berlin to connect with the burgeoning electronic music scene there.[1]
SoundCloud as MySpace’s Competitor
In an interview with Wired magazine,[2] Alexander Ljung saw SoundCloud as a direct competitor to MySpace. Similar to photos on Flickr and videos on Vimeo, music tracks should be uploaded to SoundCloud for sharing. This would allow music creators to establish a direct fan connection and let fans participate in their own work. This was the appeal and unique selling proposition (USP) of SoundCloud right from the start, which not only caused user numbers to skyrocket, but also convinced investors to invest in the internet start-up, as can be seen in figure 1.
Figure 1: Investments in SoundCloud, 2009-2016
The investors were not disappointed. SoundCloud became one of the most popular portals on the Internet. While 1 million registered users were reported in May 2010,[9] there were 5 million by June 2011[10] and more than 15 million by May 2012.[11] At the presentation of the new SoundCloud user interface in Paris in December 2012, Alexander Ljung announced that SoundCloud had a monthly reach of 180 million internet users and that 10 minutes of audio material were uploaded to the site every minute worldwide.[12] This made SoundCloud one of the fastest growing internet applications, and growth accelerated in the following years. In July 2013, the company reported 40 million registered users[13] and was valued at US $700 million.[14]
SoundCloud’s as a Music Streaming Service
By this time, however, SoundCloud was already facing serious problems. Rights holders, led by the major music companies, were taking a critical look at the audio material being uploaded to SoundCloud. More than half of the audio files – mostly mash-ups, remixes and DJ sets – had not been cleared in terms of copyright and, in the view of the rights holders, needed to be licensed. However, SoundCloud’s position was that this was user-generated content and would fall under the safe harbour provisions of the US and EU.[15] To accommodate Universal & Co, rights holders were given the option of identifying copyrighted material and having it removed from the site. However, active users of the service, whose tracks disappeared without warning when they were flagged as infringing, protested. In April 2013, an online petition signed by around 2,500 premium users called on SoundCloud to change its copyright policy again.[16]
SoundCloud then had to react and entered into direct licensing negotiations with the major rights holders.[17] At the same time, the search for a financially strong partner began. In spring 2014, Twitter (today’s X), which was working on a music portal of its own, became interested in SoundCloud.[18] However, the takeover failed due to the excessive demands of the SoundCloud management. A purchase price in the billions was rumoured in the media, which Twitter was neither willing to raise nor pay.[19] In hindsight, Twitter’s withdrawal from the sales negotiations turned out to be a missed opportunity. This weakened SoundCloud in the licence negotiations with the music majors and, for better or worse, SoundCloud had to meet their demands. The contract with the Warner Music Group (WMG) was signed in November 2014. In it, SoundCloud paid an unspecified share of advertising revenue to WMG and to transfered a company share of between 3-5 per cent to the music major. In return, Warner waived its right to take legal action against SoundCloud for potential copyright infringements.[20] However, negotiations with Sony Music Entertainment (SME) and Universal Music Group (UMG) dragged on and SoundCloud began to run out of money.
Losses exploded from EUR 12.4 million in 2012 to EUR 39.1 million two years later. The increase in revenues from EUR 8.0 million to EUR 17.4 million could not compensate for this. However, there was no fresh money from investors until an agreement could be reached with the two majors on the licensing front. Sony added to the pressure by making recordings by key artists such as Adele, Hozier, Kelly Clarkson and Passion Pit unavailable in the US in May 2015.[21] In August 2015, the UK collecting society PRS for Music also filed a lawsuit against SoundCloud for not paying royalties,[22] forcing SoundCloud to conclude a licensing agreement with PRS, which was made public at the end of 2015.[23] Prior to this, a licensing agreement had been in place with indie label rights management agency MERLIN.[24]
At the beginning of 2016, SoundCloud was already on the verge of bankruptcy, which was averted through debt financing totalling EUR 32 million and staff cuts.[25] The financial situation remained extremely tense. SoundCloud therefore had to quickly reach a deal with Sony and Universal, which was announced in January 2016 with Universal[26] and finally in March 2016 with Sony.[27] Although no details of the two deals were disclosed, between the lines you can read that the majors wanted to turn SoundCloud into a subscription-funded music streaming service. In any case, the result was that in March 2016, SoundCloud launched SoundCloud Go, a subscription-funded streaming service with a standard pricing model.[28] Although this provided an additional source of revenue to the sale of premium accounts and advertising, the price in form of licence payments to the majors was very high.
Back to the Routes
At the end of September 2016, there was speculation in the media about a takeover of SoundCloud by Spotify.[29] The negotiations were already well advanced when Spotify pulled the plug due to a potential negative impact on its planned IPO and terminated the negotiations in December 2016 without any results.[30] This left SoundCloud on its own again. The financial difficulties forced SoundCloud to lay off 173 of its 420 employees and closed its offices in San Francisco and London.[31] To avoid bankruptcy, the company needed fresh money from investors. In early August 2017, it was announced that two investment funds, The Raine Group from the US and Temasek Holdings from Singapore, would acquire a majority stake in SoundCloud and invest US $169.5 million in the company. In return, SoundCloud co-founder Alexander Ljung had to hand over his position as CEO to former Vimeo CEO Kerry Trainor.[32]
This began immediately with a reorganisation of the company, or rather a return to SoundCloud’s roots as a social media platform for artists. In March 2018, it launched the ‘First on SoundCloud’ programme for musicians at the beginning of their careers.[33] In October of the same year, SoundCloud Premier, which had already been an invitation-only programme, was opened up to all SoundCloud Pro and Pro Unlimited users. All music creators who could generate at least 5,000 plays in their respective markets were now able to upload and monetize their tracks on SoundCloud.[34] SoundCloud expanded this option in February 2019 when it offered users a tool to upload their music content to other platforms such as Spotify, YouTube Music or Apple Music, transforming itself into a digital music distributor.[35] To complement this offering, in May 2019 SoundCloud acquired Repost, a self-marketing platform for musicians, which was first renamed Repost by SoundCloud and then SoundCloud for Artists. This gave musicians a platform to better interact with fans and monetise their music.[36] This focus on artists as key users of the platform also included being the first music streaming service to switch to the user-centric model for royalty distribution in March 2021.[37]
SoundCloud’s business model is based on two pillars: it is a fully licensed music streaming service, but it is also a music distribution and service platform for music creators, which differentiates it from the competition. As a result, the company generates revenue not only from music streaming, but also from subscriptions for so-called ‘creators’. In this way, the company managed to triple its revenue from EUR 100 million in 2017[38] to almost EUR 300 million by 2023 and, after sixteen years in business, to report a profit (EBITDA) of EUR 2 million[39] – a rarity in the music streaming business.
However, achieving profitability also came at a price. In 2022, SoundCloud had to let go of 20 per cent of its employees worldwide to cope with the economic consequences of the COVID-19 pandemic.[40] In May 2023, a further 8 per cent of full-time positions at SoundCloud had to be cut in order to meet the owners’ profit targets.[41] In addition to the two majority shareholders – The Raine Group and Temasek Holdings – US satellite radio provider SiriusXM, which also owns music streaming service Pandora in the US, bought into SoundCloud in 2020. SiriusXM invested $75 million in return for a minority stake.[42] The investment appears to have paid off, as the two main shareholders approached investment banks in early 2024 to prepare a sale of SoundCloud at the end of the year. Berlin-based SoundCloud Holdings GmbH has been valued at EUR 1 billion.[43]
Given that the two investment funds acquired a majority stake in SoundCloud in 2017 for around US$170 million to save it, the investment could have paid off with a correspondingly high return if the company had been sold. SoundCloud, which was on the brink of bankruptcy in 2017, was able to carve out a profitable market niche by returning to its beginnings as a social media platform for music creators and differentiating itself from the competition as a music streaming service.
Endnotes
[1] BuzzFeedNews, “The Inside Story Of SoundCloud’s Collapse”, July 28, 2017, accessed: 2024-07-22.
[2] Wired, “SoundCloud Threatens MySpace as Music Destination for Twitter Era”, June 7, 2009, accessed: 2024-07-22.
[3] TechCrunch, “Now a million on SoundCloud – This startup is scaling globally”, May 18, 2010, accessed: 2024-07-22.
[4] TechCrunch, “Confirmed: SoundCloud takes funding from Index and Union Square”, January 8, 2011, accessed: 2024-07-22.
[5] Billboard, “SoundCloud Receives Investment from Ashton Kutcher’s A-Grade Fund, Passes 5 Million Users”, June 15, 2011, accessed: 2024-07-22.
[6] Heise.de, “Große Kapitalspritze für deutsches Startup SoundCloud”, January 3, 2012, accessed: 2024-07-22.
[7] Recode, “SoundCloud Has a New Pile of Cash, and Wants to Cut Deals With Big Music”, January 24, 2014, accessed: 2024-07-22.
[8] Recode, “Twitter has invested in music streaming service SoundCloud”, June 14, 2016, accessed: 2024-07-22.
[9] TechCrunch, “Now a million on SoundCloud – This startup is scaling globally”, May 18, 2010, accessed: 2024-07-22.
[10] Billboard, “SoundCloud Receives Investment from Ashton Kutcher’s A-Grade Fund, Passes 5 Million Users”, June 15, 2011, accessed: 2024-07-22.
[11] TheNextWeb, “SoundCloud announces ‘Next’ version of its site, hits 15M users”, May 9, 2012, accessed: 2024-07-22.
[12] TheNextWeb, “With 10 hours of audio uploaded every minute, SoundCloud rolls its new site design out to all users”, December 4, 2012, accessed: 2024-07-22.
[13] USA Today, “Who’s listening to SoundCloud? 200 million”, July 17, 2013, accessed: 2024-07-22.
[14] Recode, “SoundCloud Has a New Pile of Cash, and Wants to Cut Deals With Big Music”, January 24, 2014, accessed: 2024-07-22.
[15] BuzzFeedNews, “The Inside Story Of SoundCloud’s Collapse”, July 28, 2017, accessed: 2024-07-22.
[16] Musicweek, “Over 2,000 premium SoundCloud users demand copyright policy change”, April 11, 2013, accessed: 2024-07-22.
[17] The Verge, “SoundCloud pursuing its first licensing deals with record labels”, January 24, 2014, accessed: 2024-07-22.
[18] Billboard, “Twitter SoundCloud Acquisition Would Grow Two Birds With One Stone”, May 19, 2014, accessed: 2024-07-22.
[19] Billboard, “If Not Twitter & SoundCloud, Who Will Make a Deal?”, May 20, 2014, accessed: 2024-07-22.
[20] Billboard, “SoundCloud Nets First Deal with a Major Label”, November 4, 2014, accessed: 2024-07-22.
[21] Music Business Worldwide, “SoundCloud signs landmark deal with publishers – as Sony pulls catalogue”, May 6, 2015, accessed: 2024-07-22.
[22] The Guardian, “PRS for Music takes legal action against SoundCloud streaming service “, August 27, 2015, accessed: 2024-07-22.
[23] PRS for Music press release, “PRS for Music and SoundCloud reach multi-territory licensing agreement”, December 21, 2015, accessed: 2024-07-22.
[24] The Guardian, “SoundCloud signs licensing deal to pay independent labels for music streams”, June 4, 2015, accessed: 2024-07-22.
[25] Tech.eu, “SoundCloud raises €32 million in debt funding with an option for additional loans”, January 11, 2016, accessed: 2024-07-22.
[26] Music Business Worldwide, “Finally, SoundCloud signs a licensing deal with Universal”, January 13, 2016, accessed: 2024-07-22.
[27] New York Times, “SoundCloud Signs Licensing Deal With Sony”, March 18, 2016, accessed: 2024-07-22.
[28] The Verge, “SoundCloud’s subscription streaming service is here (and it needs work)“, March 29, 2016, accessed: 2024-07-22.
[29] Forbes, “Is Spotify Buying SoundCloud?”, September 28, 2016, accessed: 2024-07-22.
[30] TechCrunch, “Spotify has backed out of talks to acquire SoundCloud”, December 8, 2016, accessed: 2024-07-22.
[31] Music Business Worldwide, “SoundCloud slashes 40% of staff as financial reality hits hard”, July 6, 2017, accessed: 2024-07-22.
[32] Music Business Worldwide, “SoundCloud is about to sell a majority stake to financiers. Is a new CEO incoming?”, August 11, 2017, accessed: 2024-07-22.
[33] Music Business Worldwide, “SoundCloud launches emerging artist support initiative”, March 21, 2018, accessed: 2024-07-22.
[34] Music Business Worldwide, “SoundCloud expands direct monetization program to hundreds of thousands of users”, October 9, 2018, accessed: 2024-07-22.
[35] Music Business Worldwide, “SoundCloud is now a distributor: Platform launches tool for users to upload music to Spotify, Apple Music etc.”, February 19, 2019, accessed: 2024-07-22.
[36] Music Business Worldwide, “The exec who built Spotify For Artists just launched… SoundCloud For Artists”, October 13, 2022, accessed: 2024-07-22.
[37] Music Business Worldwide, “SoundCloud is about to revolutionize streaming payouts, launching user-centric royalties for 100,000 indie artists”, March 2, 2021, accessed: 2024-07-22.
[38] Music Business Worldwide, “SoundCloud turned over more than $100m last year, says CEO”, April 3, 2018, accessed: 2024-07-22.
[39] Music Business Worldwide, “Spotify is chasing annual profitability. SoundCloud’s already there”, December 13, 2023, accessed: 2024-07-22.
[40] Music Business Worldwide, “SoundCloud slashes a fifth of its global workforce, blaming ‘challenging economic climate'”, August 3, 2022, accessed: 2024-07-22.
[41] Music Business Worldwide, “SoundCloud, chasing profitability, cuts another 8% of employee headcount”, May 23, 2023, accessed: 2024-07-22.
[42] Music Business Worldwide, “SoundCloud secures $75m investment from Pandora owner SiriusXM”, February 11, 2020, accessed: 2024-07-22.
[43] Music Business Worldwide, “SoundCloud gears up for sale with potential $1bn+ price-tag (report)”, January 7, 2024, accessed: 2024-07-22.
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