SoundCloud may be under pressure, David Balfour notes, but how many other platforms can claim such a unique and distinct position?

29 May 2015 - Press release

You have to admire SoundCloud’s Alexander Ljung for agreeing to take part in a keynote interview at IMS in Ibiza last week.

Like many big, disruptive and well-funded tech companies, SoundCloud is the focus of intense media speculation. In SoundCloud’s case however, much of that recent attention has been pretty hostile. Nevertheless, SoundCloud also finds itself in a rather unique market position. One can’t just apply general or historic digital music models to this essentially new platform. Which means that there are a lot of interesting and legitimate questions to ask about the past, current and future role of SoundCloud.

One could describe the position in which SoundCloud finds itself right now as uniquely complicated. On the one hand, it’s known as a platform by its users and for its users, with an enviable, vibrant community of creators who have been absolutely essential to making it the hugely popular destination that it is. On the other hand, it’s a large and expanding business with burdensome costs which are never going to be adequately met by the subscription model it employed in its early days, where creators paid to be able to upload any significant amount of material, and to enjoy the full functionality of SoundCloud’s great technology. 

SoundCloud’s outlook is further complicated by the fact that it’s now also a heavily-invested platform. Leaving aside speculative valuations which have even put the service in the mythical billion dollar value club, SoundCloud’s bills are currently paid by investors who will be pretty determined to see some kind of longterm return on their investment.

It’s no secret that SoundCloud has been trying to reach deals with the major labels which would enable it to take its service into a new era. It’s also widely-reported that these licensing talks have been anything but straightforward. Whilst Warner Music and a number of independent labels have already signed agreements, Universal and Sony remain conspicuously unlicensed. This doesn’t of course mean that there is no music from Universal and Sony artists on SoundCloud: its user-uploaded model has meant that many artists have uploaded their content onto SoundCloud, regardless of the fact that these labels don’t yet have a full deal.

This dual supply chain is now under threat however. As SoundCloud has been forced to implement anti-piracy tools to give large rightsholders better control of their content, so has the removal of that content apparently become a leverage tool employed by some labels. Last week it was reported that Sony Music began taking content down from SoundCloud, even though some of its artists involved seemed none to supportive of this move. Columbia’s Madeon described it as “Sony…holding your own artists hostage.” Regardless of perspective, SoundCloud does find itself under an increased threat of wholescale content removal from the largest labels. The situation where the presence of dubiously-licensed content on the platform was tolerated by some labels seems under threat as never before.

Whilst SoundCloud’s past legal situation could be described as grey, there’s no doubt that as it seeks to form a profitable and legitimate longterm business, SoundCloud is desperately trying to move towards a properly licensed model. It’s just not proving to be anything like an easy transition to make. 

Licensing talks with labels are one thing, but SoundCloud’s push towards legitimacy has also started to impact on the very community which has been so vital to its growth. Mix content has already started to get blocked from the platform as never before, whilst mashup content looks similarly under threat. Many SoundCloud users have already threatened to abandon the platform as a result.

Considering the large amount of real challenges facing SoundCloud, Alexander Ljung somehow manages to come across as optimistic for the platform’s future. He sees SoundCloud’s complex current position as being merely a staging point in a long journey towards establishing the proper, longterm business model which will ensure the platform’s survival. Creating a properly monetised platform is the third chapter in SoundCloud’s story, he says, and a chapter that is only really just beginning. 

What is that future business model, exactly? The significant new and already-existing piece is revenue from advertising which is placed on the service. At this point in time that advertising is only being placed on the service in the US. Whilst SoundCloud has been keen to talk about ‘millions’ that have already been paid to rightsholders from this model, the reality is that the payouts are small, at least compared to the user base. Some labels, most notably Ultra’s Patrick Moxey, have poured cold water on the initial monetisation launch. “What do they pay artists and writers right now? Little to nothing,” he commented. “Will they pay anybody anything in the near future? Not really.”  

One should not judge the potential based on the current experience alone however. There are further important phases in SoundCloud’s move towards its future model. Firstly, Ljung commented that the decision to place advertising in the US only was intended to give SoundCloud experience in refining the format, before rolling it out to other markets. The launch of advertising in other territories should help the service ramp up its payouts considerably. Furthermore, there is a planned subscription tier which is as yet not clearly described, but which could also bring significant additional revenue. 

Whilst subscription will be a part of SoundCloud’s future, it seems safe to assume that its advertising-supported tier will be the central pillar of revenue creation. The key questions must therefore be: can SoundCloud attract enough ad spend, can it do so without alienating its user community and does it have a viable business without those two missing major licenses? 

One complicating aspect which we feel is often overlooked is that the pool of advertising revenue for spending online is finite. Advertisers have increasingly more and more choices about where to place their promotions, yet budgets themselves to not grow at the same rate as platforms. The idea that an infinite number of new advertising-supported platforms can all attract advertisers is unrealistic. The platforms must therefore offer something attractive and unique for advertisers, which SoundCloud would of course argue that it does.

Could SoundCloud make a success, even if Sony and Universal continue to hold out? This is where it gets interesting. What SoundCloud undoubtedly has in its favour is that it’s never pretended to be a full-content, pop-loving platform. Whilst the loss of major label content would undoubtedly hurt, it would not hamstring this service in the same way that it might others, where the big pop hits are absolutely essential. SoundCloud’s ethos and user base has always been underground and independently-minded. Perhaps the interesting question is whether that user base can itself prove sufficiently valuable to advertisers to make the service financially viable over the longterm.

The next phases in SoundCloud’s story will be fascinating to watch. Whilst many are quick to predict doom, we think there are some interesting and new factors at play here which mean things are not so easily predicted. Will users really desert the platform? They’ll have a job finding another service which is as well designed and beautifully functional. Will advertisers really stay away if Katy Perry et al are absent? A differentiated content base could just become a selling point in its own right, as advertisers increasingly look beyond pure scale and towards unique propositions. Will new launches from Apple, for example, further weaken SoundCloud’s position? SoundCloud’s uniqueness could yet prove to be its saviour, as long as the numbers can be made to add up.