Inside SoundCloud, the move to revenue begins

Peter Kirn March 14, 2016

SoundCloud has become a popular punching bag for the music press. The formula runs
something like this: choose a screaming headline predicting the companys doom, run
some out-of-context business numbers and some negative quotes by an unnamed source,
then (presumably) rake in clicks.
How bad is it? Well, bad enough that FACT chose to run two articles on the same day.
(One was in linkbait listicle form, for bonus points!)
It seems there are three big factors in creating this climate. One, SoundCloud is popular
really popular. For producers and DJs, the site runs near total ubiquity in the same way
YouTube does for video. Indeed, whatever highprofile departures from the site you
may have seen or impassioned calls to go to competitors, the site has continued to grow.
Im still hard-pressed to find DJs sharing a MixCloud link, let alone something on a
more obscure site. Some people love sites like Bandcamp, sure and they post their
Bandcamp releases on SoundCloud to promote them.
Two, user experience has sometimes suffered when the machinery of licensing has
failed. No one is going to be happy if they get a takedown notice, least of all in cases
where theres a false positive. This is hardly news if anything, it seems the situation
has improved but until theres a solid licensing structure in place, its likely to leave
users uneasy.
Three, and perhaps most importantly, theres a vacuum of information about
SoundCloud. The company made headlines recently because some 2014 financial
numbers were available. But these didnt present a complete picture, and theyre
(obviously) over a full year out of date. The company wont comment on licensing deals
with labels, of course, but theyre also silent on even seemingly basic information like
how many producers pay for Pro accounts. Into that empty space, then, its easy to pour
speculation and hearsay, or to simply make stuff up.
I dont think SoundCloud is, or should be, the tool for every job. But it remains the most
important streaming service on which producers can share music for others to discover.
So its important to get accurate information even if that means less than a complete
image. Heres the latest.
It says something about the Internet age that a business several years into being would
add an executive job position for overseeing actually making money but thats the
world we live in.

That said, theres reason to take the Chief Revenue Officer hire at SoundCloud seriously.
Alison Moore who fills the position in SoundClouds New York office has a huge
resume. (Anyone complaining about SoundCloud spending lots of money on salary, this
is the kind of highly-qualified person theyre then able to afford.)
Alison Moore seems like the sort of person SoundCloud would dream of having. Her
early experience was SVP of Digital Products for HBO, where she handled everything
from consumer experience to audience development for the hugely successful HBO GO.
And she oversaw the now-defunct DailyCandy, the womens lifestyle brand (meaning she
has some credibility in working on the Internets guy bias). What likely got her the
SoundCloud gig was overseeing (as GM and SVP) TV Everywhere, NBC Universals
streaming product.
And if you think working out streaming revenue in music is a nightmare, try TV, with its
tangled morass of cable operator interests and entrenched and lucrative broadcast
advertising and complex rights ownership. NBC has had some success with TV
Everywhere its arguably been (along with HBO GO) a trailblazer and model for the
rest of the TV industry. If anyone ought to be able to work out how to make SoundCloud
make money, its this person.
Back to that absence of information: with SoundCloud mum on what theyre actually
doing, and nothing unveiled so far, you could imagine that its quiet in the company. But
you could also wind up criticizing the SoundCloud of 2014 rather than the SoundCloud
of 2016.
For its part, SoundCloud in their statement about Moore claims that the company
expands at a rapid pace. And they make clear where all of this revenue is coming
from: capitalizing on its massive user scale to drive revenue growth via consumer
subscriptions and a diversified advertising product offering.
Last week, I had the pleasure to meet SoundClouds new design chief, Prarthana
Johnson, at an event called Musiktrends auf der Spree (it was on a boat, enjoying the
uh March weather in Berlin). Johnson has also recently joined the company (hired
late last year), and I understand shes reporting to Moore. Johnson also has an
impressive resume, managing user experience for Microsoft (on Skype) and rising to
Skypes Principal Design Manager.
Focusing on revenue at every level of the product seems to be high on the agenda, and
this year looks like whatever SoundCloud has been promising finally gets rolled out.
So what does that mean for the site?

SoundClouds base of creators thats you are one reason it isnt going anywhere. But now it needs to finally get its
business model in order.

The business of being SoundCloud

SoundCloud has publicly said its revenue plans involved two basic concepts: one,
advertising support, and two, a subscription model.
The company has been saying that for some time; whats changed is that later 2016
appears to be the timeline. Moores hiring certainly points to that, though the company
didnt make any mention of when something would happen in their statement.
Digital Music News has sources that point to October. (In January, DMNs sources predicted

July.) Fall sounds about right to me.

But from there on out, Im not sure DMN is getting things right. They call the rollout a
transformation, implying that the future of the company depends on users paying for
content.
I think thats simply dead wrong. SoundCloud has always talked about
taking bothadvertising-based offering (read: free, ad-supported) and a subscription
model. Indeed, youll see wording in the Moore announcement explicitly says revenue is
coming from (1) consumer subscriptions and (2) a diversified advertising product
offering.
Now, that could be ads launched on a subscription-only service. But weirdly, DMN also
implies that NBCs TV Everywhere and HBO GO represent NBC and HBO struggling
companies have been struggling to bring their massive, mainstay content businesses into
the digital era, with mixed results getting users to pay. In fact, NBCs TV Everywhere
launched without any additional subscription fee ad-supported meaning this
statement is a non sequitur. (HBO GO, now HBO Now, for its part may not have
struggled because users dont want to pay, but rather because HBO viewers are often
already paying for cable and havent cut the cord, or are busy paying for Netflix, or
simply waiting for a new Game of Thrones season to start. Remember when I said TV isnt
the same as music?)
SoundCloud declined CDMs request to add additional comment for this story on their
specific revenue plans. But we can look at past statements. CTO Eric Wahlforss talked
in no uncertain terms when I hosted a panel with him at Berlins Tech Open Air about
balancing both ad-based and subscription-based models.
Also missing from DMNs gossip stories, SoundCloud is unique in that unlike a service
like Spotify or Apple Music, its producer/DJ members do already often pay for the
service. (I do, and maybe you do. SoundCloud once comped my subscription early on; I
now pay out of pocket because its invaluable.) SoundCloud wont comment on the
number of paid subscribers, unfortunately, saying through a spokesperson only that
there are over 18 million creators using the platform, sharing well over 110 million
tracks, and reaching 175 million monthly active listeners.
Theres reason to think an ad model might work. While Spotifys ad efforts have
arguably stumbled, Beatports new streaming offering has already attracted advertising,
at least in the US. That suggests more focused offerings might be just the thing to attract
ads. And speaking in the highly biased capacity as editor of CDM, I believe a savvy,
producer-centered market is more valuable to advertisers than generic listeners alone.
Whats the hold-up? Likely, its the challenge of balancing two tasks at once.
SoundCloud must both restructure the site and business in order to allow for ads and
subscriptions,and get the licensing deals in place to facilitate that. Its a chicken-and-egg

sort of situation, except you dont have the luxury of anything other than both
simultaneously.
SoundCloud did share a statement about their progress with CDM, though:
Over the past year, weve continued to bring partners from the music industry onto
SoundCloud. Weve signed deals with PRS and UMG/UMPG, to add to the nearly 200
deals weve already signed, including those with Warner Music, Merlin and NMPA, as
well as MCNs and independent creators. Were focussing on enabling creators to get
paid for their creativity, and on building a financially sustainable platform that our
community can enjoy for years to come.

About that whole cash thing

Lastly, lets deal with this idea that SoundCloud is about to close shop because theyre
out of cash. Guess who DMN was trumpeting this story way back in July. (I have no
idea why theres a guy dancing in front of a fire in the picture.)
Then, in February, news outlets like FACT seized on a filing of 2014 accounts, which
report US$44 million in losses.
Basically, SoundCloud requires investment to keep operating its growing fast, and
revenue is delayed. This would be cause for alarm, except that SoundClouds massive
user success has meant it keeps attracting that needed capital. In a statement provided to
CDM, SoundCloud notes it has both incremental capital and credit at its disposal:
SoundCloud filed its 2014 accounts with Companies House in February 2016. Beyond
the full-year financials for 2014, which reflect those of a company in a strong growth
stage, they show that, in 2015, we secured $77m of incremental capital, some of which
came from our existing investors, demonstrating their belief in the future of the
company, and the rest of which is a flexible credit line from Tennenbaum Capital
Partners, an attractive option for companies like SoundCloud, who have a solid credit
rating and are on a clear path to global success.
Anyway, you cant report about the uncertainty of running out of 2015 cash based on
2014 numbers in 2016. Its clear that what remains is for SoundClouds ad- and
subscriber-based model to roll out, and that it has to be successful.

Why this could benefit SoundCloud users

Theres been a sort of populist thread through discussions Ive seen that assumes that the
more successful SoundCloud is as a business, the less useful it is to its members.

I rather think that the past years have proved exactly the opposite. The whole utility of
SoundCloud to someone like me (or you, probably) is to have music and sounds reach a
wide audience. Its been massive investment that makes that possible, from plumbing
like a massively scalable infrastructure to the money spent on UX and design and
audience development that racks up listens.
And when SoundCloud fails as a business, we suffer. The whole point of the agony of
getting takedown notices, of not being able to post DJ mixes, of having false positives
identify our music as infringement this is what happens when a site doesnt
havelicensing deals in place. Not to mention, if SoundCloud fails as a business and
becomes a significantly different company in an acquisition (or even shuts down), it fails
everyone who found utility on the service. Look at social media: I think musicians
actually still struggle because Facebook doesnt make music players prominent in the
way MySpace did.
Thats not to say SoundCloud doesnt deserve competition. A monoculture is not
necessarily healthy, either, so I think any conversation about freeing ourselves from
reliance on one service is a good thing. At the same time, for a lot of us the ideal
involves both a healthy SoundCloud and healthy alternatives.
For now, SoundCloud points us to a study by comScore that shows SoundCloud is the
eighth most popular app among USA-based millennials (thats anyone born 1980 or
after). Whatever interesting alternatives may be, that makes SoundCloud simply one of
the most popular things on the Internet. And if youre in the business of making sounds
on the Internet, that means your business is tied to theirs.