A German version of this article can be found here.
The Berlin-based startup SoundCloud is currently going through one of the most exciting and complicated transformations that the Internet industry had to experience in recent times. Launched in 2008 as slightly idealistic platform for musicians, indie labels and their following, the company is about to be turned into a full-fledged on-demand music streaming service including a free tier and subscription model. The sheer number of different stakeholders that need to be considered during this process is a huge challenge for the company founded by the two Swedes Alexander Ljung and Eric Wahlforss.
To illustrate how tricky their endeavour is and how easy the needs of one of the several integral parts of the SoundCloud ecosystem can be neglected, here is a very recent example: Mid 2014 the German company announced a new initiative called “On SoundCloud”, offering for the first time a membership for creators who want to earn money with their tunes available on the site. Until that point SoundCloud positioned itself as a place where creators could promote their productions and connect with the audience. Now, SoundCloud also wants to help musicians to earn money. The new “Premier” tier means that creators accept ads being shown and placed when somebody streams their songs. In return, SoundCloud shares the revenue with the programme’s participants. For now, an invite is needed to participate.
Pre-roll audio ads
While this is certainly a welcome addition for artists, users are currently paying the price for it. Or actually, they don’t: The paid subscription option that SoundCloud announced last year is not available yet. That causes a certain expectation issue: Users accessing SoundCloud with an U.S. IP address might have to listen to pre-roll audio ads before a desired track starts playing. I experienced that with this song for instance, both in the browser version as well as on the iPhone app. After a couple of seconds the ad can be skipped, but it is long enough to get annoying. This has to do with learned behaviour: The service has trained its users over many years to expect instant streaming. Other on-demand streaming services such as Spotify, Rdio and Deezer have not done so. They instead taught users to upgrade to the ad-free subscription tier in case they get tired of all these ads. Now, as a regular SoundCloud user, I would want to do that as well. But currently I can’t.
If you search on Twitter for “soundcloud ads” you will find various disappointed tweets. When a web service changes, some users always respond negatively. But if the premium offering for listeners would be ready, the company could refer to it and basically tell people that after more than six years, SoundCloud needs to generate revenue in order to have a future. After all, most people understand that a free lunch does not exist online either. By launching ads first and the subscription model later, the service risks alienating its community.
No launch date for subscription option yet
When asked about the subscription model, a SoundCloud spokesperson repeated the announcement that such a feature will be coming up, but would not want to name a launch date. As anyone who has ever covered digital music business models knows, startups in this field are traditionally very secretive about their product pipeline. The core reason is that a lot depends on agreements with rights holders. One can just assume that ongoing negotiations could be the cause for the situation in which the artist-based ad programme already is live, but the universal subscription option is not. As I mentioned in the beginning of this article: There are a lot of parties to be considered and to be pleased.
Also let’s not forget an important fact: SoundCloud needs to increase its revenue. As numbers revealed in October last year indicate, the losses are mounting. In 2013, the operating loss went up to €23.1 million. That itself is not unusual for startups in a heavy growth period. It is neither a necessary sign of weakness. But at some point the money machine needs to get going. Otherwise investors won’t be willing to inject more cash – at least not at the valuations targeted by the founders. SoundCloud is said to be in discussions to raise another round of funding, up to $150 million.
While pressure from existing or new investors might be the reason for why SoundCloud does not hold audio advertisements back until the launch of the subscription option, requests by the major labors might also play a role. Since its launch, SoundCloud has operated in some kind of grey area, at least silently tolerating user uploads of non-licensed music. As long as no one complained using SoundCloud’s Content ID system and as long as the company did not make any money with that kind of approach, the legal pressure seemed to have been manageable. But with the rise of serious monetization plans for end user activity, the service needs to play by the rights holders’ and major labels’ rules. So far, only Warner Music is said to be on board and even getting a stake of 3% to 5%. This is just speculation but one possibility is that Warner or the other two labels, Sony and Universal, have rushed Soundcloud into trying out ad monetization to prove that this site actually can generate income through users.
Pressure from all sides
But SoundCloud does not only need to consider its business model and the labels’ demands. The service also has to make sure not to push away those musicians and creators who love SoundCloud for the very reason that it comes across as a bit more rebellious, underground-minded and idealistic. They might fear that the distance that SoundCloud had created between itself and the conservatively thinking music industry could be endangered. And it most likely actually is.
And if all that would not be enough potential headache, YouTube is expanding its own music subscription service, and market leader Spotify is growing nicely. On the one hand the competition cannot be ignored by SoundCloud. On the other hand, it should not receive too much attention either. From a user perspective, what would be the point of SoundCloud becoming yet another non-differentiated on-demand streaming service?!
This highly complex situation requires a careful and tactically very smart procedure. It also is an open secret that having to get along with the music industry’s commercial giants can be a struggle for digital music startups. So personally I do not want to be too hard on SoundCloud. What Alexander Ljung, Eric Wahlforss and their team are trying to pull off is nothing but a really big deal.
I am curious to see if the company manages to get all the necessary things right: Pleasing users, pleasing labels, pleasing artists, pleasing collecting societies (especially in Germany no fun), pleasing investors and managing to stay different enough not to lose its unique selling proposition. My distant impression of the founders is that already pride alone would prevent them from cloning Spotify though. Like Spotify founder Daniel Ek, Ljung and Wahlforss have studied at KTH Royal Institute of Technology in Stockholm. Knowing a bit about the Swedish mindset, my guess is that if we are going to see direct competition between both companies, it would be a constructive, creative and ambitious race, not uninspired copying from each other. Although that of course depends on how much other “powers” try to control decisions.