SoundCloud hits a duff note in the digital disruption of the music industry

Stuart Lauchlan Profile picture for user slauchlan July 9, 2017
Summary:
Berlin-based SoundCloud was a European champion and pioneer in the music streaming business, but digital disruption across the sector has brought global competition.

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Here at diginomica we’ve had an interested ear out for the digital transformation of the music industry, ranging from the rise of the likes of Spotify and Apple Music through to the recent turbulence around Pandora, which led the disruption in the sector to begin with.

It is increasingly, as we’ve noted, a hugely competitive digital industry  and one in which the winners and losers are still being carved out. There’s a timely reminder of that today with the highly-public troubles at SoundCloud resulting in some dramatic decisions being taken.

The streaming music service just laid off 40% of its workforce - 177 staffers - as well as shutting down its London office in order to consolidate around Berlin, where the company is headquartered, and New York.

The rationale behind these cut-backs? A determination to remain independent in the face of continuing speculation that SoundCloud is ripe for acquisition by the likes of Apple or Spotify, although the latter is said to have cooled on the idea last December.

But for SoundCloud CEO Alex Ljung, the takeover speculation continues to dominate, despite the firm securing a freah $70 million of debt funding back in March. Hence, the need to shore up the defences and optimise the business’s operating fitness.

In a blog, Ljung outlined his thinking for the firm’s next steps, none of which include becoming part of Apple, it seems:

In the competitive world of music streaming, we’ve spent the last several years growing our business, and more than doubled our revenue in the last 12 months alone. However, we need to ensure our path to long-term, independent success. And in order to do this, it requires cost cutting, continued growth of our existing advertising and subscription revenue streams, and a relentless focus on our unique competitive advantage — artists and creators.

With more focus and a need to think about the long term, comes tough decisions. Today, after careful and painful consideration, we took the difficult step to let go of 173 SoundCloud staffers and consolidated the team into two offices: Berlin and New York. We are extremely grateful for the contributions of each and every staff member who will be leaving SoundCloud, and we wish all of them the best. Without them, we would not be where we are today. By reducing our costs and continuing our revenue growth, we’re on our path to profitability and in control of SoundCloud’s independent future.

He adds:

The SoundCloud platform listeners and artists love will remain available in more than 190 countries globally. SoundCloud will continue to be the place for what’s new, now and next in music, powered by the world’s most diverse music community. I look forward to sharing more about our future plans in the weeks and months ahead.

User base

What makes SoundCloud appealing as a potential takeover candidate is its user base of around 175 million listeners. Last month Spotify said it has more than 140 million users and more than 50 million paying subscribers, while Apple says its much younger service has 27 million customers to date.

What’s notable of course is the difficulty that most digital music services have in monetising their offerings successfully. Despite its successes, Spotify has yet to turn a profit and it’s the same story at Pandora.

SoundCloud began life as a free streaming service in 2007 before introducing advertisements in mid 2015. It has sought to encourage take-up of paying customers with the introduction last year of SoundCloud Go, a fully-licensed subscription streaming service priced at $9.99/month, followed by a mid-tier, $4.99/month option, which allows users ad-free offline play.

While Ljung is upbeat in the fiscal assessment in his blog posting, back in January the firm filed accounts showing a €51 million loss in 2015, up from €39 million in 2014. At the time, it warned of the possibility of running out of funds by the end of this year, citing:

material uncertainty which may cast significant doubt about the company’s ability to continue as a going concern.

Chief Operating Officer Marc Strigel and Finance Director Markus Harder departed the company in February.  The company stated at the time:

Two executives have left the company after five years to pursue new opportunities. This is unrelated to our normal course fundraising efforts... SoundCloud remains in a position of strength and is confident in its long-term prospects as it continues to be the go-to platform for the creative community.

Meanwhile the firm's Chief Content Officer Stephen Bryan, who played a major role in setting up up SoundCloud's paid-for subscription offerings, left the company on 30 June. SoundCloud does not have immediate plans to recruit for Bryan’s successor, according to a statement.

My take

Ironically one of SoundCloud’s competitive differentiators may also be at the root of its problems. The firm rose to prominence on the back of its library being built around amateur and unknown musicians in search of a platform, rather than striking overarching deals with established artists.

When the likes of Spotify is paying out in excess of 80% of revenues in royalities and rights payments to major artists, that might seem a good thing in one respect. But it’s those big names that people are ready to pay money for in terms of subscriptions, not an amateur guitarist in a bedroom in Frankfurt, however talented this undiscovered talent might be.

Meanwhile the Apples and Amazons of the world can afford to have skin in the music streaming business while subsidising this interest from other parts of their global empires.

What SoundCloud does boast however is a greater penetration among Gen Z consumers, those aged 16-19, than Apple or Amazon. Even if SoundCloud has largely failed to monetise that group, it would be a valuable addition to the subscriber stack for a provider with a cross-selling and up-selling capability built-in. Capture them young, nuture them and open their digital wallets ever wider.

The latest rumored acquirer is French-firm Deezer, a streaming service owned by Access Industries. This is part of the empire of Ukrainian-born UK biillionaire Sir Leonard "Len" Blavatnik, who also owns Warner Music Group. SoundCloud would be a very nice fit in that mix, whatever the desire on the part of Ljunk for continued independence.

The loss of SoundCloud would be sad - as a ‘YouTube’ alternative for struggling independents, it serves a valuable artistic purpose, even if the commercial realities don’t quite add up. Becoming part of the expansionist drive of an Apple or an Amazon would be a great pity. With that in mind, Deezer would seem to be the best bet and at least leave a European pioneer in digital music in European hands.

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