SoundCloud. Streaming Battle Lost Or There’s Still Hope?

A closer look into past, present and future of one of the music industry’s mammoths and a key player in the digital music space today.

14 min readJun 21, 2017

Music Industry Overview

In 2016, the music industry saw its first signs of true growth since the internet disruption that started more than a decade ago. By mid-year, labels saw revenue grow 8.1% over the same period in 2015, fueled mostly by an explosion in streaming services subscribers flocking to services like Spotify (75 million subscribers) and Apple Music (20 million).

Indeed, in early 2016, we learned that streaming had officially become the industry’s biggest source of income in 2015. While revenue from downloads and physical album sales both continued their years-long decline (by 14% and 17%, respectively), streaming revenue grew 57% during the first half of 2016, and since then, all signs have pointed to continued growth.

The global music market achieved a key milestone in 2015 when digital became the primary revenue stream for recorded music, overtaking sales of physical formats for the first time. In the US music market, streaming is the only form of music consumption that is on the rise, showing a total of $1.03 billion in the first half of 2015, which is 23% higher than the result in the first half of 2014.

Streaming is the core of music industry today

Americans streamed 431 billion songs on demand in 2016.

American Hedge Fund, P. Schoenfeld Asset Management (PSAM) released its new report, which projects that streaming will lift industry revenues by more than 80% from 2014 through to 2020 and the global value of the recorded music industry will nearly double over the next five years thanks to the worldwide explosion of streaming.

Goldman Sachs projected that streaming will help industry revenues rise to $104 billion by 2030.

Company Overview

Launched in 2008, SoundCloud is an audio platform where users can upload, record and promote audio or music across the internet, which aims to create a music and audio creator community, where everyone can discover original audio and connect with other users.

SoundCloud has over 18 million music creators using the platform, sharing well over 135 million unique tracks, and reaching 175 million monthly active listeners. SoundCloud’s strong point is the ability to share music with others without a need of having an account unlike their competitors. SoundCloud users collectively upload about 12 hours of audio every minute, stream over 5 billion tracks, which results in over 12 million artists being heard each month.

SoundCloud has a strong presence in the U.S., where the company saw a growth in audience of 67 percent between 2013 and 2014. In regards to age groups, SoundCloud is particularly popular amongst Millennial and Gen Z generations users, as about 75 percent of SoundCloud users fit in that age category.

“SoundCloud’s audience is loyal, influential and highly engaged.”
Alison Moore, Chief Revenue Officer, SoundCloud

Current Financial State

SoundCloud hasn’t been able to transform the base of 175 million users into profit.

SoundCloud’s revenue has been consistently growing over the years. However, net loss has been growing as well. The timeline shows data on the net loss and on the revenue generated by SoundCloud from 2010 to 2015.

According to a new filing at Companies House (UK), SoundCloud Ltd’s revenues grew 21.6% to €21.1m ($22m) in 2015 — but its net losses accelerated 30.9% to €51.22m ($52m).

“SoundCloud may run out of cash earlier than December 31, 2017. These matters give rise to a material uncertainty about The Group’s ability to continue as a going concern.“
Alexander Ljung, Chief Executive Officer, SoundCloud

Despite the financial worries, it’s still a very attractive place to work.

SoundCloud’s headcount grew by 25% in 2015, up from 236 to 295 people. It spent €26.77m ($28m) on wages and salaries in the year — up 49% year-on-year. That meant the average annual salary at the company hit €90,729 ($95k) in 2015 — up 19% on the €75,979 ($80k) average wage paid out to staff in 2014.

According to its filings, SoundCloud finished 2015 with €12.45m ($13.1m) cash in the bank and a €13.2m ($13.8m) net cash position.

Internal Insights

After analysing 54 reviews of current and former SoundCloud employees on Glassdoor we can identify a few underlying repetitive insight patterns with regards to insider’s view of company’s positive and negative sides, and their suggestions to company’s management.

Pros

The culture
Flexible schedule
Amazing people and teams
Exciting product
Great vision

Cons

Limited career growth
Lack of experienced employees (middle/ upper management)
Low employee retention rate
No leadership in engineering teams Lack transparency in communication

The way company’s executive speaks publicly can say a lot about its current state. Here’s what we can learn from a 2014 interview with TechCrunch.

SoundCloud’s CTO Eric Wahlforss has a tendency to evade questions with regards to monetization, but rather makes an emphasise on company’s big numbers such as the amount of monthly listeners and content on the platform.
Another observation is that Wahlforss thinks that platform is ‘’still in their early days and had just reached the stage of thinking about revenue plans.’’
When asked about if he sees their advertising model in the future the way Facebook injects ads in the newsfeed or Spotify plays ads in-between songs, he replied with a positive answer.
He makes an accent on making a revenue model for music creators, but rarely ever mentions company’s and its stakeholders profit. With regards to his behavior, it seems like he’s feeling uncomfortable with some questions regarding the copyright issues and avoids answering them.

‘’If we can make a sustainable revenue model for creators, us and listeners — then we won, that’s our game and that’s what we want to do.’’
Eric Wahlforss, Chief Technology Officer, SoundCloud

SWOT Analysis

Strengths

Internal factors that contribute to create value

The only relevant music social network today for artists and fans on the market today: ability to send messages directly, users can create and join groups for content to be collected and shared, the ability to “Like”, “Repost”, and “Share”, to “Follow” another user, ability to analyze data and track statistics
No necessity to have an account to listen to music
Allows users to immediately upload, record, promote and share their originally created content for free
Distinctive from its competitors
Customizable URL’s, music sharing via widgets, optional download of audio where available
Very large base of 175 million monthly active listeners, 135 million unique tracks and 5 billion streams each month

Weaknesses

Internal factors that decrease value

Lack transparency in communication with staff and media
Questionable upper management decisions policy
Unregulated and peremptory opportunity for copyright holders to remove paid subscriber’s content
High administrative expenses
Lack of vision for sustainable monetization model
Low entry barrier for new users affects quality of uploaded content
Unresolved user experience flaws

Opportunities

External factors that influence positively

Constantly growing segment of the market where SoundCloud is a big player
Infinite potential for growth
An opportunity to make profit for both music creators and company itself
SoundCloud has deals with 2 out of 3 major labels, making it a serious competitive threat to other streaming services

Threats

External factors that influence negatively

Highly competitive and oversaturated market segment
Unresolved issues with using copyright content for unofficial purposes
Solvency issue due to financial dependency

Music Industry Trends And Predictions

The continuing movement from record labels to more independent formats.
The traditional record label way is an antiquated model coming closer to its extinction. New talent has been taking charge of their own personal marketing and distribution through social media and music streaming platforms. The barriers to entry and exposure have been lowered. The possible overabundance of artists looking to break through on streaming platforms could saturate the market. This will raise new barriers to entry, giving streaming platforms an opportunity to capitalise on the opportunity to streamline exposure for certain artists.
Free music is the industry standard.
According to Digital Music News study, ”the idea of paying for music online may cease to exist as a reality in five years.” This may be the most difficult to accept concept in the music industry.
The music subscription rise will continue.
The number of people willing to pay $10 a month for music skyrocketed in 2016, about 100 million people are believed to subscribe to music services this year and this doesn’t include free streaming from SoundCloud, YouTube, or Spotify’s free tier.
Streaming services embrace on-demand model.
Professor David Philp is Assistant Professor of Music Management & Popular Music Studies at William Paterson University says, “We’ll see the big streaming audio services, like Spotify, Apple Music, Amazon, and Pandora, get more into original content’’. Apple Music and Tidal are getting exclusives already. But what he’s talking about is creating original content for music, in other words signing and recording talent, and distributing that as a new release under the auspices of Spotify Recording Group. Amazon and Netflix already do this with video content.
Live music’s second coming.
The U.S. live music industry is expected to grow to $11.06 billion by 2019, up from $9.06 billion in 2014. Music streaming, as of 2017, is at about $6.58 billion. The rise of festivals is proving to be extremely lucrative not only for big names, but it also gives up-and-coming artists more exposure. A lot of festivals and arena tours are already using RFID (radio frequency identification) and Beacon technology to incentivize fan purchases and form other initiatives with sponsors, which represents commercial interest.
Asian markets are soaring.
South Korea has emerged as one of the 10 largest music markets in the world, with sales totalling $265.8 million in 2014, according to data from the International Federation of the Phonographic Industries. A decade ago, that market was half the size and not one of the 25 largest. By 2014, the market in China surpassed $100 million for the first time in almost a decade, with streaming a major source of the recovery there.
Creative reimagining of music releases.
Nowadays, success in the music industry has more to do with an artist ability to achieve success by working smarter and more efficiently to create content that uniquely engages a fan base. The concept of the traditional music album is slowly fading away thanks to visual albums, music released as a long-form video or film from industry defining artists like Frank Ocean, Beyoncé, and Kanye West.
Playlists is a new form of music consumption form.
Streaming services use large-scale data analysis and machine learning to craft a weekly playlist designed to surface new music to listeners.
Data affects the songwriting process.
Spotify analytics can tell labels when a particular track isn’t making it onto any playlists because it’s skipped after a few seconds. That’s starting to dictate how writers and producers create songs. It forces songwriters to adjust the structure of the song based on the data which ultimately leads to loosing of identity.
Crowdsourced feedback based artist-fan relationship.
There are so many ways musicians can interact with their fans now which would result in more creative, engaging musical releases. Now fans can take their feedback to social media to suggest structural song changes to artists and they can reintroduce it later by being able to respond to feedback, reminiscent of what ‘agile’ does in the tech industry.

Business Model

Since its launch, SoundCloud has had different revenue streams. After creating a considerable user base, SoundCloud raised funds from venture capitalists. SoundCloud also generates revenue from paid accounts and from advertising on the platform. SoundCloud created the Premier Partner level, which allows artists to make a profit from their tracks through advertising. SoundCloud launched its $10-per-month subscription music streaming service, SoundCloud Go+, in the US, UK and Germany last year, and its mid-range $5-per-month subscription called SoundCloud Go more recently.

“The assumption of a successful launch of the new subscription service is the key element of our financial projections for the next three years.“
Alexander Ljung, Chief Executive Officer, SoundCloud

Business Model Canvas

Key partners

What can the company not do so it can focus on its Key Activities?

Support staff (e.g. customer service)
Artists
Music labels
Music bloggers and journalists
Media (e.g. Radio, music TV channels)

Key activities

What uniquely strategic things does the business do to deliver its proposition?

Negotiations with record labels and artists
Curating content (e.g. Charts, Discover)
Promoting SoundCloud (e.g. music festivals, music websites)
Updating website and mobile app
Resolving support issues

Key resources

What unique strategic assets must the business have to compete?

Human and financial resources
Copyrights

Value propositions

What’s compelling about the proposition? Why do customers buy, use?

Allows users to immediately upload, record, promote and share their originally created content for free
Ability to play (almost) any music at will
Access to music anywhere (e.g. home, work)
Discover new music
Find out what others are listening to
Exclusive content from influential artists
Create shared listening experiences (e.g. playlist)

Customer relationships

How do you interact with the customer through their ‘journey’?

Social media
Communities
Self-service
Automation

Channels

How are these propositions promoted, sold and delivered? Why? Is it working?

Streaming via website, widgets
Mobile app

Customer segments

Who are the customers? What do they think? See? Feel? Do?

Music creators
Listeners

Cost structure

What are the business’ major cost drivers? How are they linked to revenue?

Rents
Salaries and wages
Partner fees
Marketing and advertising
Web servers
Research and development

Revenue streams

How does the business earn revenue from the value propositions?

Streaming subscription service (SoundCloud Go, SoundCloud Go+)
Paid accounts (On SoundCloud)
Native advertising

Strategic Proposal

Focus on building social platform for the music community.
Make a shift from music streaming direction ‘’YouTube of Audio’’ towards becoming ‘’Facebook of Audio’’.
Paid promotion for artists.
Individual artists don’t need a label for exposure and ready to invest their own resources in their promotion.
Reduce administrative costs.
Administrative costs exceed revenue by almost 3x, which is a much bigger number than their competitors. There’s a serious risk of the company running out of cash.
Modernizing and enhancing user experience.
In order to look and feel up to date with current design trends and be more appealing to a younger audience, with an accent on the mobile app.
Create new revenue streams.
Capitalise on money making sides of the music industry, such as crowdfunding, selling tickets, selling artist’s music and merchandise, partnerships with t-shirt, vinyl, cassettes printing manufacturers for artists.
Lower monthly subscription price.
May seem reasonable due to having 15 million of professional songs on SoundCloud versus 40 million on Spotify for the same price. Lower the price of streaming service for creators who already pay for the account.
Using data to find what is trending to sign new artists.
To identify under-the-radar artists that generate buzz online and surface the ones most likely to break out like Spotify’s ‘Fresh Finds’. Signing new artists for exclusive content, like Netflix is doing with their on-demand TV shows.
Attract and develop more experienced employees.
Reframe company’s vision for higher transparency and clearness in the eyes of public and stakeholders alike, which would make the company seem more attractive for potential investors and partners and increase user retention rate.

Case Studies

Bandcamp
Bandcamp, a music company which is artist-centric music and merch marketplace has been profitable since 2012. In 2015, Bandcamp announced that it had paid out $100 million to artists since being founded in 2008. As 2016 winded down, that number wass already up to $190 million, a number that suggests Bandcamp is booming. That’s not just good news for Bandcamp and the artists who use it to sell music and merchandise. It’s also a clear sign that music fans are perfectly happy to pay for music and support artists directly in the digital age.
Pandora
Late last year, Pandora acquired the Spotify competitor Rdio, concert ticket seller Ticketfly, and Next Big Sound, a startup that tracks music online and offers detailed analytics to artists and labels. The acquisitions signaled a two-pronged strategy: turn Pandora into a more comprehensive, Spotify-esque place for listening to music, while also making it a more valuable resource for musicians.
Amazon Music
Amazon Music is a cheaper option for many people: If you subscribe to Amazon Prime, Amazon’s music service is $8 per month. Also, there have been rumours that Apple Music is considering lowering its prices by up o 20%. This would result in $2.00 cuts to both its family and individual plans, according to Digital Music News.
Facebook
The most important factor driving advertising revenue growth for Facebook was an increase in revenue from ads in News Feed on mobile devices. In 2015 mobile advertising revenue represented approximately 77% of total advertising revenue, as compared with approximately 65% in 2014. According to Facebook’s annual report for 2015, the company makes approximately $17 billion on advertising and approximately $850 million on payments and fees from virtual goods sale.

User Experience

Being an active and experienced SoundCloud user and music creator using the platform to upload and promote music for 7 years, I want to make a list of suggestions to enhance platform’s user experience and usability.

Toggles & filters for the Stream.
To filter content based on genre, length, content type (singles/mixes), mute reposts, turn off the continuous play feature etc.
Update native messenger.
Communication on SoundCloud is a big part of the platform. Adding features like group chats, a simple animation would only make it a better experience.
Multiple profiles management.
A handy tool for artists to quickly switch between aliases, musical projects, rather than logging out and in each time.
Implement traditional social network aspects.
Ability to like comments for songs/mixes/podcasts could be useful or repost something with a comment.
Ability to create lists.
Lists feature would help to listen to music in a specific genre or mood. Drag-and-drop feature would make this experience even nicer.
Timeline.
Navigation through timeline would incentivize listeners to explore profiles more, and allow older content to become more discoverable.

Future Vision

SoundCloud has potential to have the ultimate power in the music world.

Music streaming services would continue dominating the music industry and digital all-you-can-eat form of music consumption would be a standard. With SoundCloud stepping away from its focus on streaming service and shifting its focus on becoming the ultimate social network for the music world would make them a leader in this market niche. By building new revenue streams, improving user experience, reducing administrative costs, having a clear vision and goals, being more transparent and attractive for potential users and investors SoundCloud has a chance to rule the digital audio world in the nearest future.

“Our core investment thesis for SoundCloud is centered around our belief that SoundCloud will become the dominant online digital delivery platform for audio in much the same way that YouTube has become the dominant online platform for video.“
Somesh Dash and Dennis Phelps, SoundCloud Investors, IVP

In the next article we are going to look at Snap’s future and its rivalry with Facebook for the #1 social network in the world.

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