Soundcloud’s Fatal Mistake

After hearing the dire news published by TechCrunch about Soundcloud’s unfortunate financial position yesterday, I have a lot of thoughts to share. I’m writing this as someone who used to be an amateur music producer & DJ, part of Soundcloud’s “target market” in the early days and, at one time, a purchaser of Soundcloud’s pro plan for creators. I have followed Soundcloud’s history throughout the years, even worked at a music tech startup where we would talk about Soundcloud often, and I can say that while I and many others in the music & music technology spaces have loved Soundcloud, we have also been frustrated often with their strategy. All that being said, these are just my opinions as someone with very little inside information.

Soundcloud’s fatal mistake has always been that they never seemed to understand what they were building. I would argue that their vision was always a little too detached from what they actually had in the market. I know it sounds unfair to say that their mistake has been “fatal” — clearly Soundcloud has seen a lot of success, even if they have never turned a profit, and they are not dead yet. They could recover from this unfortunate position and my opinions may just look like baseless FUD in retrospect. Still, I view this mistake as fatal because I think it’s been slowly killing them since the early days. Allow me to explain.

I divide Soundcloud’s history into two phases:

1. a creator-focused platform utility, where the business model attempts to monetize the creators providing the platform with content
2. a listener-focused radio service, where the business model attempts to monetize the listeners consuming the content, but for some reason still attempts to monetize the creators providing the platform with content… but more on this later

In phase 1, I was a Soundcloud “early adopter.” At the time, new music from amateur artists and independent record labels was primarily shared via music blogs, and these blogs often had to host mp3’s and bear the storage/bandwidth costs associated with distributing this music. Further, the artists/labels had no control over where their content was being published or how it was being distributed, and no way to capture those listeners. Soundcloud quickly solved a need in the market by providing an easy-to-use embeddable audio widget and a generous free service for creators that allowed them to upload and share up to 2 hours of content for free. Furthermore, these widgets were best-in-class; Soundcloud solved the issue of “what should the listener see while using this widget” by generating a visual waveform and allowing comments to be embedded over the waveform. These timestamped comments opened up a unique social behavior around audio sharing that provided multiple benefits:

1. listeners could claim some ownership of the audio, and had some incentive to be the first ones to comment on uploads that might eventually become popular
2. popular uploads were visually differentiated by having a lot of user activity displayed prominently, making it exciting for content creators to be able to show off an audio widget filled with comments and also making it less likely that uploaders would want to delete audio once it had all this social capital embedded with it
3. these comments would further engage listeners by providing them something to read while listening and essentially building community around individual uploads

Of course the most important element of this feature was that, by being overlaid on the waveform, the comments were able to be included in the embedded widgets, taking what I considered to be the most revolutionary and engaging feature of Soundcloud beyond their own website.

Soundcloud had many other features during this period that were clearly focused on a vision of building the ideal platform for independent audio creators. For example, they had an “audio inbox” feature (it was called a dropbox) that allowed users to receive audio submissions via private message — this was perfect for record labels, and many labels moved their demo submission process entirely to Soundcloud (another example of Soundcloud solving a clear need in the market). At the same time, Soundcloud was bearing the cost of all this file storage and bandwidth, so they needed a way to bring in revenue to cover the costs, and they were against the idea of relying on ads (they wanted to be a clean, ad-free experience — again, ideal for creators). So they went with the business model of providing premium tiers for creator accounts: Soundcloud Pro. For a reasonable fee(think $80/year), you could get unlimited uploads, detailed stats on where your listeners were coming from (Soundcloud had an excellent analytics dashboard), better customization options for your profile, etc. etc. For an amateur musician who has dreams of dominating the music blogs and hopefully securing a coveted opening spot at a music festival, this seemed like a no-brainer. At the same time, it did begin to segment Soundcloud as an offering in the minds of users. If you had no intention of ever “making it,” (i.e. making revenue from your audio creations), then you probably would never buy into Pro. If you didn’t have a lot of music to share and didn’t care about the 100 download limit (maybe you would just put the mp3 on Mediafire and link to it, flaunting Soundcloud’s policies), then you just didn’t need Pro anyway. And maybe if you just didn’t like the idea of paying for a useful service, you would avoid Soundcloud entirely.

Over time, it’s safe to say Soundcloud could not find enough people to buy into Pro… so they had no choice but to explore an alternative business model.

Before I move on to phase 2, however, I have to share how their fatal mistake manifested early on. You’ll notice I have yet to refer to Soundcloud as a “music” service or to these uploads as “music.” That’s partly because from day 1, Soundcloud’s leadership insisted that they were more than a music platform. They repeatedly stated that they were a platform for any kind of audio, and that music was just one use case that they were not necessarily focused on. I recall that in the early days, Soundcloud had a featured audio section on the site, and one of the uploads prominently displayed there was a podcast from The Economist. It seemed awfully out of place on a platform filled with dubstep remixes, but it was clearly an indicator of Soundcloud’s vision of being the platform of choice for anyone looking to host & stream audio. And while Soundcloud did not provide any end-user podcasting software, you could use Soundcloud as the audio source for your podcast — they even supported protocols like RSS. Still, you couldn’t really operate a podcast on Soundcloud for free, since you were limited to 2 hours of total audio, and I don’t recall very many people paying for a Pro account just to host their podcast. All along those early days, it was always musicians and record labels that would pony up for Pro, because they weren’t just paying for a utility — they were paying for the promise of someday “making it” on Soundcloud, and by extension, in the music industry. Soundcloud was a place where people were getting discovered, where you could get a private message from an A&R representative interested in your popular upload(s) or from a booking representative looking to fill a slot at a festival based on the strength of your Soundcloud numbers alone.

Of course, anywhere you have hope, you are going to have hucksters, and it wasn’t surprising when Soundcloud eventually became inundated with spam, fake record labels and booking reps, etc. I have not uploaded anything to Soundcloud in over a year, but I still get the odd comment or private message on the site — unfortunately, it’s always spam. I think Soundcloud was always powerless to fight this problem, and it was never their fault, but it hurt them nonetheless. Still, people were willing to pay for Pro in the hopes that they might someday recoup their early costs with a dream fulfilled of becoming “famous,” or at least “indie famous.” Soundcloud could have probably done well for themselves if all they had to do was provide an audio platform and charge a handful of people enough to cover the costs. There were two problems that they eventually encountered, however, that made it impossible to sustain. First, they eventually collided with the reality of copyright and royalties. They had to implement expensive content ID middleware to ensure that users would not upload copyrighted content, which ultimately ended up discouraging remixes and DJ mixes (two of the most popular use cases for the platform). They also were pretty much off-limits to major label music, as they were not equipped to pay out royalties on any of this content. This latter issue brought about one of my first learnings with respect to the music industry: there’s very little money to be made in the long tail. Listeners are primarily interested in the stuff they hear on the radio from a handful of artists (and really, a smaller handful of writers) that are represented by the major record labels. The vast majority of people are not interested in wading through the wild west of “anyone can upload here” and digging to find the rare gem. The majority of users on Soundcloud were musicians, with a much smaller group of people who worked in music in some capacity; there was hardly any audience beyond that. Soundcloud was a launchpad for artists like Lorde, who went on to major label, worldwide success, but once Lorde was famous, Soundcloud didn’t benefit much from her. They didn’t own her content, they couldn’t pay her royalties or provide her with a revenue stream… essentially, she moved on to platforms like YouTube and Spotify and Soundcloud was left with still comprising just the long tail of music. And while there were plenty of examples of people going from unknown to known on Soundcloud, what I eventually learned was that the likelihood of any of this happening for the average user was still a tiny, tiny percentage. Even if you became “indie famous,” you still weren’t guaranteed to actually turn a profit in the long run. Personally speaking here, there came a time when I realized that my Pro fee was always going to be a sunk cost, and I eventually stopped paying for the service. Sure, I lost out on some cool features, but for most people, knowing full well that you won’t ever see any meaningful revenue from your music, you can’t really justify spending any amount each year just to have access to these features… which is my second point. As the music industry at large moved on, the music blogs disappeared and users eventually realized that the hope they were buying into would likely not materialize into anything, the business model of monetizing the creators failed. So it was time to change.

Unfortunately for Soundcloud, the transition to phase two was rough. The core users, the musicians, bloggers, label representatives, etc. that loved Soundcloud and were invested in the service as they knew it ended up becoming the biggest detractors as the service changed. As Soundcloud set out to build a listener-focused, mobile-friendly, ad-supported service (having accepted the reality that they would need advertising to cover their costs), they couldn’t put much energy into handling issues affecting artists. For example, it was around this time that it was common for prominent indie artists to publicly complain about running into Soundcloud’s aggressive automatic content policing system, oftentimes having uploads rejected that they actually had the rights to, or having their entire account closed and losing all of their uploads due to receiving copyright violation strikes for uploading remixes or DJ sets. They also dropped core features, like the audio inbox, as they redesigned their platform to be more listener-friendly and ready for ads. Still, Soundcloud charged ahead with the expectation that they would greatly expand their audience into the territory occupied by Pandora and Spotify. This phase two was essentially Soundcloud Radio.

I never hated Soundcloud, but there was a lot that disappointed me about their move to radio. The most disappointing thing they ever did was change the way audio was displayed and how you could interact with it in the move to mobile. The Soundcloud mobile app has a nice, gesture-friendly audio interface, but there are no timestamped comments overlaid on the waveform. There’s no way to add a comment or view comments from others. It boggles my mind to this day how they could abandon this core differentiator and make their mobile experience no better than an incumbent (Spotify) that they clearly hoped to unseat. The second most disappointing thing was that in this move to monetize with ads, they still kept their original business model intact. So essentially, while Soundcloud might insert ads into my uploaded content, I still had to pay a yearly fee to be able to upload an unlimited amount of audio. This made no sense. On YouTube, I can upload as much video as I like without having to pay a cent. I know that YouTube will monetize my content with ads, and if I meet their criteria as a “good” creator, I can collect a share of that revenue. Why Soundcloud never went down the same path is beyond me. Sure, one could argue that Soundcloud is more like Spotify, and you always have to pay a small fee to get your content into Spotify’s catalogue. Spotify does not have free uploads at all. But this brings me back to what I consider to be Soundcloud’s fatal mistake. All throughout this move to radio, Soundcloud has always been compared to Spotify. They have always viewed Spotify as their major competitor. They have always appeared to be executing a vision that sees them unseating Spotify.

I have never agreed with this characterization, simply because Soundcloud’s greatest competitor is not Spotify. It’s YouTube.

From day one, Soundcloud could simply be described as the YouTube of audio. An open platform where anyone could publish any kind of audio, for streaming and embedding anywhere. Like YouTube with video, Soundcloud sought to monetize the long tail of audio content, and they didn’t plan to rely on major label content, just like YouTube doesn’t have to have all the major movies and TV shows to succeed. Unfortunately, one of Soundcloud’s biggest challenge is a fundamental different between video and audio content. The opportunity to monetize attention with ads in video is much higher than with audio, because the user’s attention is much higher. With audio, I can look away and eliminate the value of video or text ads. Most ads then have to be audio-only, which pay less. Still, if you think of Soundcloud as the YouTube of audio, it’s hard to make sense of why they would still charge people to upload audio without limits. Why not put ads across the board, in audio streams as well as on the site real estate, just like YouTube does? Why not bring back some of those creators who have been disappointed in the past by saying, hey, you can now get the full suite of features for free. Why not really enable that long tail to produce as much revenue as possible and see where the ceiling is?

If you still aren’t convinced that it was a mistake for Soundcloud to compare themselves to Spotify, consider that their catalogs were always completely different. Spotify has the major label content, the stuff people are willing to pay a premium for, while Soundcloud has the long tail, which people are likely not willing to pay for, but they can stomach the occasional 15 second ad to get to it.

This kind of framing matters, because when you think of Soundcloud as being more like YouTube, you can see that it would have been advantageous for them to be more aggressive with their ad strategy. And by making the ads a bit more intrusive, they could probably convince more listeners to pony up the $3/month or whatever it costs to eliminate ads entirely. And while they are being aggressive about monetizing the listening experience, they can eliminate other revenue streams that only hurt their ability to really monetize that long tail, like charging creators a fee that effectively prevents SoundCloud from acquiring a larger long-tail catalog.

Still, it’s hard to say whether this strategy will work for Soundcloud, because my biggest learning from my amateur musician days is also Soundcloud’s biggest challenge: YouTube is already the destination for long-tail audio content.

If you are an up-and-coming amateur musician looking to share your music and build your audience, you ought to go to where the listeners are. There is some benefit to sharing your music with other music industry types, but ultimately you want fans (specifically, fans who are not also musicians like yourself). These are the people that will come to your shows, buy your records and merch, etc. And you are going to find far more of those people on YouTube. YouTube has always been mass market. They have ~17% of the entire world population. Unlike Soundcloud being almost entirely music (and thus, niche), YouTube has everything. If you want to share your music where it will be seen, YouTube is the place. You think Soundcloud is a big deal because Lorde started out there? Justin Bieber started out on YouTube. This isn’t just about numbers, either. It’s a superior medium. You are bound to engage people better with your audio if you have a visual component on top of it. Whether that’s an image, a visualizer, performance footage, or a music video, it is guaranteed to be more effective than the standard Soundcloud gray waveform. And when it comes to major label vs. long tail content, YouTube has always had both. That’s because YouTube has always been the platform of choice for music videos. These videos make up a large share of the entire streaming market. Honestly, the more I talk about it, the more it seems like there isn’t even room for Soundcloud in the market, because how are you going to compete with YouTube for long tail audio? If you are an amateur music producer reading this and wondering what to do if Soundcloud disappears, just put your music on YouTube, like you should have already done years ago.

This is why it seems silly that Soundcloud ever tried to go the Spotify route. Spotify is already a listener-friendly music service with an effective business model. Apple can barely compete with them. And there’s not enough money to be made on the other side of the fence in the long tail of music.

Now you might be reading this and say, well, YouTube Red hasn’t panned out. And that’s fair. YouTube hasn’t had much success with their own premium streaming strategy. But for YouTube, that’s just one of many revenue streams they are exploring, and they are doing this with an already stable position monetizing ads on their free tier. So if YouTube Red does not do well, YouTube will survive, but the implications for premium business models on long-tail content will be bad news for Soundcloud.

I don’t know what will happen to Soundcloud. I still think they can find a way to survive, but I’m not convinced they will turn a profit any time soon. Whether they decide to focus on monetizing creators vs listeners, they face difficult challenges either way that will make it hard for them to turn a profit at their scale. Obviously I wish them the best, but I’m not one of those people who acts like they can’t imagine a future without Soundcloud. This is the Internet age. Nothing is guaranteed.

While Soundcloud is still around, feel free to check out my old profiles: Decktonic & Miami Slice.