Spotify, Soundcloud, and streaming consolidation

The streaming industry might get a little bit smaller in the coming months, as word broke last week of Spotify’s late stage talks to acquire Soundcloud. As businesses continue to consolidate in the music industry, the deal has potential to solve some critical problems for both companies.

For Soundcloud an acquisition is becoming an increasing necessity. With growth continuing to stall, and though its legal woes are now behind it, Soundcloud is running out of cash and competing in a market of large and well capitalized players. With massive scale becoming par for the course in streaming, Soundcloud needs a marquee partner with cash on hand. This would be one of their best possible outcomes, and one that allows them to get close to the $700 million valuation Twitter bought in at on their last round.

For Spotify the acquisition has many potential benefits as well. The most obvious would be gaining all of the original content published on Soundcloud, diversifying Spotify’s content catalogue and giving it a legitimate alternative to the proprietary content services such as Apple Music and Tidal have been pursuing. If Spotify could find a way to maintain Soundcloud’s image as the Indie, crowdsourced streaming service, it could broaden its appeal to up-and-coming musicians, and give a huge boost to its discovery capabilities. If executed properly, the vibrant social community of Soundcloud could provide the boost in the currently under-utilized and under-appreciated, although unintuitive, social function Spotify currently employes.

A Spotify Soundcloud acquisition would also provide the opportunity to boost the advertising efforts of both platforms. Soundcloud’s ad platform ‘Go’ launched back in March to much fanfare, but little in terms of results with less than 1 million subscribers to date. Spotify, on the other hand, has a robust advertising platform that supports the 80% of users on the free tier of its freemium model. By coupling Spotify’s powerful advertising network with Soundcloud’s unique content, Spotify would have the potential to convert a sizable number of listeners who are not accustomed to advertising to an ad supported model.

The ability to reach a totally new subset of customers for its advertising and premium tiers makes Soundcloud an attractive investment for Spotify. This is bolstered by the $1 Billion in debt reportedly raised earlier this year, and Spotify’s desire to make itself as attractive an investment as possible to the public markets for its already once postponed IPO expected in 2017. According to Fortune Magazine, this could pave the way for “ Spotify to create its own digital record label of sorts, by bringing new artists in at the ground level and by-passing the record industry completely. That may be one of the only ways it can compete with giants like Apple Music.”

Although these talks are still in progress, it is clear both services understand their ability to compete with well capitalized, well entrenched incumbents, will be determined by their ability to consolidate the remaining content niches and monetize them in a way that won’t cannibalize their existing strengths. However should they be successful the move could drive major gains for both services.