SoundCloud Ltd. is finally getting into line to appease record labels. But being like everyone else in the streaming music business may not solve the Berlin-based startup's financial challenges.
On Tuesday, SoundCloud launched a long-awaited premium service, SoundCloud Go, that's strikingly similar to rival offerings already out there. This is a big change for the company, which rose to prominence by being different. It's known as the YouTube of audio tracks thanks to a huge library of free, exclusive remixes, b-sides and DJ sets that pulled in far more listeners than Spotify, Apple Music, or Pandora.
SoundCloud users can now pay $10 a month for ad-free listening, the ability to save tracks offline, and access to the full catalogs of the major labels and thousands of independent labels. This gives paying users millions of songs that have been available on other subscription services but not SoundCloud.
"We suddenly have a music service that has the entire breadth of creativity. That’s never been done before,” said Alexander Ljung, SoundCloud’s co-founder and chief executive officer. SoundCloud's free service is unchanged.
SoundCloud's massive, engaged user base has tantalized the recorded music industry for years, but its failure to turn that into meaningful revenue has driven labels crazy. SoundCloud has been under increasing pressure to develop a paid service and it faced legal action if it didn’t eventually license the music that appeared on its service. The company has completed deals with all the major music labels, as well as publishers and independent labels. In negotiations, SoundCloud’s new partners steered it toward the same model used by existing subscription services like Spotify and Apple Music. Google's YouTube completed similarly delicate license negotiations for its paid music service last year.
This may not play to SoundCloud’s strengths and could aggravate the company’s financial troubles, said Mark Mulligan, an analyst at Midia Research who follows the digital music industry. “They’re getting pushed into becoming a cookie cutter freemium service,” he said. “That’s going to be a big problem for them.”
Much of SoundCloud’s success came from hosting music uploaded by DJs or other musicians who don’t hold all the rights to the songs they’re remixing or sampling. Soon after SoundCloud began signing licensing deals, some DJs complained that the company was pulling their music off the service. Ljung acknowledged the company’s developing business model has changed its initial laissez-faire attitude toward music copyrights. He declined to discuss details about what SoundCloud takes down, how it identifies who to pay, or how it distributes royalties. “The short answer is that it’s complicated,” he said.
Ljung argues that a paid service will discourage labels from demanding music be removed because they’ll be making money from those tracks. This only happens if people start paying, so SoundCloud’s main challenge will be converting nonpaying users into subscribers. SoundCloud says it currently has 175 million monthly users, a number that hasn’t changed significantly in over a year. Ljung says that tens of millions of its users are "highly engaged."
The risk for SoundCloud isn’t just that users may not want to pay; it’s that they’re already signed up with one of its competitors. People who use SoundCloud are three times as likely as the average streaming listener to already pay for a music subscription, according to a survey conducted in January by MusicWatch, a research company. SoundCloud will have to lure its best customers from rivals. Other streaming services have tried to do this by securing exclusive content and offering it only to paying subscribers. however, Soundcloud’s exclusives will remain available on its free service.
Even if SoundCloud Go attracts new users, that may not fix its finances. SoundCloud lost $43 million in 2014, according to its most recent financial statements. If it pays the same rates as Spotify, SoundCloud will have only about 30 cents of every dollar it brings in after record companies take their cut. No streaming music service has been consistently profitable under this model. Ljung gives a version of the same answer that his competitors give: The math may not work now, but it will once SoundCloud gets enough subscribers.