SoundCloud Unveils U.K. Subscription Service, Ad Model

  • Copyright worries settled, revenue now priority, CTO says
  • Under financial pressure, move is risky, analysts say

SoundCloud, the music streaming company that rose to prominence by allowing users to upload their own songs and mixes, will begin offering its paid-for SoundCloud Go subscription service in the U.K. and Ireland Tuesday, while introducing ads for its free streaming customers.

U.K. users will be charged 9.99 pounds ($14.60) per month to continue ad-free streaming after a 30-day free trial -- the same as what both Apple Inc. and Spotify Ltd. charge for their streaming services. It will also offer the ability to play music from its library of 125 million tracks without an Internet connection.

Eric Wahlforss

Photographer: Simon Dawson/Bloomberg

"This is the world’s ultimate music subscription service," SoundCloud co-founder and Chief Technology Officer Eric Wahlforss said in an interview. "It is all the content from major labels, major artists, major indies, back catalog things -- all of that, plus all of the stuff that is on SoundCloud today. All the emerging talent, all of the stuff that big artists drop that you can’t find anywhere else, DJ mixes, podcasts, all of those things."

Those listeners who don’t want to pay for the subscription service will begin hearing ads between tracks. They will be served through a partnership with the digital audio advertising exchange of Global, the media and entertainment company that runs major U.K. radio stations Heart, Classic FM and Capital FM. Berlin-based SoundCloud has also built its own direct sales team in the U.K., Wahlforss said.

The company first introduced its subscription product in the U.S. in March and it is planning to launch it worldwide on a rolling basis over the coming months. "It is too early to talk about numbers, but what we are seeing so far is very promising," Wahlforss said.

Significant Risk

The move to a subscription service represents a significant risk for SoundCloud. Some of its users may already have signed up for a rival subscription service, meaning SoundCloud will have to lure them back from rivals. Spotify has 30 million paid subscribers globally as of January and Apple Music has 13 million as of last week. According to a survey conducted in January by MusicWatch, a music industry research body, people who use SoundCloud were three times as likely as the average streaming listener to also have a paid subscription to a music service.

SoundCloud must hold on to its existing listeners while trying to increase its user base, which has not expanded significantly in the past year. It first reported it had reached 200 million unique monthly listeners in July 2013 and then said it had 250 million unique monthly listeners in October of that year. But in December 2014 it stated it had a lower 175 million unique monthly listeners. It has not revised that figure upwards since.

Mike Mulligan, an analyst at Midia Research who tracks the digital music industry, told Bloomberg in March that the move was dangerous. "They’re getting pushed into becoming a cookie cutter freemium service," he said. "That’s going to be a big problem for them."

Wahlforss said SoundCloud’s free listeners would tolerate advertising, pointing to the U.S., where SoundCloud has run ads on its free service since August 2014. "The impact on engagement has been negligible," he said.

In 2014, the last year for which SoundCloud’s accounts are publicly available, the company had revenues of 17.3 million euros ($19.7 million) but lost 39.1 million euros. The company’s auditors, KPMG, said that without additional financing and revenue from subscriptions, there was "material uncertainty which may cast significant doubt on the company’s ability to continue as a going concern." The startup, which has received $160 million in venture and debt financing since its launch, also said in a January 2016 company filing in the U.K. that it would have to raise additional equity financing this year in order to stay in business.

The company was valued at $737 million as of January 27, according to its most recent filings. Those numbers do not reflect a reported equity investment from Sony Music for an undisclosed sum that was part of Sony’s content licensing deal with the company.

Copyright Disputes

SoundCloud, founded in 2008, gained its initial audience by offering a catalog of user-generated content, including unusual mixes and remixes, as well as some exclusive tracks from well-known musicians. But the startup found itself increasingly embroiled in copyright disputes with major music labels.

The company reached licensing agreements with Warner Music and Merlin, a network of independent labels, in 2014. Deals with Universal Music Group followed in January this year, Sony Music in March. These deals allowed SoundCloud to start offering a paid-for rival service to Spotify and Apple Music, Wahlforss said.

"It has always been our intention to fairly compensate creators and rights holders," Wahlforss said, adding that the startup struck deals that remunerate copyright holders when their music is used in remixes. "One of the things we are most excited about here is the fact that we have actually gotten the whole industry on board with a plan to embrace that and to monetize more broadly across those different layers of content."

He also said that in the future SoundCloud would look to find additional ways for artists to connect with their fans, and that SoundCloud could then charge for those engagement methods and data, giving the service additional revenue options.

(Corrects Wahlforss' title in first deck headline and third paragraph.)
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