Last week it was revealed that SoundCloud has closed a new round of funding worth $60 million. Led by Institutional Venture Partners and the Chernin Group with the participation of previous investors (Union Square and Index Ventures amongst others) this round - according to the Wall Street Journal - puts the value of the company at over $700 million. This is great news for the SoundCloud and reaffirms the investor’s faith in its future, but where does that future lie?
Currently SoundCloud’s business model relies primarily on the sale of subscriptions to content creators. The free plan only affords 2 hours' worth of uploads and no advanced features, then there’s a Pro Plan at €3 per month and a Pro Unlimited plan at €9 per month. The company hasn’t made subscriber figures available to date but TechCrunch writes that at TC Disrupt the company’s founder Alexander Ljung stated that subscription numbers were “pretty much exactly on our forecast.”
Whilst subscriptions are a relatively straightforward model only a relatively small proportion of the service’s 250m monthly users is actively uploading content and the number of music “consumers” on the service will only continue to grow, so the company will need to look at alternative revenue models pretty soon.
Ljung has stated repeatedly that the goal of the company is to be for audio what YouTube is for video, but so far the company’s limited experiments with advertising - tests with the likes of Red Bull and Blue Bottle Coffee started at SXSW 2013 - haven't seen a wider implementation.
Future content deals?
Re/code states that the large funding round will allow SoundCloud to start licensing the music hosted on the service. Whilst some labels love SoundCloud as a marketing tool, others have been rumbling about its ‘free ride’ on content so far, withholding their releases from the service and hosting them on YouTube instead. The Google-owned company - whilst not a golden goose - can still generate some meaningful revenues through advertising.
As the core user base of the service shifts to music consumers content licensing seems like an inevitable step: the company’s content team has established solid relationships with labels around the world though its marketing/promotional efforts so this may well give them a leg-up when it comes to negotiations.
The licensing conundrum
SoundCloud’s strength has always been the barrier-free international availability of the service. No need to sign in or set up complicated VPN connections to listen to a track, whether on SoundCloud.com, on the app or embedded anywhere online. Sure, the company allows geo-fencing for some very specific release campaigns & promos but for the most part the entirety of SoundCloud’s tracks are available everywhere.
Becoming a fully licensed service could mean the end of all that as the company would have to sign deals with labels and publishers - as well as work out rates with performing rights societies - and that’s a close-to-impossible task on a worldwide level. A “licensed” SoundCloud may have to restrict access to content territorially making the implementation potentially difficult.
An ad-supported streaming service?
Given the company’s experiments in the advertising space and the parallels with YouTube an ad-supported streaming service could make sense. It would allow the company to retain its current catalogue of tracks and to open up a “partners” program whereby content creators could opt in to the company’s advertising platform and receive a share of the revenues generated.
Operating this way would also enable SoundCloud to start paying something to non-music content creators, the company has doubled down on its effort to bring quality podcasting and radio shows on the platform in recent months.
Integrating the adverts as a background to the song's wave would enable the company to cash in on the countless embeds of tracks available online - much like YouTube’s adverts which appear even when videos are embedded outside of the platform. A big issue here would be the placement of adverts: would content creators need to “opt in”? What about those who already pay for a premium subscription on the site?
A subscription streaming service?
This move at first glance seems unlikely as it would completely change the user experience on the platform. Still, it’s not out of the realm of possibility to see SoundCloud leave the current service untouched but start charging a subscription for mobile users that wanted to cache tracks from the service. This would avoid the implementation of a real access barrier but would enable the company to have an extra “conversion” point to monetise the service beyond the subscriptions paid by creators.
SoundCloud hosts content of every kind, from the tiniest independent artist to majors, but it never had an all-encompassing catalogue since it relies on the rights holders to upload their own music.
Its diligent stance in taking down copyrighted recordings by using fingerprinting services means that there is very little commercial music on SoundCloud that hasn’t been uploaded by the label itself.
A licensing deal could mean a more methodical ingestion of content and back-catalogue from label partners which would liken it to current on-demand streaming offerings or it could mean a YouTube-like approach enabling users to upload copyrighted tracks - as part of mixtapes for example - whilst redirecting the ad-revenue generated for that upload to the original rights owners.
The company needs to move fast. The US market in particular is becoming saturated with premium streaming services and whilst these haven’t fully hit the mainstream yet a bulk of SoundCloud’s forward-looking users are likely to also be using an alternative streaming platform, even if only in its freemium form. The other potential challenge could come from YouTube, as the platform is rumoured to be launching a subscription service as soon as the current quarter.
All these question marks…
I like to think of SoundCloud as the dark horse of the streaming race. It has the history, the numbers and the team to create something truly special in this space. The reason why the company is often overlooked when talking about the future of streaming is that no one really has a clue as to what path the service is going to take. Also, the company is certainly not just a music platform these days hosting more and more spoken word content so it'll be interesting to see what part that will play in its future. I outlined here a few of the possible futures for SoundCloud, but there is absolutely no indication that the company is going to go one way or the other here, and that’s probably what puts it on the top of my list of services to watch in 2014.
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