There’s a famous line in business by Tom Peters, in his book The Circle of Innovation: “you can’t shrink your way to greatness.”

But shrinking is exactly what SoundCloud now has to do, with its survival – let alone any ongoing greatness – at stake. As founder Alex Ljung puts it in a blog post for the company today, massive headcount reduction and the closure of two offices is necessary to put the company “on our path to profitability and in control of SoundCloud’s independent future.” The implication is, without a buyer, the company may not last without cutting staff.

Asked for comment, SoundCloud pointed CDM to that post:

A note from Alex Ljung

SoundCloud will lose a lot of the people who made the service valuable. 173 out of 420 employees – 41% of staff – are being made redundant. San Francisco and London offices are closing, leaving New York and the headquarters here in Berlin. (That may have implications for Berlin’s reputation as a European Internet capital, as well, as SoundCloud has been its best known poster child.)

I know some of these people personally. I’ve seen what they bring to the service and our music community in general. I’ve also seen how significant SoundCloud has been in helping musicians share music and people to discover that music, its impact on record labels, on artists getting bookings … on daily life.

I think artists and ex-employees alike could feel legitimately betrayed by the course music streaming has taken. SoundCloud at least is increasing revenue. Ljung says the company has “more than doubled” revenue in the past 12 months, without citing specific breakdown of producer subscriptions, listener subscriptions, and advertising. But the issue is how revenue compares to costs.

Now, ironically, the writing has been on the wall for a decade. Ten years ago – and one year before SoundCloud was founded – Pandora co-founder and ex-CEO told CDM he thought streaming rates would shutter companies. The weird part of this is, he may have been right – it’s just that an ongoing influx of investment has prolonged that failure over the years.

If Streaming Rates Stand, “We’ll Have to Shutter”, Says Pandora Founder

If it seems greedy that he’d suggest such a thing, one reason is that there aren’t such royalties collected on radio broadcasts.

Whether you want to blame the services, tech giants like Apple and Amazon, or the music industry for setting rates, the business model just doesn’t seem to add up anywhere. And 2017 could be the “s*** hits the fan” moment as it becomes ever clearer that no one is able to turn that business model into a win.

Just last week, co-founder and returning CEO Tim Westergren left Pandora. That company has never made a profit, and it seems new investors Sirius XM (satellite radio company) have other plans.

Then there’s Spotify. As its revenues and number of users grow rapidly, its losses are actually growing even more rapidly. That should mean that Ljung’s comment about growing revenue is as much a red flag as it is encouragement.

Spotify’s Loss More Than Doubles Even as User Growth Surges [Bloomberg]

Noticing a trend here? Pretty much anyone in the streaming business is losing money. That overall picture also will rule out some acquisitions, or reduce the price. And it’s not surprising that this combination might frighten away some investors.

It’s not that there’s no hope here – just that it’s going to be a very delicate balancing act if SoundCloud is going to make its planned profitability. Fast Company took a good look at the 2017 plans at the beginning of the year, along with its potential pitfalls:

SoundCloud vows growth in 2017, but time is running out [FastCo]

Now we’ll have to see what Ljung means when he promises to share more plans in the coming weeks – how they update this roadmap.

CDM readers and associates frequently compare Bandcamp to SoundCloud. But perhaps if any comparison is apt, it’s because of the contrast in business models, growth rate, and intended audience. Bandcamp remains a niche site for people to consume music, not only as free streams, but as downloads, physical media, and in the form of merchandise. It’s the always-on, “tap water”-style streaming that is having trouble.

To state the painfully obvious, it’s also troubling to look at the streaming players who are thriving. Facebook has stayed out of music (unlike Russian social media network VKontakte). But three other big tech giants – Amazon, Apple, and Google – are able to offer streaming services as “loss-leader” offerings, directing sales elsewhere. Apple may lag Spotify, with 27 million users to Spotify’s 50 million. But then Cupertino doesn’t need Apple Music to turn a profit, since the company can instead sell iPhones, iPads, and Macs.

It’s just as easy to find music on YouTube – which also spells further pain for artists and labels.

Music press have been quick to jump on SoundCloud, often without much to back them up. But now, I believe it’s reasonable to sound some alarms. Staff cuts this significant could slow growth and curb the efforts that would expand revenue. They suggest serious financial obstacles. And there’s still not a clear picture of how streaming will be sustainable as a business model – not for SoundCloud, and not for the entire industry.

And the implications there go far beyond SoundCloud’s offices. They should raise serious questions about what a record label is, how it collects revenue in the digital age, and how much control artists and publishers will have on their music being shared and discovered.

Of course, that absolutely means now is the time to talk about alternatives, including innovative solutions like Blockchain-powered sharing and the like. But the popularity of SoundCloud and Spotify for finding and playing music is going to be a tough benchmark to match.

Whatever happens next, it’s going to involve some major changes. And if these companies do start to contract, a lot of the talent that was working on the problem is going to wind up elsewhere.

  • Dubby Labby

    Music has become a total commodity and videoclip killed the radio star (youtube).
    The problem isn’t revenue, it’s size. The time where a hit was profitable as x1000 has gone (even for Lady Gaga and mainstream).

    Solutions? It goes deeper with the Matrix. We are in Reload times and maybe soon in Revolutions…

  • Graham Metcalfe

    I suppose the investment theory would be to back the most likely victor, run everybody else into the ground through loss-leader pricing and then set your own pricing structure after the dust settles and your horse is the only one left in the race.

    However with companies that have other revenue streams in the business (as you mentioned), that bet is probably not a good one.

    I like Soundcloud as a way to publish my music. It’s got a decent community and relatively good tools. However, for me, making music is mostly a hobby with periodic professional composition projects and not my primary source of income.

  • I’ve found myself comparing Bandcamp to Soundcloud over the years even though I recognize that they are quite different business models. I still think it is a useful comparison. They are both services that I employ to host my music. If I am going to send someone a link to listen to something, it will be likely one of those two. One has had an excellent UI from day 1 (that has barely changed over the years because it was so well thought out from the jump), treated me extremely well as a customer even when I was on a free tier, has a decently configurable player to embed and has just been a rock solid service in general. The other keeps features from me even when I pay for the priciest ‘Pro’ plan (player background images are for the cool kids only I guess), has a poor player embed, a fragmented UI, weak support etc. Can you guess which is which? It is not surprising in the least that one is thriving and the other is going the way of mp3.com. Sucks that a bunch of people lost their jobs and I hope they all land on their feet though.

  • DJ Nietzsche

    soundcloud didn’t need 420 employees and expensive offices in SF and LDN, these are things companies getting VC money do, with their sleep pods and “cool” brainstorming (bs) spaces etc.
    soundcloud was on a failing road when they made the major change away from dance music/dj to try and introduce some social aspect of it and when they did the major cartel licensing deals.

    it is a pity because it was great the first 2 years it started, but then it became nothing but somewhere to host tracks to post on forums/share with some people. revenue was always going to trend towards zero.

    • I know some of the individuals laid off. You can describe what you like from what you saw on Silicon Valley or some other parody, but this is a service with 175 million users and complex relationships with various industry entities in order to operate.

      Now, that’s not to say it didn’t grow beyond its means, but … the other side of this is, that growth also created an audience *for our music*. I can’t necessarily fault it for that. I think we’re worse off if that doesn’t exist.

      • PaulDavisTheFirst

        I’m curious whether or not you think Bandcamp is (a) a different model (b) more or less significant in terms of “creating an audience for “our music”” ?

        • Bandcamp is a different model. Bandcamp generates revenue from the sale of things and is, effectively, an ecommerce platform. Soundcloud is, at best, an advertising company. It generates revenue from running ads.

          Advertising businesses require very significant scale to be relevant. A given amount of money spent on advertising with Soundcloud would likely be not very good at generating new listeners/engagement (and definitely lacking in analytics to back it up) vs advertising on something like Facebook or Google Adwords or YouTube.

          These two companies–Bandcamp and Soundcloud–may appear similar to consumers/listeners, but their revenue generation mechanisms are very very different.

          In how the relate-to/utilize creators of music they are also very different. For Soundcloud the majority of creator-related development is an expense. This can be felt in how clunky and abysmal the tools have always been for uploading tracks etc (I think it still relied on Flash until sometime last year, it’s really duct-taped together) on Soundcloud. Sure soundcloud needs tracks, but they only need tracks that generate a lot of plays (i.e. that generate advertising “eyeballs/earholes”). Since the money generated is only loosely tied to the musicians, it is easy to consider creators to be a “problem” and ignore their requests (hey they don’t generate the revenue or anything, it’s our platform that is great yadda yadda).

          Bandcamp relies on the sale of a track to generate revenue. For this reason, they must make it easy to add tracks and make the platform function well for uploading/purchasing tracks. In addition, since the musicians make money too the musicians are more likely to promote Bandcamp. I sometimes upload to Soundcloud but honestly, if I have a choice of sending someone to listen in an environment where there’s no chance of me making money vs an environment where there is a chance of me making money I’ll pick the money every time.

          Two different revenue models: advertising and ecommerce. This forces many different business decisions and outcomes. If spotify & apple don’t have the scale to be profitable, there’s no way SoundCloud was ever going to get there.

          • PaulDavisTheFirst

            Thanks for the excellent overview.

  • aaaandyT

    I recently cancelled my pro subscription. I’ve never minded paying for a service, but now they want me to take out a *second* different subscription to stop the ads. That’s insulting to their users who were happy to pay for years.

    It was a great place for musicians to share tracks and find other interesting music, then all the big players got involved and they switched focus to listeners. Fair enough if that’s what they wanted, but they were always going to run into trouble like this and alienate loyal customers while they tried to take over the world.

    Meanwhile the service for uploaders didn’t improve, they forced features like reposts on us and any brand loyalty was lost. Bandcamp may be niche, but they make a profit, and their way of doing business should convince others that there’s a better way.

    • RKJ87

      If they had kept with their original vision, they would have had a successful service, but like so many other companies, they were lured by the promise of boundless growth. Why can’t companies just focus on what they already do well? Like they say, the only thing that grows without stopping is cancer.

  • Piet Ooth

    Nothing surprising to me.

    The underlying economics of today’s music business simply doesn’t allow for profitable businesses, with the rarest of exceptions (which is mathematically expected). Between highly unfavorable supply/demand and the idiotic “give your product away for free (or virtually free)” bullsh*t, you can’t expect businesses to survive — the economics just aren’t there.

    The entire global music industry could be purchased several times over **by one person** — and there are several people capable of doing that, if they so wanted (and that’s not counting the large number of companies that could *also* purchase the entire global music industry outright several times over). That’s how little money is in the game, and that’s largely because musicians and others in the industry refuse to act like adults and learn how to run a business and behave like sensible business people. (Yes, music “consumers” are entitled brats and thieves…but who encouraged that behavior?)

    “loving their art” so much that one doesn’t learn how to run a business properly isn’t cute, funny, or noble, or authentic, or artistic, or inspired — it’s f***ing stupid. Childish, and f***ing stupid.

    So, virtually no one spends money on music (or they do in the most paltry sums); virtually no one earns money making music (.007 cents per stream? Sounds awesome, RIGHT!!!?); virtually no one spends money on the tools to make or distribute music…and somehow we’re surprised that the economics behind a standalone music streaming service doesn’t work when investor money runs out? OF COURSE NOT — UNLESS YOU’RE A MUSICIAN.

    I swear to God, you could lobotomize everyone in the music industry, and you wouldn’t notice any difference in their behavior before and after.

    • Space Captain

      “…because musicians and others in the industry refuse to act like adults and learn how to run a business and behave like sensible business people. (Yes, music “consumers” are entitled brats and thieves…but who encouraged that behavior?)”

      Please elaborate here. How does one behave like sensible business person? Are you saying musicians/artists encouraged the consumers thieving behaviour? I can’t seem to understand the point being made here.

      • Piet Ooth

        “How does one behave like a sensible business person?”

        I’m not being dismissive or snarky when I say that the answer to your question can be (and is) the subject of entire books. Long story short, as it pertains to musicians, it comes down to not understanding (or seeking to understand) the most basic of market forces — forget advanced concepts, the most basic of basics is lacking.

        For example, instead of saying “this is what I want to do,” musicians need to ask “what does the market want/dictate me to do.” At the most fundamental level, the answer to that question is largely unaddressed in the music industry — and necessarily by extension, all of the offshoot businesses that support it (such as soundcloud).

        “Are you saying musicians/artists encouraged the consumers thieving behaviour?”

        Frankly, yes. They bare (partial) guilt for that. There are other guilty parties and cultural forces that contribute, but musicians have themselves to blame in large part.

        Between that and the utter lack of business sense, it’s little surprise that the entire music industry has become a loss leader for tech giants and other large corporations. It doesn’t mean that individuals still can’t do well in music — but they’re swimming against the currents.

  • NRGuest

    It’s worth remembering that the music industry is still fairly young, as its modern incarnation didn’t come about until recorded music became common. For most of history the only musicians making any money were those with wealthy patrons. It seems like streaming as it exists today is a forced attempt to graft the economics of the modern music industry onto a method of consumption that is inherently incompatible with that system.

    Based on the amount of artists I’ve seen moving to services like Patreon, it seems like we’re moving to a world similar to the pre-music industry era. Only instead of a handful of wealthy patrons, artists will be able to get support from larger audiences of fans directly, and streaming fees will slowly die off, as companies find they can’t support them and stay in business.

    I think Bandcamp has picked up on that, as it now offers “artist subscriptions”. Soundcloud might have to radically change their business model if they want to stick around.

  • pinta_vodki

    So in a few years it’s all gonna collapse and we’ll be back to iTunes/CDs/Vinyl. To be honest, I was perfectly happy with this system, even though I’m now paying for Apple Music. You could always preview music on YouTube and then buy what you like to listen offline.

    Plus, it appeals to me as an artist. Both from “listening to whole albums” perspective and potentially getting some money for my work.

    • D

      Just files in the future please. CD and vinyl are pollution at this point. Are there any clubs with a strictly enforced no vinyl policy? It’s 2017 after all.

  • A shake up in streaming was inevitable and long overdue.

  • Antisa Ante

    Soundcloud is charging 99€ yearly for broken full of bugs app that doesn’t have basic features such as sorting tune order or managing your front page.

    Toneden and Bandcamp offer much more than soundcloud at least they don’t have ads.

  • abluesky

    I never liked streaming because I don’t want to pay for the data. I would rather purchase my music individually and own it. Yes, I’m 40 and I love vinyl but I also love bandcamp. Besides Apple, they are the only service that gets my money.

    • PaulDavisTheFirst

      Consider a non-wireless/cell/mobile internet service.

    • Foosnark

      Perhaps perversely, I do most of my streaming in the car and listen more to my personal collection on desktops. My mobile data usage never goes above the fairly low cap I set though to save money on my plan.

  • JBVick

    Elon Musk will start a streaming service based on Blockchain technology and provide a simple, clean way for artist to be paid. He will distribute it thru Tesla. It will lose money for a while but as older audiences die off everyone new (hip hop, rappers, new country acts) will sign on and within 10 years he will own the market and everyone else will be left searching for people who are still interested in hearing the Eagles or Stones or Nirvana. Todays big acts will be like Neal Sedaka (who use to fill up stadiums) still around but totally irrelevant to the scene.

  • Anthony Parks

    Has anybody bothered to mention the prevalence of generally crap content with a niche audience on Soundcloud?

  • EveryDay

    The new iOS 11 music share feature is about to be rolled out in a few months – combine that with Apple Music/iTunes Match: Your entire music library in the cloud, a public profile of ‘what you’re listening to’ (goodbye last.fm) along with with per-playlist public/private share option.
    I see this small update coming from Apple as a huge middle finger to the Soundcloud streaming business model.
    I think we can all agree that 420 was the perfect number of employees & that the free streaming dream is over for now 🙁

  • FS

    i do feel that Soundcloud strayed way beyond it’s niche. it’s been a really incredible way for music makers to share their music without having to release it through iTunes etc. and back when tracks could be remixed and put on Soundcloud just for the sake of creativity was awesome. i have been happy to pay for the pro account, and i think it would have done them well to recognize this niche they alone had and kept it rolling. i know businesses like to grow but sometimes it’s also good to recognize your strength and let that be the focus.