SoundCloud’s CEO published a post saying SoundCloud is here to stay and uploads are safe. But it isn’t just SoundCloud’s business that’s troubled.

Okay, first – the one thing you shouldn’t worry about is music you’ve uploaded to SoundCloud. As I wrote at the end of last week, you should worry if you have media that’s important to you that’s located in any one place without backups, SoundCloud or otherwise. But while there have been plenty of signs SoundCloud’s business is seriously troubled, that doesn’t necessarily translate to any indication you’ll lose access to the service.

SoundCloud co-founder and CEO Alex Ljung was left scrambling in the wake of deep layoffs to assuage user fears. He took to the phones with at least one celebrity user, Chance the Rapper, who reported a “fruitful” call with the exec on Twitter Friday.

Also on Friday, Ljung posted a plea on the company’s blog:

The music you love on SoundCloud isn’t going away, the music you shared or uploaded isn’t going away, because SoundCloud is not going away. Not in 50 days, not in 80 days or anytime in the foreseeable future. Your music is safe.

SoundCloud is here to stay. [SoundCloud blog]

Alex also refers dismissively to “an insane amount of noise” about the company.

But let’s back up. SoundCloud’s CEO can’t just shrug off fear and uncertainty when the company’s own messaging, actions, and even financial filings are largely responsible. Whatever’s going on with SoundCloud’s business, the company has lost control of its image. It’s hard not to view this “noise” as partly SoundCloud’s fault.

Co-founders Alex and Eric are each articulate and passionate advocates of music sharing. But the company has for years failed to articulate its business model. It’s talked about subscription services like SoundCloud Go, without being clear about how it can compete with entrenched competitors, and talked about advertising without being clear about how it will attract advertisers or how those ads will be effectively delivered. It’s been evasive about details of revenue and profit. It’s allowed bad press to accumulate, like allowing lavish office photos to spread just as financial filings were adding to concerns about its future. It has often failed to go on the record with press outlets (not mine, major press), while small rumor blogs flooded the narrative with leaked (and often inaccurate) information.

To see how badly SoundCloud’s media relations are going, look to recent reports by the likes of Forbes or even TechCrunch. That’s TechCrunch, who just last year were so bullish on SoundCloud that they said the company should be worth more than Spotify

Flash-forward to last week, and TechCrunch are reporting leaked accounts from inside the company’s headquarters and
questioning whether the company will survive.

The best SoundCloud could do by way of correction or response in this place was to say that the fourth quarter begins in 80 days, not 50, and that they meant they had money through the end of that quarter (that is, the end of the year) – but that means we’re not any further along than when Ljung initially made that same statement in a financial statement in January. You can watch the messy back and forth here:
SoundCloud Responds to ‘Extensive Inaccuracies’ in Article Claiming It’s Almost Out of Money

[Indeed, TechCrunch has reason to complain here – SoundCloud doesn’t specify what it means by “extensive inaccuracies,” and actually appears to confirm some of the main gist of the article.]

Presumably these layoffs were planned for some time, so why did SoundCloud appear to be improvising its message to the press and its own staff?

And this problem isn’t a new one in summer. Way back in January, the apparent failure of revenue plans to keep pace with growing costs were fueling acquisition predictions. Now we have vague platitudes from the CEO that the company intends to remain independent, without any material on how they will do that. (That is, even after 40% staffing cuts, they’re still not talking about having money after the fourth quarter, unless by “foreseeable future” Ljung only means he can forsee 2017!) Here’s Fortune back at the end of the year; we actually know very little new information since then:
Here’s Why SoundCloud Will Likely Look to Be Acquired Soon [Fortune]

As if SoundCloud weren’t already having a bad enough week, one of their most popular mix uploads inexplicably disappeared from the site on Friday. RinseFM posted a tweet showing their account was gone, and referred to being glad to have backups, but didn’t respond when asked what had happened. (It appears their account was disabled, whether intentionally or unintentionally?) The absence of information from either SoundCloud or RinseFM is only adding to the confusion about what’s happening with the service. (For scale, RinseFM has over 100,000 followers on Twitter alone.)

I know SoundCloud can do better, having covered the company since its 2008 founding. I know its founders can do a better job of messaging than this, too, having known them almost as long. Rather than simply imploring its users to help, they need to provide a better picture as soon as possible as to how revenue growth will work versus costs – particularly now, having cut some of the staff who were responsible for making that revenue growth happen.

A Spotify timeline. Photo (CC-BY) Jon Åslund.

Not only SoundCloud

That said, I think SoundCloud are unfairly bearing the brunt of bad press and angry musicians.

Let’s not mince words: right now, the whole model of streaming appears economically broken, and surely all the major players deserve some share of the blame.

Talk about a rock and a hard place – maybe “buried under a pile of rubble” is more apt.

Content creators and owners believe they should get paid for music being streamed. So you’ve got the industry that represents them asking for higher royalty rates.

The problem is where the revenue to pay those royalties is coming from. Listeners don’t appear to want to pay much for subscription fees. That’s at least partly why Spotify and SoundCloud and others aren’t showing profitable results. Even if you don’t buy their arguments (lavish offices and huge headcount being evidence), there’s still a fundamental problem here. If users pay a flat fee for a subscription, then the company loses money the more they listen to the service – because royalty costs accrue. SoundCloud here actually has an edge, in that not all of the music uploaded requires a license – think spoken word and unreleased music. But SoundCloud hasn’t yet proven that they can make this work, either. (We’ll see if those staff cuts or other budget trimming helps.)

In fact, balancing immaterial revenue with somewhat paltry revenue fees that still manage to exceed that revenue makes the whole game feel a bit like this:

Advertising is the one thing that will grow with increased listening, at least in theory – more listening means more revenue for ads. But listeners and even content creators have been resistant to advertising. And selling ads in sufficient volume and with significant value means you need to have a talented staff able to liaise with big agencies and advertisers. Google is the one tech company who seem to have built a significant competency in the ad business, but they claim they’re not making money on ads, either.

And it gets worse. Largely missed in all the coverage of SoundCloud last week (but observed by some CDM readers), it’s really YouTube that dominates streaming. The Washington Post has just painted a bleak picture of the value of those YouTube plays to music.

Why musicians are so angry at the world’s most popular music streaming service

In a pot-calls-kettle-black argument, YouTube weirdly warns of the dangers of consolidation in big players:

“The industry should be really, really careful because they could close their eyes and wake up with their revenue really concentrated in two, three sources,” said Lyor Cohen, YouTube’s global head of music, referring to Spotify, Apple Music and Amazon Prime Music.

Right, so it’s better if it’s concentrated in four, and the fourth is Google? Huh?

The real danger here seems to be a race to the bottom. Apple, Amazon, and Google can all afford to lose money on streaming, turning it into loss-leader business for other revenue streams. SoundCloud, Spotify, and other tech companies can afford to lose money by repeatedly turning to outside investment. (It’s absurd that we’re still calling this “runway” with those companies, as the business is now around a decade old at least. The runway metaphor only works if you take off at some point. A “hole in the ground into which you throw money” metaphor is what we seem to have here.)

I wouldn’t normally compliment the record industry, but to the credit of groups like the RIAA, at least they’re exerting some pressure up. The problem is, even a $7 royalty per 1000 streams may prove negligible to smaller artists and labels – and if the business that pays that royalty can’t survive, it’s a moot point anyway.

So, uh, how’s everyone feeling? Super… happy? No?

Of course, the buzzword that everyone seems to be running to at the moment is the blockchain – offering decentralized content and paying creators more directly. But describing one part of a larger solution isn’t the same as describing the whole solution. Will listeners embrace micropayments for music, or will they find it a hassle? What will make them migrate from services they’re already accustomed to using – and in which they’ve already assembled playlists and preferences? What about the fact that services like Apple’s are already integrated with the listening devices they own? How do you convince listeners to change their mind about what music should cost, when they’ve already grown accustomed to $10 monthly fees – or, very often, no fee whatsoever?

It isn’t all bad news. People are listening to more music. Streaming isn’t a nonexistent business – it’s US$7.7 billion in the United States alone. Someone, somewhere is actually earning money.

Also, because of the cost of PR and building fanbases, and the potential revenue earned from paying live (or selling physical goods), a lot of musicians I’ve talked to really do appreciate the promotional value of online streams. There are plenty of cases where giving away streaming music is viable – because you might then sell people vinyl, for instance.

And, look, while all of this shakes out, musicians and labels continue to pursue a strategy that caters to building relations on all these services. Some of them have great success stories with YouTube, with SoundCloud, with Spotify.

But maybe that’s the point. It seems to be the businesses in between that are non-functioning – or (in the case of futuristic blockchain propositions) just not ready for primetime.

Musicians and labels keep doing the hard work of making the music and fighting to get it heard. Yet investment and attention pours into the middleware between us and listeners – and that middleware really isn’t working terribly well.

At the very least, it seems totally valid to me that people who make music have reason to be frustrated. I think we should continue talking about our own solutions. And I’d like to see the captains of industry – music industry and tech industry alike – take some greater responsibility for what’s gone wrong and how it might go better. Well… one can dream, anyway.

So, uh… vinyl? Cassette tapes? Eight tracks?

Erm… happy Monday?

  • Pop

    Soundcloud article number 4 already? Gosh..

    Anyway, this isn’t partly SoundClouds own fault. Its entirely their fault. They expected to have their pockets well lined by providing a half baked service.
    It has significant issues (as mentioned in previous comments) which are entirely fixable, yet have shown zero intent to fix them. Its no wonder that few are willing to pay for it..

  • I never understood why SoundClouds shifted from a hosting company to a listeners Go platform. I still believe they can add more services for musicians as a great hosting company. Don’t forget the enormous amount of podcasts it also hosts. What about injecting ads in podcasts in a flexible way? There are so many things you can think of which would help makers. But it’s hard because somehow it feels as if SoundCloud want to be both.

    See how Flickr works. It is a platform for photographers who love to share their work. There’s a free model and a PRO model. Somehow that seems to work right? Even while not having any Go-like service. It’s free to watch. Go was a mistake. Kill it SoundCloud. And keep focussing on the Maker.

    • Erm, is Flickr making money? I don’t know any numbers, but I’m guessing no. The only reason why Flickr still lives is because of a parent company that keeps it alive. In this case, Yahoo – and whoever now holds whatever share in that. But point being that – as Peter pointed out – there is no money to live off in the streaming business. And there is an immanent problem, even if Soundcloud focused on the makers again: Where is the money coming from that is needed to run the hosting platform? I’ve got a Pro subscription, but solely because it seemed easier to me paying them to do all the tech stuff instead of hosting everything on my own website. I make music for fun, not for a living. So I don’t care about how far my music reaches or whatever. But for those artists to whom this matters, it is a problem. Soundcloud still have not told us (and the investors that keep it alive for now) how they are actually going to make money.

      • Don’t know the number either. Yahoo was making profit though.

        Streaming is a serious issue indeed. Even YouTube is not making money. For most websites business is an issue. Including Wikipedia, Twitter etc.

        Yes, problematic. We need to go beyond thinking money maybe?

      • I always seem to forget about one of the winners in streaming: Netflix.

        • Netflix is not comparable. The film and tv series business is completely different from music streaming. Also, Netflix produce their own content which they hold the rights for. The whole copyright and distribution rights model works different than in music industry.

          • You are right. Must say that Napster did work. Torrents did work. Distribution for almost zero costs. I guess something needs to change…

      • R__W

        no, flickr never made any money

    • Presteign

      This is likely an unfortunate result of the venture capital path. My best guess is that while SoundCloud’s founders saw a Flickr for music, the investors looked at the tiny valuation of Flickr and the huge valuation of Spotify and set their sights on the big fish.

      (Ironically, neither Flickr nor Spotify are making money right now.)

  • Foosnark

    On a probably entirely unrelated note, is anyone else having trouble playing embedded SoundCloud links recently (within the last couple of weeks)? On both my home and work computers (Windows 7, Chrome) everything looks okay but the play button simply doesn’t play anymore. It works fine if I click through to the SoundCloud site.

    Someone on KvR mentioned it this weekend too.

  • Shmerdjee

    IMHO Bandcamp serves artists better. Streaming? Hard to compete with Apple and Spotify.

    • But it’s ultimately harder to get your music onto Apple or Spotify than on SoundCloud. Unless you pay a distribution service, which brings you back to using extra money that you need to count into your budget.

      • R__W

        nowadays there are distro services that only cost 20 dollars per year for unlimited albums

  • Lindon Parker

    When the somewhat savvy Chris Randall starts to offer an alternative I begin to think somebody’s business vision/plan is broken

    • He started Octave a few years ago. Does he have any customers at all? The website doesn’t look so…

  • TJ

    The problem it seems to me is the confluence of having a platform that allows individuals to upload their own music files for streaming (without a middleman distributor) AND a platform that’s a social network, which spreads this music to a worldwide audience and allows people to collate libraries of free music. Somehow, YouTube is making it work, despite tons of copyright infringements.

    The amount of overhead necessary to policing copyright issues was probably doomed to failure from the get go. An open and free sharing system of potentially copyrighted material is Napster in a different form. “Go” was a bandaid for a festering wound.

  • R__W

    soundcloud actually can’t do better. you can’t get good people to work on streaming music anymore because they know there is no light at the end of the tunnel.

    After my employer RDIO melted down I haven’t been paying attention to this space other than reading about it here, so this article was the first I learned that Lyor Cohen is the music guy at YouTube. LOL…

  • streamer

    Interesting article, lots to think about here. One point, you say:

    “If users pay a flat fee for a subscription,
    then the company loses money the more they listen to the service –
    because royalty costs accrue.”

    That’s not accurate for subscription royalties. The way the deals work, all the money is put into a pool and then individual labels, publishers and societies generally get their pro-rata share of that money, based on their streaming volume. So if the pool amount remains the same, but the number of streams goes up, the effective rate per stream goes down.

  • That $7B industry is going mostly to the middleware: what remains of labels, tech platforms etc. Those services should be paid of course. But there somehow is never enough left over to pay for the content that is used to build the “businesses.”

    It seems that where we are right now, if you an emerging or niche artist, and you are not privileged to be able to forego revenue in the hopes of being able to sell something later (i.e. “Hey kid, play our club for free and you’ll get exposure!!”) digital isn’t the place to be. The money is in the physical world: vinyl (see the oft-quoted RIAA report, page 3, compares free streaming vs vinyl sales) and live performance.

    Digital efforts are useful only as marketing expense for those physical things. Interestingly, there may not even be much need to have a music-sharing service to do this sort of marketing. Little clips on Instagram, plain old-fashioned engagement on Twitter/Facebook etc could probably generate enough “social proof” to get gigs etc. If you have extra cash then boosting the social proof with paid followers etc (which I agree is distasteful but whatever, it’s rampant so no shame in using it if someone wants to).

    Services like SoundCloud are the classic “this is a feature, not a product.” Streaming for Apple is a feature of buying their tech hardware (interestingly, also a physical thing). Streaming for Spotify is a feature of their sucking money out of VCs hungry for eyeballs. Streaming for Google is a feature of their supporting the Android ecosystem (like Apple, a hardware play when the dust settles). SoundCloud had the music feature but no product to actually sell.

    While you say that you believe the founders can communicate better, I think all of their actions prove that they cannot. I think if they could they would have by now. They’ve been on the ropes for well over a year. I don’t blame them, it’s a difficult position they are in and they likely can’t see their place in it very clearly right now.

    All the problems of streaming music cannot be laid at SoundCloud’s feet in any fair world. However, it’s a world they chose to play in. At this point, it’s just business. And, as you and everyone else who observes this space closely will not, they do not have one.

    • terrygrant

      Very well said.