Why Ignoring the Independents Means Thunderstorms for SoundCloud

The Background: Courting the Mainstream Players

While the TC piece makes some astute points, its most important argument — that SoundCloud has the opportunity to become the YouTube of audio — doesn’t exactly stand on its own. SoundCloud has a major issue in that it’s caught in between two completely different paradigms — that of the independent and that of the major label — and doesn’t seem to know how to resolve those differences. Up until now, the ill-fated balancing act it’s been trying has been somewhat workable, but going forward it will be tenuous at best. As such, the real story here is how SoundCloud is evolving, and not in a way that is wonderful for the independent artists who have historically been its core constituency.

Leaving the Core Content Base

To be clear, there’s nothing wrong with serving the mainstream. However, most every one of the major music companies already does that, leading to an already crowded crawlspace of competitors vying for mainstream supremacy. While the major music companies set their collective focus on mainstream material, the independent demographic is left languishing in the wind time after time. Initially, SoundCloud was an exception in this respect, cutting its teeth in the independent arena long before it signed deals with any of the major labels (starting with Warner Music Group last year). Since then, however, SC has been moving further and further away from the paradigm from whence it rose and closer towards the crowded party at the mainstream table.

The music pipeline
Growth of independent music between 2003–2012; image courtesy of Techdirt

Money and Equity

As some have already pointed out (or could simply guess), the Universal deal could not have been cheap by any means, particularly as it meant Universal dropping its legal action against the music service. Furthermore, as Warner gained around a 5% stake of the company when it licensed its own catalogue, one can calculate that Universal settled for nothing less than a similar deal (likely pushing for more equity in order to drop the legal suit).

Royalty rates, minimum wage, and reality; image courtesy of informationisbeautiful.net

Operating in the Red

All of this firmly underscores the uncomfortable news recently that SoundCloud took a $44M hit in 2014, making their raise of the above-mentioned $35M almost irrelevant. That the raise of the $35M in debt financing will essentially have to go to cover SC’s 2014 losses must be a bitter pill for investors to swallow, particularly as much of their customer base uses the service for free. The simple truth, as it appears to be, is that SoundCloud is hemorrhaging money with no clear path to take to fix things, either quickly, or in the long term. That being the case, it’s fairly probable that SoundCloud will need to start raising another round of money somewhat soon, even if it’s just to weather its current storm.

SoundCloud losses (in Euros); image courtesy of Music Business Worldwide

Short Term Gain, Long Term Loss

The big kicker though, is that SoundCloud didn’t start as Spotify of Apple Music did, with deals with the major labels. It doesn’t come from that part of town. It comes from the less expensive, more experimental street of independent artists, covers, and remixes. It blew up among independents long before mainstream listeners got wind of it, and now it’s moving away from those early adopters towards a more corporate clientele.

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