SoundCloud is about to be saved in the nick of time by a pair of investment funds – but the details of the deal have left some who rely on the platform deeply concerned about its fate. Very solid industry sources have said that merchant bank The Raine Group and Singapore state investment company Temasek Holdings will each acquire stakes in the business imminently.
Those stakes are understood to jointly amount to more than 50% of SoundCloud’s equity. In other words, the two finance houses are about to take control of the platform. We’re told that loss-making SoundCloud would not last long into the second half of 2017 without such investments – which come at a far lower valuation than that the company has bandied around the market in the past few years. Raine Group and Temasek’s investments both value SoundCloud at $300m in total. You can therefore make a fair guess that the two parties’ combined exposure sits somewhere around $150m – $160m.
If you’ve been following the SoundCloud saga for a decent length of time, you’ll know that in 2014, the firm’s co-founders – Alexander Ljung and Eric Wahlforss – were trying to sell it to Twitter for $1bn. Talks between the two parties eventually fell apart, but Twitter did come back to the table in summer last year to make a $70m investment – a deal which apparently valued SoundCloud at $700m. A few months later, towards the end of last year, sale talks were reportedly started with Spotify and reached an ‘advanced stage’ before Daniel Ek’s company – like Twitter before it – walked away. Earlier this year, MBW heard that Google was investigating a SoundCloud buyout for a price closer to $500m, while in June it was reported that Deezer – majority owned by Len Blavatnik’s Access Industries – was also considering making a bid.
Both of these approaches have since fallen quiet.
Soundcloud penetration is higher than Apple Music, Amazon Prime Music, Tidal and Deezer, with only Spotify boasting higher penetration for audio services.
Soundcloud was once a streaming powerhouse, with 175 million Monthly Active Users reported in October 2014. Though that number is still widely cited whenever Soundcloud is mentioned in the media, in truth its user base is now much smaller. Spotify, which now has around 150 million MAUs has a Weekly Active User penetration rate of 16% while Soundcloud’s WAU rate is just 6%. With the caveat that multiple additional variables impact WAU vs MAU rates, this would imply that Soundcloud’s MAU number is now closer to 70 million. Despite this shift in its public narrative, Soundcloud remains a uniquely valuable asset in the streaming landscape, one that would give another streaming service a distinct competitive advantage. Here’s why.
A Streaming Service Unlike Any Other (Except YouTube That Is)
Soundcloud first rose to prominence as a platform for artists before it rocketed into the stratosphere as a consumer destination with its new VC-powered mission statement ‘to be the YouTube of audio’. The legacy of its unique starting point is that Soundcloud: Has a catalogue unlike any other streaming service, except YouTube (and to a lesser extent, Mixcloud) Gives artists a direct connection with fans unlike standard streaming services
Gives up and coming artists a global platform for reaching fans with no intermediary
That unique combination of assets makes Soundcloud a highly valuable commodity despite its diminished user base and similarly reduced valuation (now said to be around $250 million from a high of $1 billion). Soundcloud has two crucial attributes that will enrich any streaming service: A service tailor-made for Gen Z (ie those consumers currently aged 19 or under)
Soundcloud Is Built For The Era Of Mass Customization
As DJ Spooky put it: “Artists no longer work in the bubble of a recording studio. The studio is the network.” … “The 20th century was the era of mass production. The 21st century is the era of mass customization…” Artist creativity is no longer a creative full stop, we are now in a phase of Agile Music. Even though the number of people that upload music is small (7% of consumers upload music to Soundcloud or YouTube, of which half upload their own music) their impact on the broader market is multiplied many times over as they provide the music others listen to. But even more importantly, the blurring of the line between audience and creator is the fuel in the engine of Gen Z experiences such as Snapchat and Instagram. Other than lip syncing apps like Musical.ly and Dubsmash, Soundcloud and YouTube are pretty much all the music business has in this space. That, coupled with a highly shareable, highly social UI makes Soundcloud tailor-made for Gen Z. The importance to the segment is clear: among 16-19 year olds.
Crowd Sourced Discovery
The other key asset Soundcloud brings is the bridge it provides between fans and artists. A host of diverse services like Tunecore, BandLab, Bandcamp and Reverb Nation provide an unprecedented range of tools to up-and-coming artists. But Soundcloud (along with YouTube) is still the only place where artists can reach such a large audience directly, without an intermediary. Layer on its massively social functionality and discovery algorithms and you have an unrivalled audio platform for new artist discovery.
Soundcloud Needs An Ecosystem
Unfortunately for Soundcloud, it has found it impossible to effectively monetize these assets (and aping Spotify’s freemium model has done little to move the dial). What Soundcloud needs is an ecosystem into which it can slot, bringing all of the great functionality but relying on another part of the ecosystem to do the monetization. Slotting Soundcloud into Deezer, Spotify or even Apple Music would create an entirely new layer in each of those propositions and would massively enhance market positioning.
It would also enable the service to start behaving more like a label, identifying and testing artists before moving them up into the main service. If done by Spotify or Apple Music, this would look highly disruptive to labels as it really would be a precursor to becoming a next-gen label. But for Deezer, the story is a little different. As part of the Access Industry potfolio, Deezer sits alongside talent management agency First Access Entertainment, live discovery platform Songkick and, last but most certainly not least, Warner Music. By acquiring Soundcloud, Access Industries would be rounding out the most complete Full Stack Music Company in the business.
YouTube Is Not For Sale But Soundcloud Is
YouTube might do most of what Soundcloud does, and at much larger scale, but Soundcloud is up for sale and YouTube is not. Right now, Soundcloud represents the best opportunity in the marketplace for an audio streaming service to make up the ground in user experience innovation that the streaming market lost over the last few years in comparison to Gen Z apps. And with Deezer at the front of the queue, the French streaming service could be about to transform its market narrative in an instant.
By Mark Mulligan of MIDiA and The Music Industry Blog