SoundCloud, the online music streaming service, is exceeding financial and user growth targets less than a year after a $170m financial rescue took it back from the brink of collapse.
Kerry Trainor, the former chief executive of video site Vimeo who pulled together a fundraising deal in August with backing from Raine Group, the boutique US bank, and Temasek, Singapore’s state investment company, says SoundCloud made sales in 2017 that surpassed its annual goal of $100m. Crucially, after years of sluggish user growth, the user base rose in each of the past three quarters.
While the company remains lossmaking and its long-term prospects uncertain, its user growth will encourage the music industry given the scale of the crisis at the group last summer. With months before it was expected to run out of cash, and having laid off 40 per cent of its staff, SoundCloud’s founders were faced with a choice: sell, or raise money and find a viable business model for the service that had been a driving force in music zeitgeist, but has been squeezed in a market dominated by Spotify and Apple.
Mr Trainor convinced management and investors that SoundCloud was worth another shot and took over as chief executive from co-founder Alex Ljung, who became chairman. Seven months later, he says SoundCloud says the company “has never been healthier financially”.
Still, he has his work cut out. SoundCloud rose to prominence as the “YouTube for audio” — an online home for artists and podcasters to post their work after early pioneer MySpace fell apart. The company, which was founded in Stockholm but then moved to Berlin, amassed hundreds of millions of users and remains a breeding ground for emerging talent, spawning new sub-genres of music.
But in the era of digital music, SoundCloud has struggled to find its place and build a sustainable business model. The large record labels have latched on to streaming subscriptions as their chief moneymaker — a format that has brought billions back to the industry but is dominated by a few players: Spotify, Apple and Amazon.
After being pressured to build its own subscription product, Mr Trainor says SoundCloud has switched gears an is no longer trying to mimic Spotify. Instead, the company wants to focus on its original market among the creators of music. SoundCloud sells tools to artists and podcasters, such as data on listener habits or extra storage, for between $70 and $100 a year.
There was a period, for literally over a decade, when no one was sure anyone would pay for music ever again. It’s exciting to be able to forget that now
Kerry Trainor, chief executive The benefit to SoundCloud is twofold. These artists pay for the services, and they also post content that will draw listeners to the platform. Mr Trainor points to Soundcloud’s 177m tracks, which compares to the 40m song library offered by Spotify and virtually every other streaming service. He hopes this extra content, which includes mash-ups and DJ mixes, will set SoundCloud apart from a crowded pack of streaming services.
Mr Trainor says that after last August’s funding round “we’ve significantly reduced the [cash] burn” and that the company recently achieved a few cash flow positive months.
The investment showed Soundcloud’s valuation had sunk to $150m, from $700m in 2014. However, the platform’s relevance has been rising, says Mark Mulligan, analyst at Midia Research. He points to “SoundCloud rap” — the term for a crop of emo-influenced rap artists who got their start on SoundCloud, and have invaded the US music charts.
“Artists were always SoundCloud’s core value, and that is how we need to measure its success,” he says. “How many people are starting their careers on SoundCloud? What SoundCloud needs to prove is it can be the most-used stepping stone between obscurity and stardom.”
The focus on higher-margin services for artists comes because SoundCloud’s subscription service has not gained significant traction. The company will not say how many people have signed up, but Mr Mulligan estimates about 100,000, compared to Spotify’s 71m.
He adds that SoundCloud’s best bet is “to get in good enough shape for Spotify to come knocking again,” after Spotify abandoned a deal in 2016.
Mr Trainor says he is not focused on deals right now, but that he expects “we will potentially be of interest [to suitors]”. Spotify declined to comment but one person close to the streaming company says all focus has been on its public offering, although SoundCloud is “always the one that’s kind of out there”.
That one of Europe’s most promising start-ups nearly ran out of cash is a testament to the tough economics of music streaming, just as Spotify is set to test its own unprofitable business model on the public markets on Tuesday.
But for the major labels, the more streaming services that exist, the better, as they want to avoid becoming wholly dependent on tech groups such as Apple and Google. “Obviously we want to see healthy [independent streaming companies] in the space,” says one senior label executive. “We want to see them win because [SoundCloud] really does fill a need. We like the bedroom artist nature of it . . . it’s a very different complexion than the YouTubes or Facebooks of the world.”
Mr Trainor, a 20-year veteran of the music business, is bullish. “There was a period, for literally over a decade, when no one was sure anyone would pay for music ever again,” he says. “It’s exciting to be able to forget that now.”