SoundCloud's growth in subscribers has been nothing short of stellar. Users prefer the application over competitors such as Spotify, as users can access it for free. They also prefer the application to YouTube, which has adverts in videos and is also hard to upload music to.
However, questions have also remained over how it can convert that user-base into money. With ~$120m of funding so far, and with the latest funding round of $150m valuing the company at a staggering $1b, investors are likely to ask - "when are you going to start making real money"?
Take the latest available financials - SoundCloud generated revenues of €11.2m in 2013, up 40% from 2012’s revenues of €8 million. However, its operating loss in the period more than doubled, to €23.1m in 2013 from €12.4 million in 2012.
So will it go with the Spotify route of paid subscriptions and deals with music companies, or the YouTube model of displaying ads?
The answer, so far, seems to be "all the above". In August, the company launched an ad platform, and is currently negotiating with large music publishers such as Sony, Universal and Warner. It has signed a deal with Warner in November and the others seem to be holding out for better terms.
So SoundCloud is facing a few challenges;
- If it enters into paid subscriptions, the issue of licensing deals with publishers needs to be solved - a drastic rise in costs. It will also turn off many users who don't want to pay to hear music at all.
- On the other side of the coin, if it enters into advertising, it may also turn off their user-base, but may also make it hard to generate enough revenues to pay for the licensing deals.
It will be interesting to see how a highly valued company like SoundCloud will walk this tightrope, and solve the problem of converting a giant, growing user-base, into cold cash, without alienating a a large number of its fan base
The company is rumored to be raising another $150 million round of funding, according to a Wall Street Journal report today. The funding is said to be intended to help SoundCloud secure licensing deals with the major record labels. Right now SoundCloud is mostly known for helping unrepresented artists and those at smaller labels promote and share their music with fans, but licensing deals with the major companies would mean getting access to a huge selection of popular songs. It would also make SoundCloud more competitive with YouTube Music Key, which already has those licensing deals in place.