Will SoundCloud’s Subscription Service Flop? Yes, It Will. And Here’s Why.

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According to the Wall Street Journal, SoundCloud “is in discussions to raise about $150 million in new financing at a valuation that is expected to top $1.2 billion.” Soundcloud may achieve this because of its huge number of current users, now estimated to be 175 million throughout the world.

But for the first seven years of its life, SoundCloud’s only way of making money was to charge users who wished to upload more than a certain amount of audio.   Currently, SoundCloud only allows for three hours of audio for free. After that, the cost is $55 yearly for up to six hours, or $135 yearly for unlimited.


Although it doesn’t disclose its finances, it is widely believed that this model has not made SoundCloud profitable.  But now the company is in negotiations with the major labels, and has already struck a deal with Warner.  The plan is to make Soundcloud profitable by — in addition to accepting advertising money — making users pay a subscription fee.

It won’t work.

Here’s why:

1. Wrong Demographic

The users of SoundCloud are absolutely the wrong demographic for a subscription service.  SoundCloud’s users are largely similar to its co-founder and CEO Alexander Ljung, i.e., aspiring musicians and producers.  The bulk of the music on SoundCloud are new DJ sets and song remixes.  SoundCloud users are people who make that new music and people who want to hear it.   And the vast majority of them are tech savvy.

As soon as they are asked to pay for the service, why wouldn’t they walk?

2. Alternatives to SoundCloud Already Exist

There are already alternatives for producers and DJs looking to gain exposure for their work.  MixCloud, for instance, offers unlimited uploads for no fee, and pays royalties out to artists.  Bandcamp also makes it easy for musicians to upload music, show a profile, and either let their music go free to anyone who wants it, or make money from their own storefront.  SoundCloud has only shared revenue with about 60 “Premiere Partners” consisting of indie labels and artists selected on an invite-only basis according to the Journal.

3. Major Label Music Won’t Help

The introduction of major label music won’t work either.  If SoundCloud tries to use major label music to lure people to pay, why would that succeed in creating a profitable subscription business?  There are already innumerable digital places to find the same tracks for free — from authorized services such as YouTube, as well as ad-supported Pandora and Spotify (except for Taylor Swift), to BitTorent-powered cyberlockers, to pirate apps available on both Apple’s App Store and Android apps made available by Google.

 

Who Will The Winners Be?

The major labels will be the recipient of much of the money pouring into SoundExchange’s coffers.  They will wrangle huge up-front advances and/or minimum financial guarantees in exchange for providing their digital catalogs.  What do they care if SoundCloud ever becomes profitable?

Whether artists signed to those labels ever see any of this money is a totally different story.  But if critics of the majors are correct, most artists will not — either because they are unrecouped (still owe money for recording costs and marketing expenses), or because their contracts include clauses that the labels can use to avoid paying them.

 

Steve Gordon is a music industry attorney practicing in New York.  He is the author of the recently-released 4th Edition of The Future of the Music Business (more on the book at futureofthemusicbusiness.com).

34 Responses

    • steveh

      But mixcloud is no good as a hosting service for listening samples of individual tracks.

      http://support.mixcloud.com/customer/portal/articles/157235-single-tracks-why-can-t-i-upload-songs-

      And Bandcamp is no good because it will only stream the whole tracks, not a 2-3 minute sample. This gives too much away.

      Soundcloud is the best for this but if listeners have to pay to listen it defeats the whole purpose of a “shop window”.

      And why should labels or artists have to pay to have a Soundcloud Pro Account if the listeners are also paying?

      This could very easily be the death of Soundcloud.

      Reply
  1. Irving Mindreader

    Correct conclusion, but your list is incomplete. The primary reason this model fails is because streaming is a bridge not a destination.

    The world of consumers has evolved. They grew up with the web, and millions of choices, and instant gratification. Their media expectations are higher now. The value proposition is different now.

    Monosensory (audio-only) media is the new 8-track cassette. Just playing a song is boring. That’s why so few people pay anything and most pay nothing at all. Want to change the price and get more people paying? Change the standard media format and recalibrate expectation.

    The value of static audio media, even lossless, is almost zero, regardless if delivered by download or stream. It will not support any transactional model of any kind ever again.

    Reply
    • Versus

      “Monosensory (audio-only) media is the new 8-track cassette. Just playing a song is boring.”

      So why are people listening to more music than ever before, in mono sensory mode, whether on iPhones, computers, car stereos, office and store radio or satellite or Internet streams, while studying or working, etc?

      Reply
      • Irving Mindreader

        <>

        Your question is misdirected. Correlation is not causality.

        More people are listening because it’s convenient. More devices + more sources + ubiquitous connectivity = increased consumption. If the goal were to get more people to listen, then great. Mission accomplished.

        Except that consumption is different than demand, thus the metrics of increased volume are not mirrored by increased revenue. These forces don’t work in proportion because the problem is not quantitative. The market has not been a function of supply and demand since the decline of analog media.

        In fact, it’s imperative that we stop thinking about music as a binary product, and start thinking about music as a consumer experience. Economics is not a study of money – it’s a study of behavior. Markets evolve to satisfy appetites. Markets move when people change.

        The (song/dollar) value proposition collapsed because the consumer attention span grew shorter, while audio-only media stayed basically the same, like a bystander at its own marketplace funeral.

        The market is soft because artists and rightsholders failed to recognize what business they were truly in. This is not about selling audio, it is about selling dopamine — the consumers response to the audio.

        Recalibrate to serve that moving target, or dismiss the need at your peril.

        Reply
        • Anonymous

          The market is soft because artists and rightsholders failed to recognize what business they were truly in. This is not about selling audio, it is about selling dopamine — the consumers response to the audio.

          Plenty of people in the business understand this and fight for it, but those with the power and control and ultimately the money and work ops, dont seem to care, they are serviing other interests, not listening to their top workers who know anything about music anyways, and instead think people want superstars and image and to be involved in every last detail of their life…

          On a whole other point, let me just say, Big Corps just dont care man, i wish they did but they dont.

          Take Call Centers for instance… They have all these metrics to hit, spend all this time and money and energy crunching all this data, looking into numbers, running studies and tests, and yet the thing they fail to understand and realize every time, is that they forget the customers are the ones who pay the bills, so the customers get pissed off, hate the lack of service they get, constantly want to take their business elsewhere, and yet always its just metrics metrics metrics metrics metrics metrics… hit this number, focus on lowering that number, look at this other number, its bogus, its pathetic, its embarrassing, its ultimately going to just run the whole thing into the ground and the top guys siphoning everything will be living lavish and large dangling carrots for the billions of people left out in the cold…

          Same thing with music, same thing with any of these corps these days… Accountants and algo players ruddering the ships at the helms with their noses stuck in spreadsheets and up their employees asses all the time, forgetting the one person that truly matters, the customer!!!

          Then they think that some new fangled crummy slapped together buggy service is going to wow their customers and keep their business… How about fucking servicing the fucking customer boys???

          Nope, that would be too much trouble, far too much to sit on the phone with a customer for an hour to keep them happy, nope, thats termination right there, better to piss the customer off, piss all over them, jack their bill up, charge them some things they didnt pay for or want, and then fuck them some more…

          Makes me want to never spend another dime anywhere…

          Seriously brutal businesses out there…

          Reply
        • doktor audio

          hey irv, well put. just not sure about that part where you claim streaming is a bridge rather than a destination – i’m not seeing any destination other than play buttons. nobody i know still maintains an active mp3 collection on a home disk. we are not going to steer back to physical media. i might add that there still is future for audio-only (listening while working/studying/making out).

          Reply
          • Irving Mindreader

            “just not sure about that part where you claim streaming is a bridge rather than a destination”

            Streaming is a delivery mechanism, not a state of consumer nirvana.

            It increases the number of ways media may be delivered to the consumer, but does not (evidently) advance the experiential value enough to coerce a majority of the audience to pay.

            Had the digital music illuminati prevailed upon the label and publisher heads twenty years ago, subscription services might have been brought to market far earlier and more robustly, and perhaps to greater overall adoption by this point.

            Nevertheless, I think the consumers overall exposure to other stimulus and media platforms in the interim would have us in approximately the same song/dollar value proposition conundrum. That is, unless and until we deliver something better, more dynamic, and more emotionally engaging than monosensory audio as bait.

            As with drugs, the customer has built up a tolerance. We need to increase the dosage to deliver the same high, let alone improve on how we made them feel yesterday.

            Otherwise (evidently) they’ll spend their money and time somewhere else.

          • steveh

            If the audio-only music experience is so lacking why then do so many people download so much music from torrent sites?

            From the evident decline in music revenues you cannot purely extrapolate that it is because people are losing interest in the audio-only experience when they go to great lengths to obtain recorded music without paying for it.

            If people were not interested in audio-only music experiences then you would observe a decline in music piracy, which in fact has not occurred. In fact latest report suggest that piracy is on the increase.

          • Irving Mindreader

            “If the audio-only music experience is so lacking why then do so many people download so much music from torrent sites?”

            Ok. First of all, consumption is different than demand. I already made that point upthread. Please read before responding.

            Secondly, your point is a non-sequitur based on flawed assumptions. Save the rhetoric like ‘so many people’ and ‘so much music’ for someone else. I’m only interested in a serious discussion about a problem I hear too little about, not rehash digressions that weren’t productive the first thousand times they were bandied about erroneously.

            The reality is, most music fans do not source music from torrent sites. Piracy is a problem that cuts into the recorded music industry bottom line, but _declining experiential value_ is why it’s bleeding out.

            “From the evident decline in music revenues you cannot purely extrapolate that it is because people are losing interest in the audio-only experience when they go to great lengths to obtain recorded music without paying for it.”

            Sorry. Another flawed assumption. Only the boogeyman goes to great lengths to obtain recorded music, from torrent sites or elsewhere. You need to get your propaganda from better sources.

            “If people were not interested in audio-only music experiences then you would observe a decline in music piracy, which in fact has not occurred. In fact latest report suggest that piracy is on the increase.”

            More devices + more sources + ubiquitous connectivity = vastly greater impact. Again, consumption and demand are mutually exclusive.

            Your fixation with piracy is revisiting arguments made by the very ‘thought leaders’ who drove this industry into the ground. Piracy is a problem, but solving it won’t restore the market because the demand doesn’t exist anymore. The consumer has moved on, and is spending their time and money on more engaging media.

            Netflix alone is bigger than the entire global recorded music business. Where is your Reed Hastings? (Sadly, you don’t have one.)

            If he was here, would he be wasting his time bitching about piracy? Probably not. My guess is, he’d be focused (and rightly so) on delivering the best consumer experience possible. Fast, simple, convenient, personalized.

            Also he’d be telling you that your monosensory media format sucks like 1999, and that you better fix that first.

            2015 coming, with or without you.

          • steveh

            I find the arrogance of your response disturbing.

            You obviously have some kind of deep agenda and I guess if you continue posting on DMN we will eventually smoke it out.

          • Irving Mindreader

            I’m no angel, but if facts come off as arrogance perhaps you might check the filter. There’s no informed debate about the real issues here. My tone is the least of your worries. If I have an agenda, it is to move the discussion to a place where resulting attention and efforts might actually make a lasting scalable difference.

            Piling more money and time into models like SC is a race to IPO. Nothing more. They’ve raised too much to be an attractive M&A target and the P&L is a horror show. They’ve burned through > $100M and earned roughly the revenue of a midsize taco stand.

            That is more an observation of consumer behavior than an indictment of the people involved. I know and respect many of the executives and investors at SC. The majority are driven by best intention, and would privately agree with my analysis. Their best hope is to catch *just enough* free-to-paid conversion for a decent bank to underwrite the offering.

            For their sake, and the revenue sharing artists who depend on them, I pray that ad revenue and a spattering of subscription silos will buy them some sunshine.

            I just cannot abide any pretense of that being a long term strategy. The underlying media experience must fundamentally change in order for the behavioral trends to change in response.

          • Lord Fancypants

            You’re not wrong, but so longwinded I felt my interest waning.

  2. Jeff Red Berry

    Bummed but I guess all good things must come to an end. We, all of us have been through so many music services over the years we are practically nomadic now. I remember downloading songs off Napster with a 32k modem, 15-20 minutes a song, as you prayed you wouldn’t lose your connection. But I’ve said it to friends, many times, all these companies eventually come to be motivated by greed. The original motivation is replaced by gold fever. They all try to monetize something cool. That means bringing in folks who are the opposite of cool, beancounters and lawyers, the anti-cool. A few people at the top will make money and they kill the golden goose in the process. I wish I could say I was surprised, sadly however I’ve been waiting for it. Good morning heartache, sit down.

    Reply
  3. Anonymous

    The Majors will ultimately want to own each and every last outlet place so that they can dominate each and every set of eyes that visits the website with the faces of their superstar deities and continue to crush the hopes of anyone else trying to navigate the waters…

    As the cost of entry becomes cheaper and the tools more easy to use, the Majors will further bully and dominate the market to make it impossible to make a go at it without them…

    As soon as these more indy sites gain traction and popularity, the Majors will step in and bully something out so that they can assume the market control and put their faces in front of everyone, thus killing all indy hopes…

    Reply
  4. Paul Resnikoff
    Paul Resnikoff

    “The major labels will be the recipient of much of the money pouring into SoundExchange’s coffers. They will wrangle huge up-front advances and/or minimum financial guarantees in exchange for providing their digital catalogs.”

    Steve — is Pandora paying upfront advances to the majors, as well as Merlin, as has been reported by Billboard?

    Reply
  5. Steve Gordon

    Paul,
    To my knowledge Pandora has only made a direct deal with Merlin.
    It is useful to point out that since SoundCloud’s subscription service will be interactive (i.e., the listener can select individual songs), it must do direct deals with labels. Pandora has a choice. It is non-interactive and qualifies for a compulsory license under the DMCA. So it can pay SoundExchange the applicable rate or it can do direct deals with labels.
    BTW there is a typo in the second to last paragraph.
    “SoundExchange’s coffers” should read “SoundCloud’s coffers”.

    Reply
  6. Steve Gordon

    Paul,

    To my knowledge, Pandora has only made a direct deal with Merlin.

    It is worth noting that since SoundCloud’s subscription service will be interactive (i.e., the listener will be able to select individual songs), it MUST do direct deals with labels. Pandora has a choice. Pandora is non-interactive, and qualifies for a DMCA compulsory license. So it can pay SoundExchange the applicable rates, OR it can do negotiate direct deals.

    BTW, there is a typo in the next to last paragraph. “SoundExchange’s coffers” should read “SoundCloud’s coffers”.

    Reply
  7. SoundClown

    This article assumes that SoundCloud is going to require users to pay to use the site. That’s a silly, incorrect guess as to what they are planning.

    Reply
  8. once upon a time

    🙁 sorry to say but everyone just seems to be pissing in the wind… The wind isnt going to change direction.

    the wind will only get stronger.. You need to piss in a different direction

    Reply
  9. dancetech

    “The Majors will ultimately want to own each and every last outlet place so that they can dominate each and every set of eyes that visits the website with the faces of their superstar deities and continue to crush the hopes of anyone else trying to navigate the waters…”

    Well yes, but it’s a bit more subtle than that. People have failed to see one key thing all through this endless ‘downloading & pirating’ debate (which now has moved on to include streaming services, eating into sales & artist royalties as much as pirating).

    This was always about ONE thing. The majors trying very hard to retain control of distribution. Labels don’t really have much other purpose. Long gone are the days of just a handful of studios (due to expense of the gear) and labels having control of handing out ‘recording’ deals to pay for studio time. Nowadays you can finance your own album easily even if not wealthy & private funding or self-funding can finance any known-artists album. So labels have lost that original role of being ‘record labels’.

    Labels really have one last role… distribution which they used to absolutely control when it was hard-copy media – vinyl, cassettes and other forms – and through the years even if new indies appeared ultimately they’d have to go crawling to the majors for distribution when they scaled up because the logistics are huge when it comes to global distribution of hard-media in big volume.

    But now we’ve got the web…. yes we had ‘share’ type sites & s/w when you’d download from just one persons actual computer (limewire etc) but torrents then came along in force and this is a whole other ballgame because nobody really has the whole file, & you just get fragments from a selection of connected people & it is impossible to stop as it does not rely on a single s/w program or on any site or servers hosting files.

    So think about it… if torrents were legal and monitored/measured so that whatever was downloaded via torrent the copyright holder would get paid… bye-bye record labels entire remaining business model because there is no distribution anymore via specific sites or from specific servers. Then all the labels are left with is being ‘promotion’ companies, promoting the artists who’s torrents are out on the system and getting paid because they get a cut of the royalties

    Irving Mindreader above has some grasp of it… the biggest artists now almost release music as promo for themselves as a celebrity/artist & much of their BIG revenue comes from their profile as a celebrity via endorsements, so the music just is a tool to keep them in the public eye and this can be traded for corporate sponsorship/endorsements/advertising deals, tv shows, and other celebrity appearances etc.

    So back to the actual music… if torrents were monitored as i say – and it could be done if people weren’t hiding their activity & it was legal and measured, (a company like google could do it even) – then you have what the web was supposed to be in terms of media distribution… absolute democracy.

    There is ZERO distribution costs. No servers are required, except to host the initial file/torrent, after which it then spreads like a virus to people’s computers worldwide and is distributed from that point onwards by a network of ordinary users – — anyone can put a song on a server and publish a torrent, and all that remains then is to publicise that song and if it’s good music people will download it… and you’d get PAID for each download!

    bedroom labels would have free global distribution and everytime someone dowloaded a copy it would get notched up on a database and a royalty paid (albeit not a big one)

    A model like that of legal torrenting could be funded by say a small 5 euro tax on all ISP connections – 5 euros is nothing in return for no legal hassle and you just carry on torrenting – which you know how to do anyways – and you feel happy because you know the artists get paid (and film studios where movies are downloaded)

    and btw, movie distribution is also strangleholded by the major studios/distributors, so indie films also get this free distribution model

    5 euros applied to all EU ISP connections would equal something like 400 million x 5 euros PER MONTH which i make 2 billion a month if my maths is right, to be shared between the copyright holders. That is roughly the figure for just Europe alone, and of course there is all the other territories each yielding similar or bigger monthly royalty distribution pots.

    THIS is what the labels have always been shit scared of and luckily nobody much talks about it as a solution & you’ll have noticed than when torrenting/downloading was really hot news a few years back & govt’s were leaping to pass ‘laws’ etc, musicians on forums were the silly sods screaming at everyone that torrents were killing music… in reality torrents are probably it’s saviour IF it is legalised and measured as i said.

    Think about it? what is the difference between

    A) legalised/monetised torrenting via a tax with the royalty paid direct to the copyright holder
    and
    B) a streaming service like spotify? or film/tv library stream on demand sites like netflix?

    Nothing, except there is no middle-man between the royalty collection and distribution….. but those services make sure the distribution stays UN-democratised and always in the hands of a few big companies, but the cost to the companies is that they must host the music/films on servers and pay the bandwidth every time it is streamed to a user – Torrents have zero distribution costs, no servers, no bandwidth, nothing except collect the royalties! — with legalised torrenting you get absolute and total free distribution globally with payment.

    Iegalised torrenting wouldn’t mean the end of sites like Soundcloud; their problems are a whole other ball game & you could see this was always going to happen; it’s just that their expansion model just did the typical ‘flashy-offices & slew of highly paid executives’ sketch which has quickened the inevitable demise which was always going to happen when you set out to try and make a profit from a massive volume of users who wont pay much if anything while at the same time being burdened by colossal bandwidth costs to stream from exclusively your own servers to millions of people per hour.

    anyways sorry to ramble, aint slept for over 48 hours, but trust me, legalised monitored torrenting… it might happens one day – that is what the web was always about, that you DONT need servers and bandwidth to distribute even huge volumes of digital media…but because of that you can’t control the distribution and profit from the actual act of distribution.

    finally in that respect (with an even playing field – everyone has access to the same global distribution for free), promotion is key to how many people torrent your song/set) – So labels could still have a business with legalised/monitored/royalty-distributing torrenting, but it is purely a promotional one. Even with such a system model, the big artists promoted by big labels with big budgets will still gain the most streams… but the difference is, all those artists who are on teenagers ipads or computers who normally dont get paid… do get paid, and often these artists are very popular, but the kids simply dont pay for the music so those artists dont get much lolly by trad distribution means.

    anyways, that is what the www was always meant to do, remove any digital distribution costs.. labels fight that cos they lose control of distribution & of being the middle-man between streaming royalties and artists, & the streaming sites they are now trying to break financially and then buy up and control is the latest way they are seeking to hang on to control of the distribution model.

    oh btw… you can broadcast from your own bedroom easily… checkout http streaming – all you need is your deejay setup feeding IN to your computers soundcard, and you stream OUT from that pc to the web to an m3u file hosted on a server somewhere. The cost is 128k per second – compare that to server package bandwidth allowances.

    A 128Kbps stream uses 56.25MB per hour, or 1GB in 18 hours & a company like fasthosts offer Unlimited monthly data transfer for 29 quid a month… so go to it.

    finally if you just want somewhere to host deejay set files we have a server in a nuclear bunker in kent: 7161.com, it’s been around donkeys years always working but everyone f*cked off to corporate sites like soundcloud years ago from genuine small indie sites like ours… it;s free, but it’s ghetto lol, there’s no flashy embed in facebook etc, just raw mp3 file hosting and m3u streaming, but you can also create an itunes podcast with the site quite easily. it should work unless apple have catastrophically changed their podcast creation protocol peopel are creating them still anyways.

    nn

    Reply
  10. Aha

    who ever try their basic pro plan knows that they are taking your money automatically every month. if you cancel your subscription they will do it immediately ..what about those days they force you to pay for?
    Anyway SC is dead .

    Reply

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