SoundCloud Running “Dangerously Low on Cash,” Sources Report…

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Streaming mega-giant SoundCloud is now close to exhausting its available financing, according to three individuals close to the organization.  SoundCloud, whose valuation recently soared past $700 million on an estimated $123.3 million in cumulative funding, is not only “dangerously low on cash,” but also faces significant obstacles finalizing its next round, according to details expressed in confidence to Digital Music News.

A separate source explained that SoundCloud is at risk of exhausting readily-available funds and will likely require an ’emergency bridge,’ either from existing investors like Union Square Ventures, or alternatively, a bank, by the end of this year.  On timetable, sources couldn’t specify the exact ‘runway,’ or exact time remaining under static financial conditions and no additional funding.  But two sources agreed that the situation could become quite serious if additional funds aren’t secured by the end of this year, ie, within 4-5 months.

 “The issue is definitely with the [major] labels.”

The news closely follows rumors of intensifying licensing demands from the major labels, and imminent legal action.  Last year, Soundcloud closed an important round with Warner Music Group, though that is now being viewed as a ‘one-off’ brokered by crony ex-WMG-turned-SoundCloud exec Stephen Bryant.  The WMG deal involved a percentage stake in SoundCloud of up to 5 percent, according to sources, as well as a publishing pact with Warner/Chappell Music Publishing and consideration for all-important ‘derivative works,’ which refer to samples and snippets of copyrighted works that are frequently threaded into DJ mixes.

Of course, DJs and EDM are a critically-important component of SoundCloud, which makes derivatives an equally important consideration.  Currently, startups like Dubset Media Holdings are pushing to broker a derivative works exchange, a multi-billion marketplace that often involves dozens, if not hundreds of samples within one DJ mix.  Right now, derivative licensing solutions are somewhat crude, making it difficult for mega-streamers like Spotify to license mixes and DJ sets.  Currently, Spotify has 30 million tracks, all of them fully licensed, while SoundCloud boasts more than 100 million, with few properly licensed.

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All of which makes the majors less than enthusiastic about their non-existent cut.  The cash component on the Warner deal was unclear, though neither the percentage or cash considerations afforded to WMG seem sufficient for the other majors.  Since WMG inked, remaining majors Universal Music Group and Sony Music Entertainment have yet to finalize deals, and are reportedly demanding far larger upfront payments and percentage shares in the mega-valued SoundCloud.

More importantly, UMG and Sony are also threatening to sue SoundCloud if talks don’t progress at a faster pace, according to earlier sources.  And that, more than anything, is choking SoundCloud’s access to cash.  “Investors want to see what happens [with the majors] before they put more money into it,” one source told Digital Music News.

“They want to be building a company, not paying for lawyers.  It’s not a game anyone wants to play.”

So, how much to feed this beast?  A separate source pointed to a recent, $32 $35 million-plus advance payment demand by Sony Music in separate negotiations with TIDAL.  That demand was subsequently eased, though it demonstrates the ball park that SoundCloud is probably dealing with.

Meanwhile, SoundCloud is plowing forward with a subscription-based service, though details remain incredibly vague.  Just this morning. SoundCloud co-founder and Chief Technology Officer Eric Wahlforss pointed the Wall Street Journal to top-level subscription plans, but left out components like price, launch timetable, and premium products.  Earlier, fellow SoundCloud co-founder Alex Ljung noted that free access will always be a cornerstone of the SoundCloud service.  “There are 3 billion people online, you’re never going to all get those into subscription, it’s just not going happen,” Ljung flatly told a group of industry executives at Midem.

+ Will SoundCloud’s Subscription Service Flop? Yes, It Will, and Here’s Why…

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Then there’s the issue of cash-burn.  Just recently, SoundCloud finalized a lavish, multi-year rental agreement on a upgraded, 40,000 square foot Manhattan office space (pictured above), one that aptly complements their dazzling Berlin headquarters.  That level of spending is likely to be dialed down if another substantial round fails to materialize.

 

 

Image by ‘Captain Smurf,’ licensed under Creative Commons 2.0 Attribution Generic (CC by 2.0).  Written while listening to Emma Louise, Wankelmut, Getter, Claptone, and araabMUZIK on Spotify and SoundCloud, using Plantronics’ Backbeat Pros.

19 Responses

  1. Remi Swierczek

    Spotify should have same problem by now! …and no IPO environment on the horizon.

    Time to switch from Turbo-Napster mode to discovery based $5B music store.

    Reply
    • Anonymous

      Please, tell us more about discovery based monetization. Don’t think you’ve ever discussed it on here before.

      Reply
      • Paul Resnikoff
        Paul Resnikoff

        Remi’s ideas aren’t isolated. Even before streaming was a viable idea, people Gerd Leonhard were advancing ‘music like water’ systems that would effectively monetize every listen of virtually every song, no matter what platform (or, ‘tap’) they came out in. Yeah, ‘music like water’ got beat up too, but too bad, because there’s a kernel of an idea there.

        Reply
  2. Anonymous

    It’s really irritating seeing the swanky offices and lavish lifestyles of the top execs at these companies, in contrast to the pittance artists are supposed to be happy with. I’m sure plenty of other people feel the same, and it’s not good PR!

    Reply
    • Anonymous

      The lavish offices are a recruiting and marketing tool. You can’t attract the top hipster developers without appealing to their vanity with swank offices, over-priced coffee machines, and all you can eat avocados.

      Reply
  3. Versus

    Good. They should shut down, have their assets seized, and owners fined, and the resulting money used to pay a fraction of the damages to the artists whose works were infringed.

    If SoundCloud can’t police their own content, and pay fairly for use, they do not deserve to survive.

    Reply
      • Anonymous

        Yeah, the artists aren’t going to see any of this money, it goes to the labels. This is not about Soundcloud screwing over artists its about labels screwing over the artists.

        Reply
        • Troglite

          @versus. I think your comment was misinterpretted. If I understood correctly, you’re not talking about a negotiated pay rate for artists. Rather, you’re pointing out that soundcloud failied to prevent copyrighted works from being uploaded by users and intentionally delay responses o requests to remove copyrighted works. Basically, the same issues that are prevent in the youtube marketplace google has built.

          I think these are valid concerns and agree that any business that cannot address them deserves to fail.

          Reply
  4. Musicservices4less

    One of these bloated ventures (Spotify, Soundcloud, etc.) better get acquired soon and acquired for close to the value they claim their worth or it is possible this house of cards may collapse! And wouldn’t that be nice if we were married and we wouldn’t have to wait so long . . .

    Reply
    • Daniel

      Frankly, whats bloated is clearly the outdated rights of exclusivity and the industry that in stead of adjusting is now suing for settlement deals to try to keep things “as always” in the classless, egalitarian, user friendly internet age.

      Reply
      • Troglite

        I actually think you’re both right.

        New tech-focused players are distorting the market through theft and slow legislative and legal systems. They hope that by the time they are held accountable, they will secure a dominant position.

        Legacy music industry players are distorting the market by trying to inhibit innovatio. They hope they can maintain control of the market even if their actions hurt the artists and composers they represent.

        There’s enough blame to go around (including the artists and composers themselves)

        Reply
  5. michael

    Why not just chuck all the major labels music off the site and so they don’t have to pay them.
    It was underground electronic music that helps raise the site so why not stick with the ethos of small artists and labels that truly value the site and the art of making music and don’t see it as a place to strip money from.

    Major labels truly kill the art of music and from this they seem to be destroying many avenues for new artist to showcase their music.

    Reply
    • KolaO

      Completely agree with this. As a producer I’ve been on Soundcloud for ages and used to be a premium member – that was back when Soundcloud was great for independent artists/producers to upload their work and share it. Soundcloud was never supposed to be a place where you went to listen to major label music and what they should have done is stop people uploading that sort of stuff.
      For people who come from a music production background, they have dropped the ball so many times. It’s amazing that their response to DJ mixes isn’t as “fair use promotional tools” that are different to wholesale sampling of other people’s music.

      TLDR Soundcloud should be kicking major labels and their music off, not making streaming or whatever deals with them.

      Reply
      • bg

        +1 for kicking out the majors & going back to their roots – supporting independents.

        Reply
  6. bg

    As an artist who uses Soundcloud as a promotion tool for my original music, I can 100% tell you this is not about defending artists. This is about major labels screwing over the artists (most of whom on Soundcloud are *not* with a major label). Shut down Soundcloud and you make my (and thousands of other artists) lives that much harder.
    Soundcloud have actually implemented very good means of preventing copyright infringement – I uploaded a preview of one of my own tracks that was also available through beatport. It was instantly blocked by soundcloud and I had to provide proof that it was my own. Do the same thing with a major label release and it will be blocked instantly. The only reason the majors are suing Soundcloud is because they know Soundcloud won’t have the funding to defend themselves against multi-million dollar lawyers, sad but true.

    Reply
    • Anonymouse

      Yep – it’s like the comedy Silicon Valley where the main protagonists start up Pied Piper is deliberately stymied by lawsuits from a powerful competitor company Hulio in order to burn through it’s funding.

      Soundcloud is useful to the majority of musicians – just not to those that have contracts with majors

      Reply
  7. anonymous

    I used to work at SoundCloud: *amazing* offices, astonishing parties, free booze all day every day, free lunches and snacks, the very latest MacBook pro, iPhones and all gear you want, teams off-sites in incredible locations, etc. etc., but when it came to pay the artists a little, no one cared – I can tell you that.

    Reply

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