SoundCloud ‘Could Become the Next Grooveshark,’ Sources Say

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This could be the summer that fried SoundCloud, thanks to increasingly-contentious and deteriorating discussions with major music labels and publishers.  According to a trio of sources close to the licensing discussions, SoundCloud’s ‘negotiations’ with mega-labels Universal Music Group and Sony Music Group have devolved into ‘f–k you, pay me’ arguments, with monstrous upfront payment and equity demands peppered with the specter of equally massive lawsuits.  “I really don’t think [co-founders] Alex [Ljung] and Eric [Wahlforss] are having fun anymore,” one source noted.  “Eric I think has said that out loud.”

“In some ways it’s looking a little bit like what happened to Grooveshark.”

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The comparison may be closer than you think.  SoundCloud says they’re obeying the law, unlike Grooveshark, whose top executives ordered employees to infringe copyright while actively lying to frustrated artists and labels (Grooveshark’s co-founder, 28-year-old Josh Greenberg, died last month under suspicious circumstances).  But the stark similarity is this: both sites amassed tens of millions of users by offering unlicensed content from major artists, and both attracted the furious, unrelenting ire of the major recording industry.

Enter UMG chief executive Lucian Grainge, a man desperate to prove that free music isn’t the future.  Just recently, rumors leaked that Grainge’s bosses at parent conglomerate Vivendi were considering giving Grainge the boot, thanks to massive and unrelenting devaluation of UMG’s catalog at the hands of Spotify, YouTube, and SoundCloud.  The ongoing free-for-all cost UMG digital executive Rob Wells his job, but according to sources, Grainge shrewdly used the leak to politic a contract extension, complete with a press release confirming the re-up.  “Grainge fired Wells, but made the case for [internal] stability instead of chaos,” a source close to UMG explained.

“But he also made assurances that the free problem would be solved.”

All of which brings us back to SoundCloud, and the lingering ghost of Grooveshark.  Partly under Grainge’s rule, UMG’s ‘legal jihad’ against Grooveshark not only destroyed a company, it also burned the village down and probably cost the life of its co-founder.  By contrast, SoundCloud remains a vibrant company, but one that depends on massive funding levels that simply may not continue.  According to earlier sources to DMN, mega-investors like Union Square Ventures are pulling back, and despite funding levels of nearly $124 million, SoundCloud is actually starting to run out of cash.  “This isn’t a group [of investors] that’s used to losing money, but they don’t know what to do at this point,” another source told DMN, referring to successful investor group that also includes Kleiner Perkins, Index Ventures, and GGV Capital.

“If they put more money in, it goes straight to Universal.  Either that or paying lawyers.”

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All of which brings us to the pressing threat of major label lawsuits, which both Universal Music Group and Sony Music Entertainment have been threatening if talks don’t progress (Warner Music Group inked a deal with SoundCloud, but that now appears to be a one-off).  “It’s either ‘give us $300 million,’ or ‘we’ll spend $300 million on lawyers,'” the source exaggerated, but only with the numbers.

“In the end, [the majors] could kill SoundCloud if they don’t get their way.  They want to pick the winners and losers, and SoundCloud is looking like a loser.”

 

 

Top image taken from a simple soundcloud.com search; second image is grooveshark.com post-shutdown.  Third is Sony Music Entertainment (and former UMG) CEO Doug Morris.

23 Responses

    • Versus

      Covers require permission. What about royalties for covers that are put up on SoundCloud for “free”?

      Reply
      • Hans Annellsson

        You don’t need a “permission” to release a cover or play one live. If you press a record you have to pay a licensing fee based on the number of records you press, or on the number of records you sell.

        Reply
      • Anonymous

        Covers don’t “require” permission actually. Just require you to pay the statutory rate. That’s why compulsory licenses exist.

        Reply
  1. Benevolence

    Unfortunately this seems to be the case; not respecting the rights of authors/writers is unraveling music sites who started on the wrong path, for what purpose? To build their mighty status off the backs of hard working writers/performers, and now such sites are careening like a train wreck waiting to happen.

    Another point worth mentioning – Major labels are also terrified of the fact that terrestrial radio stations (Label’s major player) are gradually falling by the wayside (source: Google articles about TV and car manufactures integrating ‘non-terrestrial’ radio). Great success can be achieved without being signed to a major label, though I suppose partner, sub-label/parent deals may be worth considering.

    If bands want total control and 100% of their royalties kept intact, then consider apps such as, TopSpin and sites such as BandCamp however, it’s critical that all musicians learn about branding and marketing; Mi2N (affordable plans) and SLM group are two of many other sites worth considering. “A release is not a release without clever marketing planned (months in advance)” All types of businesses must be innovative, highly motivated and invest money into branding and PR/Marketing. These are the right strategies to gain the edge necessary to float above what is indeed a very competitive business. But don’t expect to be an over-night success; be patient, keep working at it, better your last effort, never give up!

    .

    Reply
  2. JTVDigital

    A few comments + why SoundCloud and Grooveshark are different:
    – unless proven otherwise, SoundCloud employees never uploaded copyrighted material to the service’s servers, users do (just like on YouTube)
    – SoundCloud has engaged into a monetization program and have assigned significant resources to it.
    – if major labels go to court against SoundCloud, they’d only succeed if they are able to assess the loss, which seems very difficult to evaluate at this stage. What is the potential loss of gain for major labels here from unmonetized (until recently) UGC uploads?

    Reply
    • Paul Resnikoff
      Paul Resnikoff

      Good points, JTVDigital. Let me respond.

      “– unless proven otherwise, SoundCloud employees never uploaded copyrighted material to the service’s servers, users do (just like on YouTube)”

      Right. The question is whether SoundCloud’s (and YouTube’s and Google’s) enormous DMCA loophole is something that should continue. The DMCA was not created to sustain businesses like SoundCloud, at the expense of rights owners.

      “– SoundCloud has engaged into a monetization program and have assigned significant resources to it.”

      True, though the more significant subscription aspect remains unlaunched, and most regard SC as a free site (with little royalty payouts).

      “– if major labels go to court against SoundCloud, they’d only succeed if they are able to assess the loss, which seems very difficult to evaluate at this stage. What is the potential loss of gain for major labels here from unmonetized (until recently) UGC uploads?”

      In the case against Grooveshark, it was uncertain what the outcome would be. Rosenberg & Giger argued that Grooveshark’s activities were legal, until it was found that Grooveshark executives directly ordered employees to engage in infringing activity to populate the site with the most sought-after content. They also destroyed a lot of evidence, leading to one of the most catastrophic legal losses in the last ten years of the music industry.

      In the case of SC, perhaps everything is according to law. But even then, you have to remember that the legal system in America is often deployed as a weapon to suffocate companies, even when they are right under the law. Because you need the money to defend yourself, and without investors, SC can’t do that.

      Reply
      • JTVDigital

        I agree with your comments Paul.

        “The question is whether SoundCloud’s (and YouTube’s and Google’s) enormous DMCA loophole is something that should continue.”
        Yes, that’s a valid question. However as long as the content is monetized it benefits the right holders, maybe not as much as they would like, but still. And allowing UGC is a good thing since it creates a feeling of “freedom” amongst users who can “take ownership” of the service.

        “significant subscription aspect remains unlaunched”
        Yes, agree they’ve been way too slow. The technology has been there for a while. It could have been monetized from day 1. But now they are really hands on the case. Hopefully it is not too late. We’ll see.

        “the legal system in America is often deployed as a weapon to suffocate companies, even when they are right under the law” yes, sad but true (and elsewhere as well). However from a PR standpoint, major labels should really think twice before (indirectly) going after their customers once again. This is the only industry where the market leaders are systematically trying to make their customer’s lives more difficult, and therefore encouraging workaround solutions (piracy).

        Jeremie

        Reply
  3. Anonymous

    Soundcloud could end this problem today if they authenticated their users.

    Tech douches never want to take responsibility for their failures. And fail is exactly what the vast majority of them do.

    Reply
  4. DavidB

    I don’t know Soundcloud all that well, but from what I have seen I think the comparison with Grooveshark is unfair. A large proportion of material on Soundcloud appears to be either genuine original content or ‘semi-original’, e.g. amateur covers and remixes. True, there is also a lot of blatant copyright infringement. E.g. I searched for ‘Rolling Stones’ and found results for ‘Satisfaction’ and other Stones hits, in the original recordings. Some of these have racked up millions of plays. But this raises the question of DMCA compliance. Do Soundcloud respond to takedown notices, do they have policies against repeat offenders, and so on? So far as I know, there is no evidence that they use the same wac-a-mole tactics as Grooveshark, who had systems deliberately designed to frustrate takedowns. Unless Universal or other copyright holders have made serious attempts to use the existing legal procedures, I don’t see that they have much chance with a lawsuit.

    Reply
  5. anon

    “But the stark similarity is this: both sites amassed tens of millions of users by offering unlicensed content from major artists, and both attracted the furious, unrelenting ire of the major recording industry.” This is an oversimplification at best. Soundcloud amassed users largely by becoming the home for electronic music producers to post mixes, unreleased/demo tracks and clips of releases. Hordes of independent musicians (including outside of electronic music) began to call Soundcloud home. It became a Twitter for independent music. Their growth strategy has never been to grow a service on the backs of major label singles/albums.

    Reply
  6. Versus

    Good. SoundCloud have had plenty of time to clean up their act and have done nothing to control the rampant piracy they enable. They should either pay up or shut down.

    Reply
    • deckard

      You realize SoundCloud has a copyright takedown system in place right? I’m a DJ and sometimes producer and have had mixes pulled for copyright. They even have a ‘strike’ system in place. 3 strikes and you lose your account.

      The real issue isn’t that they don’t have any detection system in place, the issue is how do they monetize both for the labels and artists and be able to profit themselves.

      Reply
  7. GGG

    If the songs are covers and not monetized, I don’t see what the problem is.

    If they are the original recordings, SoundCloud needs to stop being stupid and understand why every site like them has had issues, if not shut down. Program a better way to recognize illegally uploaded material and take it off. Spend a little less on fancy couches and hire some college kids part-time to scour all the uploads for illegal shit. It can’t be THAT hard.

    Same thing for remixes, just find a more efficient way to notify rights holders when remixes, etc are uploaded. Partner with Shazam or any of those companies that can recognize samples and streamline the process. It’ll probably cost some to implement but it will save them in the long run.

    Reply
    • Anonymous

      Interesting. Created a login, searched for music, tried to play several but it just says “loading”, nothing actually plays.

      Nothing was installed on my pc. It’s either severely bugged or it’s just bait for something.

      Reply
  8. sleepd

    This article doesn’t seem to understand what Soundcloud is. It is not Spotify. The vast majority of music on Soundcloud is original to the independent artists who post it. There are some labels that post music from artists which can be streamed, and some covers but the vast majority is original content, NOT owned by major labels.

    The investment banks behind Soundcloud may be pushing them to stream major label artists and feature them over indie artists, like Spotify, but that is not what it is currently. And it would be a mistake to assume that Soundcloud’s users would stick around for something like that.

    That said, Soundcloud is in a unique position to become the indie “college radio” of the Internet, if they play their cards right.

    Reply
    • RS

      I’ve been using Soundcloud for years, and it was best when it was just a place for indie artists to post original work. I was originally attracted by the reasonable sound quality, compared to sites like Reverb Nation .

      I hosted my demo on Soundcloud, and we achieved a major indie record deal after a company heard the recording on Soundcloud (although the contact was made outside Soundcloud).

      Why do I need to got to Soundcloud to hear major label releases? There are plenty of alternatives for that.
      Soundcloud should initiate take-downs on all of the unlicensed material and focus on what made it useful in the first place.

      It’s worth noting that it has an algorhthym to stop you uploading unlicensed content, but it doesn’t seem to work that well. This does however stop me uploading my own tracks as they are are licensed to my label!

      Reply
  9. Austin

    Yeah let’s crucify Soundcloud, a music platform and community for independent artists, while in the meantime platforms like Spotify are crushing the average artist and making it impossible for anyone but those in the top 1% to make a living.

    If this article hasn’t been spin-doctored by the tech-giants behind Spotify whose greed knows no limit, I’ll eat my shoe.

    Reply
  10. BL8antBand

    Go back to being the small guy on the block. Help new musicians coming up. Big bands get old and die (Oldies). Help new musicians coming up. I said that twice, just like in a song…

    Reply
  11. Anon

    Soundcloud is different from the other streaming “services” in that most plays (at least for me) come as embeds from my websites – ie it’s just a player that happens to give a nice little graphic. I don’t drive much traffic to them, they don’t drive much to me. If fans do something on my website (buy something, sign up, etc) is basically no different from having a wordpress in line music player. Bandcamp is basically the same thing – but the name ‘Bandcamp’ sounds like a bad movie from the 1990s.

    Compare Crapify or Crapple Music — fans are stuck in that environment, they’re not on your website and probably never will be. If you drive your traffic to those, it’s almost a 100% loss.

    Reply

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