SoundCloud Facing Legal Action ‘Before Thanksgiving,’ Sources Say

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Legal threats against SoundCloud from major content owners are now intensifying, according to sources, with filings likely to happen within a few months if negotiations don’t progress.  Earlier, Digital Music News pointed to looming legal threats from major labels Universal Music Group and Sony Music Entertainment, based on massive and unresolved levels of infringing content on the site.

Now, with negotiations spinning in circles, the clock is ticking as a stalemate approaches.  “[The lawsuits will] be filed before Christmas, definitely,” a source closely tied into the situation told Digital Music News.

“Before Thanksgiving? Very likely.”

The biggest litigation threat easily remains Universal Music, whose principals remain “deeply unsatisfied” and “grumpy” with SoundCloud’s response to aggressive compensation demands.  That is partly being driven by corporate parent Vivendi, whose brass have been squeezing the reproductive organs of UMG chief executive Lucian Grainge to fix the free music problem.  “[Universal] aren’t getting their pound of flesh,” another source relayed, while pointing to “wide-scale infringement at an insane level” on SoundCloud that keeps getting higher.

Exactly how much Universal is asking for is unclear, though it’s enough to substantially delay an agreement, cool investor support, and wreck a lot of good night sleeps.  Typically, UMG pushes a percentage of the ‘partner’ company, an upfront payment, or both, while threatening massive content pullouts and legal action if terms aren’t met.  That’s certainly the case with Spotify, whose launch in the United States was substantially delayed by endless back-and-forth over major label ownership and payment demands.

Currently, the major labels control as much as 15% of Spotify, according to sources.

If legal action proceeds, SoundCloud would represent one of the largest legal targets yet for the major labels, a group accused of cautiously selecting small- or medium-sized companies to crush.  That was certainly the case with Grooveshark, whose lawyers at Rosenberg & Giger mounted a costly defense for years, but were ultimately incinerated by a Universal Music Group legal department waging ‘legal jihad’.

On April 30th of this year, Grooveshark was shut down forever.  Less than three months later, Grooveshark co-founder Josh Greenberg was found dead at age 28 with no declared cause of death.

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The question is whether history is now repeating itself with SoundCloud, a far bigger gorilla whose audience and impact eclipses anything Grooveshark achieved.  According to stats just released by Next Big Sound, SoundCloud has nearly doubled in size over the past year alone, thanks partly to EDM.  Indeed, SoundCloud’s roots are with the DJ, who helped build SoundCloud with endless mixes, live sets, and podcasts that cater to a ravenous music crowd.

Then, there are the cooler heads.  Enter Warner Music Group, who’ve already signed an agreement with SoundCloud and whose CEO, Stephen Cooper, warned against ‘burning freemium at the stake‘.  Still, it’s entirely feasible that Warner could let its offer lapse and join the broader legal assault, if only to present a united front.  Sony Music Entertainment, meanwhile, has shown some mixed signals, according to sources, but is almost guaranteed to follow UMG’s combative lead.

And then there’s the problem of SoundCloud’s financing.  According to a DMN source, “the Valley isn’t touching [SoundCloud] with a 10-foot pole” given the predicament, but existing investors may be looking at a “too big to fail” scenario.  That means mitigating losses, or at least getting out unscathed.  “[SoundCloud] believes they are going to raise the money,” the source continued, while noting that one major investor has issued a “don’t worry, we won’t let you go under” assurance.

More details as they become available.

Turkey image from the US Department of Agriculture, licensed under Creative Commons Attribution 2.0 (CC by 2.0).  Middle image supplied by Next Big Sound.

7 Responses

  1. Remi Swierczek

    Again stupefied UMG boys looking for some kind of cash from confused, well financed, intoxicated own formula of DOPE DEADBEAT!

  2. UsefulArts&Sciences

    I’ll follow this with interest – it’s the DJ mixes, in particular, I find interesting – will people try to argue that a DJ set is a “transformative use”? A commentary? A parody? If much shorter sampling continues to get shot down, why is, say, Girl Talk not being sued? Are the labels afraid of losing such a case?

  3. MPX

    I used to work for SoundCloud. They keep email lists in plain text and use unsecured third party email accounts to mass mail. It is a mess. The EU and German authorities in particular don’t care about this because they get their annual “gifts”.

  4. Um...

    >>>Turkey image from the US Department of Agriculture, licensed under Creative Commons Attribution 2.0

    Aren’t all U.S. government works automatically in the public domain?

  5. Versus

    I’m with the labels on this one. SoundCloud: time to clean up your act. Pay up.

    Next target should be YouTube, biggest “legal” pirate site on the planet.