SoundCloud, a popular Berlin-based music streaming service, announced earlier this month that they’d posted a $52 million loss in 2015. That’s obviously not a good look for the company, and it inspired numerous hot takes like this, this, and this, foretelling doom for the service.
The problem with that analysis is that it considers SoundCloud’s problems in isolation with this one report, and discusses it like it’s a simple matter of subtracting revenue minus costs. In reality, startups like SoundCloud operate in a much stranger system.
To be clear, this is not a good report. But check out this headline:
That dates back to last year, when SoundCloud released its 2014 numbers. The numbers looked bad. It inspired a number of hot takes like this and this. And yet, SoundCloud survived the year, only to post another loss and cycle back through the news this year. Since its inception nine years ago, SoundCloud has never posted a profit.
This year, SoundCloud has posted a 30.9% year over year growth in losses, but they also posted a 21.6% growth in revenue. Again, not good, but it shows they’re trying to do something. In fact, the month after they reported their 2014 losses, SoundCloud announced that they’re launching a subscription-based service for their platform called SoundCloud Go.
SoundCloud was counting on leveraging its community to set itself apart from the big players in subscription-based streaming services, Spotify and Apple. SoundCloud has a repository of around 100 million user uploaded tracks and a reputation for being a first destination for discovering new and emerging artists, due to the lower barrier of entry for artists to get music on the platform. It’s also been popular among music enthusiasts for being a more social platform.
The initial numbers, as SoundCloud’s revenue growth has indicated, have been slow. However, they’ve been implementing the system slowly to reduce the shock to users. CEO Alexander Ljung told Fast Company:
“[Last year] was really putting a lot of key pieces into place,” Ljung says, adding optimistically that 2017 “is going to be a big year, especially in terms of revenue growth.”
In fact, Ljung went on to predict a 137% revenue growth (which, for those counting, covers the 2016 fiscal year and the bulk of the subscription services’ existence).
The reality SoundCloud is working within is that startups often occupy a space where consistent losses are tolerated as long as strong growth numbers are continually posted. One of the largest startups in the world, Salesforce.com, only managed to post a modest profit in the first quarter 2015, after 17 years of existence. Spotify, despite being the market leader and having an established subscription model, has never turned a profit.
While many argue that this is not sustainable, until the alleged tech bubble bursts, this is how startups operate. They’ll build out their ideas, and while they figure out how to monetize their idea, they’ll continue to try and attract venture capital investment with growth numbers.
For SoundCloud, this means there are a couple of ways forward for the next year:
SoundCloud Turns a Profit
If the numbers do indicate anything, this is really far off at the moment. Let’s move on…
SoundCloud Takes in More Funding
The numbers aren’t good. But SoundCloud is a well-known platform with some measure of consumer loyalty. The reports are that SoundCloud could run out of cash before the end of the year. An injection of cash from one of their current investors, or a new investor, could fix that right up and we’ll all take another ride on the carousel next year.
SoundCloud Go Works Out
Investors don’t just hand out money to tech companies (as much as it may seem so sometimes). Although startups are classified as risky investments, venture capitalists certainly do their due diligence. And for SoundCloud, that probably means showing investors that this subscription service model will work out for them. The biggest problem here, though, is that they probably still do need that venture capital to keep going because even the CEO’s optimistic projection probably won’t entirely cover their losses.
SoundCloud Gets Acquired
With SoundCloud’s yearly struggles, there have been numerous reports of companies looking to acquire SoundCloud, including Google and Spotify. While this might compromise the integrity of SoundCloud that many users have come to love, it also represents the most likely path forward for SoundCloud. Whoever acquires SoundCloud will be taking on a lot of liabilities, but they’re also getting a valuable brand that their likely to maintain and a vast library of music that could be integrated into their own services, making both even better.
The doomsday scenario is still on the table, but that is probably a more remote possibility than most of these articles might have you think. Skeptics will point to death of Vine, but that’s more of a case of its parent company choosing to shut down an unworkable division, and even then, Vine is simply being folded into the main Twitter platform. SoundCloud, as an independent company, will have to stand on its own, for better or worse.
To be clear, I’m not saying that you should go out now and try and invest in SoundCloud – but whatever happens in the coming year, we’ll probably still have SoundCloud, in one form or another.
