The SoundCloud Business Model – How Does SoundCloud Work & Make Money?

Executive Summary:

SoundCloud is an online music platform that allows anyone to listen to music from (mostly) independent artists.

SoundCloud makes money from advertising, premium subscription services (namely Go, Go+, and Unlimited), audio mastering services, and ticket sales from events. The company operates on a freemium model, meaning its core product is free to use, but users would need to pay for premium features.

Launched in 2008 and headquartered in Berlin, Germany, SoundCloud became an immediate success with both artists as well as music enthusiasts. The company has raised over $540 million in venture capital funding to this date.

How SoundCloud Works

SoundCloud is a music sharing and online audio distribution platform. It allows anyone to listen to music while artists can upload, promote, and share their work (as long as they have the rights to do so).

From a consumer perspective, music can be accessed both on the SoundCloud website and through their app.

A key portion of what makes SoundCloud unique is its focus on communication. Users can comment on parts of a track to either show their appreciation or critique it.  Furthermore, users can discover new music through functions such as Charts and Featured.

On the creator’s side, SoundCloud offers an extensive set of tools to promote and asses one’s music. Through the SoundCloud Pulse app, creators can check their stats, interact with their respective communities, or share tracks they like.

A Short History Of SoundCloud

Coincidentally, just like with Spotify, the story of SoundCloud started in the Swedish capital of Stockholm. Around the mid-2000s, a young Alexander Ljung, who studied Media Technology at the prestigious KTH Royal Institute of Technology, saw himself being troubled by synching the school calendar on his MacBook.

And as chance would have it, Eric Wahlforss, his co-founder at SoundCloud who studied at the very same university, shared one key trait with Alexander: he was the only other classmate who had a Mac. So Alex, the open person he is, just walked over and introduced himself.

The pair quickly bonded over both their passion for technology and music. Alexander, as he described in a 2011 interview with FounderLY, lost himself in a “huge sort of rabbit hole” of music when he was a teenager. He even produced an album, which he recalled was “terrible music, very, very bad music.”

Due to the low cost of living and the big local (electronic) music scene, the pair decided to move to Berlin. And after a year of coding and refining, SoundCloud launched their private beta in October 2008. Just take a look at this OG video from Alex describing the service:

The company’s initial vision was to allow musicians and producers to share and collaborate around their work in a cloud-based service. Back in the day, music was shared through FTP Servers or services like YouSendIt, which was extremely cumbersome due to the file size of these tracks.

With SoundCloud, you didn’t have to swap those files, but could directly collaborate on their servers. Furthermore, it provided features such as commenting on parts of the track (especially relevant for long mixtapes) and analytics services to see how others interact with the track.

Since SoundCloud solved some of the music industry’s biggest pain points, its start was an absolute smash hit. Within a year, it had over 160,000 musicians signed up with major artists such as the Foo Fighters switching from Myspace to their platform.

Over the coming years, the company grew at an exponential rate. By 2013, it had a total of 130 million consumers of music coming to its platform. That same year, Alex and Eric even won the European Web Entrepreneur of the Year award. One year later, Twitter was in heavy discussion to acquire the hot startup, but the acquisition eventually fell through.

Unfortunately, winds got a lot rougher in the coming years. For instance, the Performing Rights Society for Music (PRS for Music) told Business Insider that it felt it had “no alternative but to commence legal proceedings,” following “five years of unsuccessful negotiations.”

Furthermore, users started to lose their faith, feeling SoundCloud had strayed from its earlier focus of supporting DJs. Rather, they believed the company was putting more stake into focusing on high-profile artists and licensed music.

In some instances, music and files were taken down due to fear of copyright infringement. They often left their independent artists hanging without any explanation.

Adding to the failed product adjustments and legal claims was the lack of Alex’s presence in the office. Instead of maneuvering the company through the turmoil, he was seen partying with DJ Steve Aoki in Ibiza and taking private jets. As a former employee recalled, “people were like, that should be going to my salary.” Investors weren’t pleased either, stating that “he let it get to his head and he lost his focus.”

So in 2017, the inevitable happened. The company had to let go of 40% of its staff (i.e. 173 employees) and received an emergency investment by Raine Group and Temasek. Along with that investment, Alex was being let go as well, residing as a Board Chairman.

As his replacement, the investors brought in Kerry Trainor, who has remained CEO of the company to this date. At the beginning of 2019, Eric followed Alex by announcing his departure from the company. He remains as a company advisor. 

The founders have recently started a new business – not in the music, but mobility industry. Their new venture is called Dance, an e-bike subscription service that has already received $17.7 million in funding.

During the recent Coronavirus pandemic, SoundCloud has announced it would pledge $15 million to the artists of its platform. Initiatives include an artist accelerator program worth $10 million as well as direct fan-support buttons to enable donations.

Recently, SoundCloud announced a partnership with Amazon-owned Twitch. The collaboration would allow selected artists to stream studio and other live music sessions on Twitch’s platform to further expand their reach.

How Does SoundCloud Make Money?

SoundCloud makes money via advertising, its premium subscriptions Go, Go+, and Unlimited, audio mastering services, as well as ticket sales for events it hosts.

Let’s dive deeper into each of these revenue streams below.  

Advertising

‘Free’ users will have ads displayed in between tracks. Advertising partners include firms such as Amazon, Netflix, Starbucks, or Red Bull.

SoundCloud gets paid for every ad impression that it receives. Pricing is dependent on the 2 options that advertisers can choose from, namely Simple and Advanced. Minimum spend is $25 per promotional campaign.  

Furthermore, SoundCloud collaborates with other companies to create a multitude of different ad campaigns. These range from playlists (e.g. running sponsored by Asics) over remixes up to music contests.

SoundCloud Go

SoundCloud Go (and Go+) is a monthly subscription service for consumers. With Go, users can unlock a breadth of premium features, including:

  • Offline listening (allowing them to download music)
  • No ads
  • No previews (for Go+ members)
  • Access to SoundCloud Go+ premium tracks

The Go subscription costs $4.99 per month while Go+ comes in at $9.99. Similar to other modern-day subscription services, Go and Go+ can be cancelled at any time.

SoundCloud Pro Unlimited

Apart from its consumer subscription, SoundCloud also offers plans for its artists. Its most popular option is SoundCloud Pro Unlimited, which allows artists to:

  • Upload unlimited amounts of music
  • Receive real-time data through SoundCloud’s insights dashboard
  • Schedule releases
  • Receive a pro badge

… and a lot more. The plan costs $12 per month when billed yearly and $16 when billed monthly. Alternatively, artists can subscribe to Repost (costing $2.50 a month), which allows them to distribute unlimited tracks to platforms like Spotify, Apple Music, Instagram, and more.

The caveat with Repost is that artists only keep 80 percent of the revenue coming from these platforms, while SoundCloud receives the remaining 20 percent.

Dolby Powered Mastering

In July 2020, SoundCloud announced it would offer mastering services to anyone for $4.99 per song. The mastering will help to make songs ‘release-ready’, thus allowing artists to sound more professional.

Pro Unlimited subscribers will receive 3 free tracks per month – with the option to pay $3.99 for every track added.

Events

Next to their online activities, SoundCloud hosts a set of music events. These range from talks like the creator forum to dedicated concerts where they showcase promising artists.

The company makes money from the tickets that it sells for these events.

SoundCloud Valuation, Funding & Investors

According to Crunchbase, SoundCloud has raised over $540 million in ten rounds of funding. It’s latest Series G round included a $75 million injection from SiriusXM, the owner of streaming platform Pandora. This is seen as a strategic investment into the company since Pandora and SoundCloud entertain a mutual ad partnership.

While the valuation has not been disclosed in the latest round, SiriusXM stated that the investment was used to acquire a “minority stake” into the company. If we assume that a minority stake is anything < 10 percent, then this investment would put SoundCloud’s valuation in the ballpark of $750 million.

Apart from SiriusXM, investors into the company include the likes of Temasek, Twitter Ventures, Kleiner Perkins, Atlantic Labs, and Index Square Ventures among others.

SoundCloud Revenue & Potential IPO

After Trainor’s takeover, financial performance has seemed to pick up again. For the fiscal year 2017, the company brought in $102 million in revenue. That’s an increase of 80% from its 2016 numbers ($53 million). Conversely, losses declined by 27%, from $74.2 million to $58 million.

While numbers for 2018 have not been released yet, a company spokesperson stated that the company has successfully surpassed its growth plan for the year.

Although financial performance seems to accelerate again, it is highly unlikely the company will IPO anytime soon. With an approximate run rate of two years and recent IPO debacles such as WeWork and Uber, the market for a money-losing business to go public does not seem to be suitable for now.

SoundCloud Mission & Vision

Creators are at the core of SoundCloud’s mission. They aim to empower them by creating the best possible tools, services, and distribution channels to grow their music careers.

The company’s vision is to become the world’s biggest social sound platform. This, in turn, will allow creators to make a living through the SoundCloud platform and focus on what they’re great at – creating the best possible audio experience.

Hi folks, my name is Viktor! By day, I lead a tech team of 10 for an e-commerce startup. At night, I work on expressing my weird thoughts through this blog. And if there's time, I cuddle my cat..