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

For anybody bumping to Hip Hop on a regular, the term SoundCloud Rapper seems all too familiar. In the same way “Netflix & chill” became a cultural phenomenon, almost everybody has listened to a track on SoundCloud.

So how is a free-to-use platform able to not only attract millions of users every month, but also become essential to artists around the world to be discovered? And how does it keep afloat for over a decade?

Let’s delve into how the platform works, its history and the way it makes money.

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.  

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 2000’s, a young Alexander Ljung, who studied Media Technology at the prestigious KTH Royal Institute of Technology, saw himself being troubled 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 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 date. In the beginning of 2019, Eric followed Alex by announcing his departure from the company. He remains as a company advisor. 

The SoundCloud Business Model

SoundCloud operates on a freemium basis. This means that while its core music streaming service is free of charge, there are premium features that can be unlocked for a monthly fee.

Let’s have a closer look into the various income streams the company utilizes.

Advertising

Similar to Spotify, ads play in between tracks. Advertising partners include firms such as Amazon, Netflix, Starbucks, or Red Bull.

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

If the user decides to go premium, he or she can do so by opting in for either SoundCloud Go or SoundCloud Go+. The difference between the two options lies in the access to high quality audio tracks and removal of track snippets.

SoundCloud Pro Unlimited

Next to the consumer business, SoundCloud furthermore monetizes its artists as well. Next to their free-of-charge basic plan, artists can access a multitude of premium features through SoundCloud Pro Unlimited.

These, for instance, include scheduled releases, full suite of analytics or the ability to replace tracks.

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.

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.