09 02 16

SoundCloud financial results show €39.1m loss in 2014

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SoundCloud’s revenues rose 54% to €17.4m in 2014, but its losses increased to €39.1m that year, according to the company’s annual financial results.

Filed with Companies House in the UK, they reveal that the company was further away from profitability in 2014, a year in which it raised $60m of Series D financing.

“Our overhead base has increased faster than our revenues,” admits SoundCloud’s strategic report section of its financials. The company also hints that it will need more funding in 2016.

“After making enquiries, the Directors have concluded that they have a reasonable expectation that the Group will have adequate resources to continue in operational existence for the forseeable future,” explains a note in the accounts. “However, the Directors have concluded that there are material uncertainties facing the business.”

SoundCloud raised $77m of funding in 2015, but expects to continue recording losses in its plans for the next three years.

“The Group’s business plan shows that further capital investment will be required in the next 12 months to fund the business until it is forecast to become cash generative at an operating level,” continues the note, which points to the issuing of more equity as the likely funding mechanism.

SoundCloud’s revenues have grown steadily since 2010, the first year for which full accounting information is available (via the year-on-year comparison in its 2011 results).

SoundCloud generated €1.37m of revenues in 2010, €4.32m in 2011, €8.04m in 2012, €11.28m in 2013, and now €17.4m in 2014. However, its losses have also increased over that five-year period: €1.55m in 2010 to €3.74m in 2011, €12.43m in 2012 and €23.11m in 2013, and now €39.1m in 2014.

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SoundCloud’s costs are set out in the 2014 financial filing: €47.7m on administrative expenses (up 68% compared to 2013) including €24.6m on staff costs (up 50%). SoundCloud’s average headcount was 236 in 2014, up from 195 in 2013. It ended 2014 with 288 staff.

2014: Takedowns, licensing, biz dev

2014 was an important year for SoundCloud, but also a challenging one. The company started the year by raising $60m of funding in January at a reported $700m valuation. SoundCloud was rumoured to be an acquisition target for Twitter in 2014 too, although the social network ultimately passed on the deal.

2014 was also the year when SoundCloud improved its analytics; became a partner of Sonos; revamped its iPhone app and made clear public hints about its desire to start paying royalties to musicians and rightsholders.

“When you have millions of followers and millions of listeners, you’ve got some point expecting there to be some sort of monetisation there. We hear that loud and clear,” co-founder Eric Wahlforss told Music Ally in June 2014.

To that end, the company beefed up its business team, hiring former YouTube exec Alexis Giles as director of business development for its platform, and then poaching Warner Music’s veteran digital exec Stephen Bryan for a role as SVP of business development and strategy. He has since become chief content officer.

In August 2014, SoundCloud launched its On SoundCloud initiative to run advertising on the service, sharing some of those revenues with its creators and rightsholder partners. The initiative was US-only, and 16 months on, it has yet to launch elsewhere in the world, although it paid out $1m to creators by March 2015.

But 2014 was the year when SoundCloud’s licensing negotiations with music rightsholders – major labels in particular – really heated up.

In July that year it was reported to be nearing deals for the three majors to each take a 3%-5% stake in the company, as well as a percentage of future revenue, but by October the Financial Times was reporting that major labels were “unhappy with SoundCloud’s proposal to license their music and are holding out for much better terms”.

November saw SoundCloud bag its first big deal with Warner Music Group (including its publishing arm Warner/Chappell), while revealing plans to launch a premium subscription tier for its service in 2015 – the launch of which has since slipped to 2016.

Greater engagement with the major labels came at a price: more takedowns of content from SoundCloud, including some of the remixes and mash-ups that had fuelled the streaming service’s growth. 2014 saw the first unrest from DJs and artists about their music being removed.

There was speculation about whether Universal Music had the ability to remove tracks directly from SoundCloud. Meanwhile, dance star Kaskade criticised the company in June 2014 after some of his recordings were removed, due to the policy of his label Ultra Music’s parent company Sony Music.

“Am I authorised to post my music? Yep. Does their soulless robot program know that? Not so much,” wrote dance star Kaskade, after a flurry of removals from his account. He admitted that some of his mash-up tracks were “absolutely rule breakers” but criticised his own label Ultra Music’s parent company Sony Music for its policy of removing tracks.

“Our marching orders are coming from a place that’s completely out of touch and irrelevant. They have these legal legs to stand on that empower them to make life kind of a pain-in-the-ass for people like me,” he wrote. “Countless artists have launched their careers though mash ups, bootlegs, remixes and music sharing. These laws and page take-downs are cutting us down at the knees.”

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2015: growth, lawsuits, debt

SoundCloud’s latest financial results don’t tell us much about 2015 for the company: at this rate, it could be 2017 before it releases financials for last year.

2015 can be seen as a continuation of all the trends above. On the positive side, Aphex Twin used the service as a dumping ground for hundreds of unreleased tracks; Prince joined the platform; as did Kanye West.

Yet SoundCloud faced more criticism in 2015 than ever, with publishing industry boss Jane Dyball memorably skewering the company in May:

“SoundCloud present themselves as the musicians’ friend, for example. I am friends with musicians and I buy them a drink every now and then. SoundCloud haven’t even bought anyone a cup of tea as far as I can tell,” she told Music Ally.

In July, IFPI boss Frances Moore levelled her own criticism. “User upload platforms, such as SoundCloud and YouTube, are taking advantage of exemptions from copyright laws that simply should not apply to them,” she wrote in a blog post.

There were more deals though. In May, SoundCloud reached an agreement with the US National Music Publishers Association, then followed that in June with a deal with indie licensing agency Merlin.

“This is not another service aiming to be a ‘silver bullet’ for the music industry. The labels we represent perform particularly well on SoundCloud,” Merlin boss Charles Caldas told Music Ally.

“It is a meeting point between people who are fans of new music in general, and a lot of adventurous people who are active in the way they curate that music.”

Even so, as labels like Sony Music continued to file takedowns, there was more artist unrest – even if not always targeted at SoundCloud. “Thank you SoundCloud for being such a great discovery platform over the past five years. Well done Sony for holding your own artists hostage,” tweeted dance artist Madeon in May.

In August, DJs Jakk’d made their own allegations. “They are dead broke, and lost touch with why they created the site in the first place. They are kissing the asses of Sony and Universal and so on in an attempt to keep themselves on the chart, but they are taking away form the people who got them there in the first place,” they wrote in annoyance at their own takedowns.

However, Ultra Music’s Patrick Moxey had some sharp criticism for SoundCloud the same month. “I think that SoundCloud is fantastic because there 100,000 creators uploading new music to [the platform] every night, but what do they pay artists and writers right now? Little to nothing. Will they pay anybody anything in the near future? Not really,” he said.

“What electronic artists are going to get out of SoundCloud financially in the next few years is close to nothing. Once you realise that then you’ll realise that you do have to protect the guys that are trying to pay the artists and the labels.”

SoundCloud’s slow progress towards becoming a service that could pay artists and labels was its story in 2015, although its delayed subscription tier drew the company into the wider industry debate about the merits of free, on-demand streaming.

“Thinking that if we didn’t have ad-supported, everything would be subscription is not a useful way of thinking, because it is not true,” said CEO Alexander Ljung in May 2015.

He followed up in June: “I think that there is a lot of debate right now on ad-supported versus subscription, but I think we are all doing ourselves a disfavour if we’re framing this discussion as [one against the other]. For me, it’s very clear that it’s a combination of both… There are 3bn people online, you’re never going to all get those into subscription, it’s not going happen.”

The end of 2015 saw SoundCloud dodging a legal bullet, after British collecting society PRS for Music sued it for copyright infringement in August, after licensing negotiations broke down. Four months later, just in time for Christmas, the pair settled.

2016 and beyond?

SoundCloud remains one of the biggest names by volume (if not by revenues) in the music-streaming space: analytics firm Next Big Sound claimed that it tracked 4.9bn monthly SoundCloud plays in May 2015, up from 2.6bn a year before.

As the 2014 financial results show, though, the company ended that year with as much uncertainty around its long-term sustainability, even if its co-founders have always declared their intentions to play the long game.

“We were always planning on a longer journey. It’s a huge platform now, but we’ve been building it up over eight years, very methodically. I don’t think we assumed profitability would come easily or quickly,” Ljung told Billboard in September 2015.

“Also, what people sometimes misjudge is that it really depends on the timing: We have very tight controls over how we’re spending, but profitability hasn’t been our primary goal.”

With total losses of €80.7m in the five years between 2010 and 2014, that’s clear. In 2016, SoundCloud faces several important challenges.

It has inked a licensing deal with Universal Music Group for its subscription service, but once that launches SoundCloud must  it can persuade a good chunk of its listeners to start paying; and raising more money (beyond debt financing) to fund all this for starters.

Oh, and working towards a business model that successfully blends ads and subscriptions, and balances the needs of rightsholders, creators and users – all without losing its unique character, against a backdrop of Apple, Google/YouTube, Spotify and Pandora gearing up for a well-funded battle royale of streaming.

In a recent interview with Music Ally, SoundCloud boss Alexander Ljung was positive about his company’s prospects.

“Universal is the biggest music company in the world, we’ve got Warner, all the publishers on board, Merlin. We basically have most of the music industry supporting these ways of monetising content, and supporting remixes and derivative content,” he said.

“People have alway recognised the massive scale of SoundCloud and the unique amount of creators and creativity [it has]. Everybody knows that all of the future stars are already on SoundCloud today, and people already know that if you are a star today, you are going to use SoundCloud to create a lot of buzz and promotion around new releases.”

“But the shift that’s happened over the last year is that on the business side of the industry, people started to understand how you can make a large amount of revenue from that too. And the proof point for it is that most of the industry is now in partnership with SoundCloud, and that really happened in the last year.”

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Stuart Dredge
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