Slowly but surely, SoundCloud’s status as an unlicensed streaming music service – albeit one where it’s mostly artists and labels willingly uploading their own songs – is being chipped away.
It covers the latter’s 20,000+ label and distributor members – Beggars Group, Domino, Epitaph, Ninja Tune, PIAS, Warp Records and more – and will see them earning royalties from the On SoundCloud advertising initiative – initially in the US only, but elsewhere as On SoundCloud rolls out globally – as well as from SoundCloud’s upcoming paid subscription tier.
Terms of the deal aren’t being announced, obviously, although given the recent Sony/Spotify and SoundCloud/NMPA contract leaks, it wouldn’t be a shock to see this agreement’s finer points blinking in the spotlight at some point in the coming weeks.
But to get a sense of what the deal means for SoundCloud and Merlin’s members alike, Music Ally spoke to both companies this morning, ahead of the announcement.
“It took a while to do this deal, but that’s because it’s not just this deal between us and SoundCloud that’s in consideration at the moment. There’s a whole broader marketplace that is constantly moving,” said Merlin CEO Charles Caldas.
“For us, it was partly about making sure that between us and SoundCloud, the monetisation models were right and our commercial benefits were aligned, but also to place this deal in the context of everything else that’s happening. It was worth taking the time.”
SoundCloud remains an important service for independent artists and labels – not just because lots of them upload their music to it, but because its community of listeners actively seeks out that music.
“SoundCloud has carved out a niche not only in functionality but also, I think, in terms of its users and where it sits in the market. This is not another service aiming to be a ‘silver bullet’ for the music industry. The labels we represent perform particularly well on SoundCloud,” said Caldas.
“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. So, here’s a service that’s carved out a particular niche in the marketplace, so how do we maximise the value of that niche, and have it co-exist with everything else going on in the marketplace? It is nice we’re starting to see layers in the market rather than just the cookie-cutter approach.”
SoundCloud CEO Alexander Ljung sang a similar tune when describing the deal – and indies’ importance to his company – to Music Ally. “We’ve been a very powerful, very crucial tool for the indie community for a long time,” he said.
“We built a lot of great tools for those creators to use the web, and a lot of great ways to reach an audience. But we’ve really been longing for this last step: enabling them to make money off of their music. We had a little over 100 partners in On SoundCloud before this deal through Merlin, but now it enables their 20,000 contributors to be part of it. All of a sudden, we can provide these monetisation opportunities to much more of the independent community.
“The independent artists are right at the heart of SoundCloud: they’ve been there from day one, and we’ve always been a lot about supporting the indie community. When we first launched On SoundCloud, we only had 20 partners from the biggest companies in music to completely independent artists, and that was to really show that while we don’t have everybody on board from day one, our vision was that this works for all kinds of creators.”
One of the areas of tension for SoundCloud in recent times is that the service has become more and more of a streaming-music destination – many of its 175 million active users see it as a primary source for music – rather than a purely-promotional platform that will spark sales elsewhere.
Artists and labels have always understood the latter aspect of SoundCloud, from its usefulness in getting their tracks embedded on music blogs and other sites around the world, to its analytics that help them find out where they’re being listened to most, and plan tours accordingly. But lately, there has been palpable frustration at SoundCloud not moving faster on the direct royalties side of its business too.
“As the value of the streaming market grows, people are starting to realise that consumption is the new sales. Anywhere that people are listening to music is actually the end-game now. This notion that everything is promotional: that way that people used to talk about YouTube as a ‘promotional channel’. When that becomes the destination for music fans, it needs to compete in the marketplace with all the platforms that are monetised,” said Caldas.
“So part of this is looking at where all this goes longer-term, and seeing that the challenge is to take all of these destinations where music is consumed – particularly in the volumes it’s starting to be consumed on something like SoundCloud – and finding out how to build value around that.
“That’s the point SoundCloud is at in its evolution: what was purely a promotional platform – and there will still be that aspect of the service – has become a destination, and the frustration stems from the challenges of finding ways to in some ways control and in other ways derive value from it, as we’ve learned with YouTube in the past.”
Caldas stressed that Merlin’s negotiations with SoundCloud “have not been contentious in the way that others have been”, portraying the company as a good actor in its dealings with the independent community. “For the future of their business, they have to find ways to better interact with the industry as a whole,” he said. “The future of their company and our interests should be aligned, and this is the first step towards that.”
“People have been making money indirectly from SoundCloud for a long time: booking gigs and so on, but they do want to know how they can also make money directly,” said Ljung. “It’s always been fairly obvious that this is where it’s going. There are some people that think it should be happening faster, and some people who are less concerned. Doing a deal with Merlin is definitely a huge step forward in opening up a lot of monetisation opportunities to tons of indie creators.”
One key question: is Merlin getting an equity stake in SoundCloud as part of this deal? That’s something the major labels are thought to have demanded (and, in WMG’s case, secured), so is Merlin following suit on behalf of its members? Caldas declined to say.
However, there’s a line in his quote in the press release announcing the deal that provides a strong hint: “Our deal significantly extends this existing relationship, and ensures Merlin members can participate fully in the long term value of SoundCloud’s future.” (our italics).
If that does mean equity, even if it’s a small stake, it would mean Merlin (and by extension, indie labels) stand to benefit from the two most lucrative anticipated exits in the digital music world: SoundCloud and Spotify – Merlin has held a stake in the latter since its early days.
With SoundCloud’s valuation rumoured to be $1.2bn last time it raised funding, and Spotify valued at around $8bn (again: rumours), it’s a reminder that if these companies go public or get bought, the payoffs won’t just be to the major labels.
Talk of majors and indies does lead to another source of concern about SoundCloud from indie labels: the fears that as it strikes licensing deals with the three majors (as it must – even if Sony has walked away from the negotiating table for now) that may be bad news for the indies – if SoundCloud comes under pressure to funnel more listeners towards the majors’ catalogues, or develop its business in a way that suits those companies more.
Caldas agrees that this is a current talking point. “For me, that’s one of the ongoing concerns in the marketplace: the music marketplace is way out of balance in terms of where interests and incentives are aligned. I’ve been public in saying before that one of our concerns with the way the two biggest majors in particular behave in the digital space is that they’re trying to impose business models or limitations on services that suit them [the labels] but not the consumer,” he said.
“If you look at SoundCloud as a platform where we’ve performed particularly well, and were an integral part of the business, that’s not the way conventional wisdom says the music industry looks. That says ‘you have these very big players who bring the most value to the marketplace, so you independent companies can play in the sandbox, as long as you don’t come into their part of the sandbox and get in their way!’.”
The sight of Merlin’s CEO poking the majors with a stick – “the evolution of the market from the independents’ perspective is more nuanced than what’s being presented in the ‘Lucian Grainge war on free’ stories in the press,” is one jab today – may not be a surprise. But he added that SoundCloud must not lose its unique character as it seeks licensing deals.
“Having this platform that’s very much driven by creators finding interesting and unique ways to present content… All of a sudden you can’t change that to a ‘this is a 100% curated channel now, and you’re going to present 40% of my label’s music otherwise I’m not going to license the service’. It just makes no sense as a model,” he said.
“I think record labels are record labels: they’re very good at signing and discovering and creating demand for artists. I think they should stick to that and let retailers be retailers. We’ll see whatever Apple’s doing very shortly, and I think people will notice the cost of Apple getting into the streaming business with those major labels, in terms of what that might do to the functionality of that service.
“Clearly, if we [indies] do very well on Spotify and Rdio and Deezer, and the consumption dynamic of those services is skewed towards the music our labels put out, then the opposite must be the case for the major labels. I’m sure they spend a lot of their time working out how they can regain the market advantage they had in the past.”
Apple? That’s SoundCloud’s other big challenge, of course: how to survive and prosper in a streaming market that will soon have three 900lb gorillas striding about – Apple, Spotify and Google/YouTube – as well as the still-numerous crop of other pureplay streaming services. SoundCloud has scale with its 175m monthly users, but how does it fit in to that competitive landscape in the future?
“I won’t comment on what other people are doing, but I see SoundCloud as something that is completely different and unique to everything else out there. We played over 10 million artists last month. No other service comes close to that. And I think traditional radio plays about three to four thousand artists a year,” said Ljung.
“We have over 100 million tracks available on the platform, which is much bigger than any service I know: and it’s a lot of tracks and artists that don’t exist anywhere else. For me, that is something completely different to any other service out there. What we’ve been trying to build is a massive platform for tens of millions of creators and hundreds of millions of listeners, and connect that all together on one platform.”