SoundCloud cuts 41% of staff as streaming music business melts down

There’s a famous line in business by Tom Peters, in his book The Circle of Innovation: “you can’t shrink your way to greatness.”

But shrinking is exactly what SoundCloud now has to do, with its survival – let alone any ongoing greatness – at stake. As founder Alex Ljung puts it in a blog post for the company today, massive headcount reduction and the closure of two offices is necessary to put the company “on our path to profitability and in control of SoundCloud’s independent future.” The implication is, without a buyer, the company may not last without cutting staff.

Asked for comment, SoundCloud pointed CDM to that post:

A note from Alex Ljung

SoundCloud will lose a lot of the people who made the service valuable. 173 out of 420 employees – 41% of staff – are being made redundant. San Francisco and London offices are closing, leaving New York and the headquarters here in Berlin. (That may have implications for Berlin’s reputation as a European Internet capital, as well, as SoundCloud has been its best known poster child.)

I know some of these people personally. I’ve seen what they bring to the service and our music community in general. I’ve also seen how significant SoundCloud has been in helping musicians share music and people to discover that music, its impact on record labels, on artists getting bookings … on daily life.

I think artists and ex-employees alike could feel legitimately betrayed by the course music streaming has taken. SoundCloud at least is increasing revenue. Ljung says the company has “more than doubled” revenue in the past 12 months, without citing specific breakdown of producer subscriptions, listener subscriptions, and advertising. But the issue is how revenue compares to costs.

Now, ironically, the writing has been on the wall for a decade. Ten years ago – and one year before SoundCloud was founded – Pandora co-founder and ex-CEO told CDM he thought streaming rates would shutter companies. The weird part of this is, he may have been right – it’s just that an ongoing influx of investment has prolonged that failure over the years.

If Streaming Rates Stand, “We’ll Have to Shutter”, Says Pandora Founder

If it seems greedy that he’d suggest such a thing, one reason is that there aren’t such royalties collected on radio broadcasts.

Whether you want to blame the services, tech giants like Apple and Amazon, or the music industry for setting rates, the business model just doesn’t seem to add up anywhere. And 2017 could be the “s*** hits the fan” moment as it becomes ever clearer that no one is able to turn that business model into a win.

Just last week, co-founder and returning CEO Tim Westergren left Pandora. That company has never made a profit, and it seems new investors Sirius XM (satellite radio company) have other plans.

Then there’s Spotify. As its revenues and number of users grow rapidly, its losses are actually growing even more rapidly. That should mean that Ljung’s comment about growing revenue is as much a red flag as it is encouragement.

Spotify’s Loss More Than Doubles Even as User Growth Surges [Bloomberg]

Noticing a trend here? Pretty much anyone in the streaming business is losing money. That overall picture also will rule out some acquisitions, or reduce the price. And it’s not surprising that this combination might frighten away some investors.

It’s not that there’s no hope here – just that it’s going to be a very delicate balancing act if SoundCloud is going to make its planned profitability. Fast Company took a good look at the 2017 plans at the beginning of the year, along with its potential pitfalls:

SoundCloud vows growth in 2017, but time is running out [FastCo]

Now we’ll have to see what Ljung means when he promises to share more plans in the coming weeks – how they update this roadmap.

CDM readers and associates frequently compare Bandcamp to SoundCloud. But perhaps if any comparison is apt, it’s because of the contrast in business models, growth rate, and intended audience. Bandcamp remains a niche site for people to consume music, not only as free streams, but as downloads, physical media, and in the form of merchandise. It’s the always-on, “tap water”-style streaming that is having trouble.

To state the painfully obvious, it’s also troubling to look at the streaming players who are thriving. Facebook has stayed out of music (unlike Russian social media network VKontakte). But three other big tech giants – Amazon, Apple, and Google – are able to offer streaming services as “loss-leader” offerings, directing sales elsewhere. Apple may lag Spotify, with 27 million users to Spotify’s 50 million. But then Cupertino doesn’t need Apple Music to turn a profit, since the company can instead sell iPhones, iPads, and Macs.

It’s just as easy to find music on YouTube – which also spells further pain for artists and labels.

Music press have been quick to jump on SoundCloud, often without much to back them up. But now, I believe it’s reasonable to sound some alarms. Staff cuts this significant could slow growth and curb the efforts that would expand revenue. They suggest serious financial obstacles. And there’s still not a clear picture of how streaming will be sustainable as a business model – not for SoundCloud, and not for the entire industry.

And the implications there go far beyond SoundCloud’s offices. They should raise serious questions about what a record label is, how it collects revenue in the digital age, and how much control artists and publishers will have on their music being shared and discovered.

Of course, that absolutely means now is the time to talk about alternatives, including innovative solutions like Blockchain-powered sharing and the like. But the popularity of SoundCloud and Spotify for finding and playing music is going to be a tough benchmark to match.

Whatever happens next, it’s going to involve some major changes. And if these companies do start to contract, a lot of the talent that was working on the problem is going to wind up elsewhere.

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