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Soundcloud, Is There A Tall, Dark Spotify In Your Future?

Musical Mergers

Soundcloud, Is There A Tall, Dark Spotify In Your Future?

Announced as imminent at the end of September 2016, the merger between Spotify and Soundcloud seems to be at a standstill. As a market leader with 100 million active users, including 40 million who subscribed to the premium offer, Spotify displays an impressive growth in the sector of music streaming, in which they changed the rules and reinvented the value chain. However, in spite of the aforementioned elements and a turnover of some $2bn in 2015, the Swedish company saw losses which have increased significantly over the past three years.

On the other side, the German company Soundcloud, launched in 2008, is an outsider with its atypical positioning since it offered everyone the ability to upload content on the platform. Relatively unknown to the general public, Soundcloud is recognised by record labels as an inexhaustible source of new and promising artists who make themselves known through this musical platform. This unique model is bearing fruit because the company currently has 175 million users.

The Overall State Of The Market

With estimated revenues of $5.6bn for 2016 and a CAGR of 14.31% projected until 2021, the music streaming sector is experiencing exceptional growth. The same is true for the number of users, expected to exceed one billion by 2017. In this market, the hunt for paying subscribers is the priority for those companies that have innovation spearheading their future growth.

However, in spite of significant revenues and a growing number of users, the specifics of the business complicates the task of these companies. The best example is the Swedish company Spotify, which reports $173.1m of net losses despite its leading market position in 2015. Currently, the average revenue per user (ARPU) is $5.61 which indicates the difficulties encountered by music streaming companies in retaining their customers and pushing the subscription towards premium offerings.

Moreover, another major obstacle is the amounts paid to record companies and other copyright bearing associations.

Spotify On Top Of The Podium

As mentioned before, Spotify holds the leading position, despite a business model that is not yet profitable in a market with promising growth prospects. However, the company’s top position could change rapidly in a sector in perpetual evolution. Indeed, music streaming does not present the characteristics of a “winner-takes-it-all” market.

Spotify and its competitors struggle to make this business profitable, and this is due in particular to the amounts paid back in the form of royalties to artists. In 2015, the Swedish company disbursed $1.63bn in royalties to record labels, independent labels and artists, which represents approximately 70% of its total turnover. These royalties paid on a pro-rata basis are added to upfront payments which represent the minimum guarantees to record companies.

However, according to a recent statement by Par-Jorgen Parson, one of the company’s first investors, Spotify could make a net profit in 2017. The priority of the Swedish company is notably to develop new services for both users and artists, but also to penetrate new markets. Recently introduced in Japan, Spotify does not hide its ambitions to conquer major markets such as China, Russia and South Korea.

Resisting The Acquisition

The flagship asset of Soundcloud lies in its catalogue of 125 million titles available, three times more than its direct competitors. Hence, after strenuous negotiations with record companies, Soundcloud can offer the same catalogue as its competitors, but also unreleased content uploaded throughout the world by unknown bands in search of glory. Furthermore, the company also raised commercial and promotional initiatives with the artists on the platform, in order to retain them and obtain exclusive content coveted by all market participants.

The recent launch of the Soundcloud Go offer marks the debut of the Berlin-based company in the market of paid music streaming. Even if the free service remains available, this new offer gives the user access to an extended catalogue, an ad-free uninterrupted experience and an offline mode. The company, which counted 40 million registered users in 2013, experienced significant financial difficulties in 2014 but seems to have recovered by multiplying fundraising among investors who believe in the potential of Soundcloud and its success in the market of paid musical streaming.

However, its late arrival to the market seems rather daring from a strategic point of view. Taking on with pioneers such as Spotify or Apple Music, Soundcloud will have a lot to do to gain market share. The merger with Spotify seems to be a unique opportunity in creating what would be the musical streaming platform offering the most comprehensive catalogue to a record number of users.

Conclusion

The acquisition of one of its direct competitors would allow Spotify to strengthen its leading position. Although no agreement has been reached yet, this move would allow the Swedish company to consolidate its lead on an increasingly organised competition. This merger would also allow Spotify to obtain greater negotiating power with record companies and thus optimise the costs associated with the payment of royalties.

On Soundcloud’s side, a company currently valued at $1bn according to its owners, this operation offers obvious advantages in a market where competition is raging. But given the positive dynamics observed on the platform in recent years, given its different offer and the support of its investors, the German company could choose to carry on alone.

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