Why Soundcloud Stumbled Into Crisis

What does it mean to be a “Soundcloud Artist”? By popular definition, it means you’re underground—unknown to mainstream music listeners. It also means you are probably not signed to a label (yet!), but have a cult-like following of listeners who are relentlessly putting you on.

You release your music gratis to amass enough fans to book your own shows or for a record label to notice. But you are part of a culture that may be coming to an end.

Recently, Soundcloud, the audio streaming platform, was forced to cut 40% of its jobs and close its offices in London and San Francisco.

YouTube faced the same situation a decade ago. It was back in 2006 when Google stepped in to rescue the online video platform amid legal and financial troubles that nearly destroyed the startup. YouTube’s experience was a harbinger of things to come for cool, free and trendy streaming services. Ultimately, giving away your product for free is a huge gamble that seldom pays off.

How then, can a free online service avoid Soundcloud’s fate? First, it’s essential to prepare for sustainability. Soundcloud is engaged in a game of tug of war with itself. Its business model is good and bad: there is ease of access to the product (good), however, the more popularity it gains, the more artists will request compensation for bringing traffic to the site.

While the Soundcloud team enjoyed its early success, it failed to diversify its business, upgrade its marketing efforts, or incorporate advertising into its playlists.  As Pandora and Spotify know, consumers may find it annoying to have every sixth song interrupted by an ad, but many accept more readily than paying a monthly fee.

Soundcloud has become a cultural phenomenon that is winning the attention of major companies in the music business. For example, in the hip hop community, becoming a “Soundcloud Rapper” is growing into a viable route to fame (The same way that becoming a “YouTuber” or “Vine Famous” inspired a new wave of aspiring entertainers).

But the music-streaming business is undergoing a massive evolution. The emergence of Apple Music and Tidal competing with mainstays Spotify and Pandora have made it difficult for Soundcloud to retain user-traffic. These companies offer revenue share to labels and artists that publish music to their respective sites.

For years, the company has operated as a free of charge service and lacked the funds to pay musicians that use its site. (This is the first mistake many start-ups make in their infancy stages; not enough creators believe people will pay for their product, so they undersell. Remember when Apple premiered the iPad for a shocking $1,000? The product flew off the shelves. Steve Jobs probably kicked himself that he didn’t charge even more for his revolutionary product.)

In contrast, in Soundcloud overvalued a service that wasn’t nearly as innovative as the iPad. At $14.99/month, there was no chance they could pull customers away from Apple Music or Spotify which offer rates of $9.99/month and an even sweeter $4.99/month for students.

The greatest challenge for a successful start-up is remaining independent. YouTube didn’t even last two years before its founders accepted $1.65 Billion from Google. YouTube’s founders were lucky; Google saw a way to monetize the service.

Soundcloud likely won’t be as fortunate.

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