Bull Session

How Will SoundCloud Survive?

July 21, 2017          

Episode Summary

On The Digital Life this week, we discuss SoundCloud’s cashflow woes, the difficulties of making money with online audio, and the ongoing problem of finding business models for digitized content. Last week, SoundCloud announced layoffs of 173 employees — about half of its staff — as well as the closing of its offices in San Francisco and London, leading to speculation that the service would soon shut down. However, in a blog post entitled “SoundCloud is here to stay,” the company’s CEO stated, “we did this to ensure SoundCloud remains a strong, independent company.”

As a premiere online music and podcast streaming service that enables users to share tracks, SoundCloud gives unsigned artists and podcasters an easy to reach listeners. However, the streaming audio category is getting increasingly competitive: Spotify, Apple Music, Amazon Music, and Pandora vie with SoundCloud for listeners’ ears. How will SoundCloud survive? Is there a new business model in the company’s future? Join us as we discuss.

Resources:
Music streamer SoundCloud has cash until fourth quarter after layoffs
SoundCloud says it’s ‘here to stay’ amid rumors it’s running out of cash

Jon:
Welcome to episode 216 of The Digital Life, a show about our insights into the future of design and technology. I’m your host, Jon Follett and with me is founder and co-host Dirk Knemeyer.

Dirk:
Greetings listeners.

Jon:
For our podcast topic this week we’re going to chat about SoundCloud’s cash flow woes, the difficulties making money with online audio, and the ongoing problem of finding business models for digitized content. So let’s start off with the recent news that SoundCloud doesn’t have cashflow much past December of this year. So just to frame this up, there was layoffs at SoundCloud, about half of their staff, 173 employees, as well as the closing of offices in San Francisco and London. These employees were obviously tech-based, probably a lot of engineering. And of course, San Francisco and London it’s not inexpensive real estate to say the least.

According to the SoundCloud CEO however, they did this to ensure that SoundCloud remained a strong company and he wrote a blog post entitled SoundCloud is Here to Stay, just a few days ago to sort of quash the rumors that SoundCloud was shutting down. But I think from the community that is SoundCloud there’s a bit of alarm, I think, that this wonderful service might be going away due to the fact that they can’t pay the bills. And it’s understandable.

So let’s talk about the music ecosystem that SoundCloud is a part of. So the streaming music is ecosystem is dominated by Spotify of course. You also have Apple Music as a major player, Amazon Music is a player as well, and then Pandora, which is sort of the grandfather of streaming music, but not necessarily the most successful. Nonetheless, you can see there’s-

Dirk:
If Pandora’s the grandfather what’s Napster?

Jon:
Napster is sort of the … What was it? The Greek or Roman gods. I’m going to get this mixed up, but Saturn right? Saturn came before the other … was one of sort of the precursor gods so we’ll say that Napster is the precursor for all of this.

Dirk:
I’m not up on my gods well enough to know if you’re right or wrong. I’m going to assume you’re right.

Jon:
So there’s this awfully competitive area, which, of all the industries, I think digital music has really been disrupted in ways that are still playing out today. So it’s no real surprise that SoundCloud would have a tough time getting traction in that. I will say that because of the ease of use of SoundCloud combined with the fact that they have a loyal following it’s really a great platform for independent artists to find an audience and has really given birth to an entire hiphop movement. It’s elevated artists beyond the indie realm to become mainstream or at least more mainstream. From that perspective it’s been game changing. Before services like SoundCloud you probably couldn’t reach millions of listeners very easily if you were an independent. There are other services, other ways to do that. I can think of a couple, Bandcamp being one. But let’s talk about that for a second.

So we’re talking about trying to make money with music in the digital audio era. I think a service like Bandcamp, I don’t know their financials, but they have a clear business model in terms of you understand you go on there and you listen to independent music and then you can purchase it or you can purchase merchandise from the band. So it seems very clear like, “Okay, if I buy some music from an indie band on Bandcamp, Bandcamp will get a slice of that transaction.” And they let you know how much money is going through the service at any given time and who’s buying what. So it sort of reinforces the idea that you are paying independents for music.

Dirk:
Right, right, but here’s the problem. I’ll let you continue in a second, but listeners I want you out there right now if you’ve ever heard of SoundCloud before raise your hand. Okay, I see most of you have your hands raised, now put those hands down. Now, if any of you have heard of Bandcamp before I want to see you raise your hands. Boy, there sure as hell aren’t many hands being raised, are there Jon?

Jon:
Well, the point I’m getting to is that Bandcamp has a way of making money and that is-

Dirk:
They’re sure as hell aren’t many hands getting raised are there Jon?

Jon:
Well, I mean-

Dirk:
There’s a relationship between their model for making money and the fact that service is not well known.

Jon:
Could be. I mean I can still listen to music for free on Bandcamp if I want. My only point was that whatever the reasoning was for the different models that SoundCloud tried out, including their SoundCloud Go, which is a way for people to stream music from the recordings on the site. None of them, clearly, are generating the revenue stream that they need whereas it’s sort of a direct, “Hey, if I wanted to sell some of my electronic dance music on SoundCloud I’d have to go through another service.” That seems crazy to me. Whereas with Bandcamp they have a way for me to do that. Now, I doubt anybody’s going to be paying me money for this, but regardless if I was trying to make some cash doing that Bandcamp makes it easy, SoundCloud doesn’t.

The business model question is certainly one that’s larger than the scope of this show, but it is worrisome, I think, that original music, podcasts, things like this are not finding ways to generate revenue online. We see this across digitized content. Sometimes digitized content ends up making money, but many times the industry just gets squeezed. I think SoundCloud’s just the latest example of that, but you could also point to online writing, like how you make money doing that. And the entire journalism industry is under significant pressure, in large part because of digital disruption. So with that rambling preamble, Dirk, I’d love to hear your thoughts on the dangers of trying to make money or the difficulties of trying to make money with digital content.

Dirk:
Yeah, I mean the difficulty is that it’s global not local now. This is happening in a lot of different fields, right? The world used to be local and now it’s global. So once up on a time there was a Piggly Wiggly in every little town and that meant that there was some local person, who was a business owner, who was essentially making the profits from a business that was about selling retail goods to local community. Now there’s Walmart, among others, that have replaced the Piggly Wiggly, put it out of business, employed people at a living rate, but not a rate that allows them to amass profits and the profits suck upmarket and upstream.

The same thing is happening to journalism, to art, to music, to audio, however we want to sort of look at his, through digital. Where once upon a time, the bands, the content that you had access to was more local in nature or through the supply chain of records, cassettes, CDs supported by the touring of the bands. There was an infrastructure there that ultimately sucked its way down to all of the different localities where everything could be monetized. You could listen to something for free on the radio, but you couldn’t pick what you were listening to. You could call in and make a request, but they may or may not play it and they may or may not play it when you want.

Now with the digitization of content we have control over when we get the content and we also, at the same time, have access to many more creators than we ever did before. Even going back to the model where there was the records, cassettes, CDs so you were getting artists from all over the world you were still only seeing a slice of them, those that were selected by the editorial process of different publishing companies. Now, every garage band musician from every nation in the world is putting stuff up on SoundCloud, on YouTube, on different platforms, on different free platforms and you can discover them. However, they’re also sort of washing out a lot of other people. It’s the weird paradox. It’s a little different than paradox of choice, even though paradox of choice has a role in it. It’s the paradox of the fact that now so many people are able to put themselves out there yet it makes it much more difficult for consumers to go through and pick and understand and make their way and make sense of it.

So I’m sort of munging a couple of different things together, but what it’s doing at the end of the day is once upon a time it was possible for a lot of different people at a local level to make money by producing content, whether that be writing articles for a newspaper or doing something around music. Now, those local outlets have been replaced by global, multinational outlets making it really hard to make money with those things. Now, it’s much easier to get your stuff out there where, theoretically, it could be discovered by anyone, but it’s far harder to make money producing creative content.

Jon:
Yeah, it’s interesting to me that really it’s merchandise sales that are fueling musicians right now. That and touring of course, but it’s you’re paying an exorbitant amount for a tee shirt but you really know that the extra money that you’re paying there is going to support the musician. So whether it’s a tee shirt or hat or hoodie or whatever you’re buying at the next concert you go to, between that and the ticket sale that’s where the musicians are making their money and the online component of that, the music really is an awareness, making you aware of the band in the first place and then also, obviously enjoying the experience of listening to it. Buts it’s the live shows and merchandise that are fueling things. So when we come back to the digital part, when we say, “Okay, this entire type of communication, the music that’s digitized is now the loss leader,” right? It’s almost not even really meant to make money anymore. Or if they’re making money it’s this tiny, tiny amount. So it’s really more about the discovery and awareness portion of it and less about making money.

Then suddenly you’re a SoundCloud and you have millions of these artists, I assume it’s that many. I would imagine you’d really need to make your money from those artists and/or enable them to make a little bit of money on the site. I know that we pay a pretty affordable yearly rate to have our podcast on SoundCloud and that enables people to discover the podcast there, but there’s probably no way that that yearly fee is anywhere near enough to support all the infrastructure that we’re able to access. I suppose if they had many, many, many more users they might be able to sustain the business that way, but it’s an interesting problem now. They’ve gone long enough that it’s become valuable to this community, but at the same time the way it’s constructed it’s doubtful that it’s sustainable. I kind of wonder if, clearly the company’s trying to do a little bit of a shuffle here and say, “No, we’re still going to be there for you.” but I think it’s planted the seed of doubt in all the users minds as to what do you do when SoundCloud goes away?

I know that we’re making plans to figure out where else to host the show. We’ve got our own servers and things so The Digital Life will be accessible via iTunes, it’s not a problem. It’s really the audience access that becomes … it’s a shame to lose that. And I imagine if we were a rock band or something that would be pretty upsetting to be on this platform and then realize that these millions of potential listeners and/or fans already are no longer going to be accessible. So my fervent hope is that SoundCloud figures a way to stay open, but I’m concerned for sure. I don’t think that that’s the likely outcome. I’m open to the possibility that it is, but if you were to ask me today, “Hey, in a year are we still going to be able to access all of the services from SoundCloud?” I’d say no. So I think they need to do a better job of reassuring people if they are going to stay there I think we need to know more. Dirk, your take on that.

Dirk:
Yeah, SoundCloud doesn’t have a viable business model and they don’t have a platform upon which to create a viable business model. I love SoundCloud. I think it’s one of the best designed, I don’t know should I call a website or software, I’m not even sure quite what to call it. I think it’s one of the best designed things on the web today. And what makes it so well-designed is it’s optimized for listening enjoyment and information and discoverability of additional content. It’s not crapped up with the stuff that’s necessary to make money. That’s what makes me love it. If it had whether it be ads or trying to get me to buy or do these other things that would make them money instead of thinking, “Wow, SoundCloud is fantastic” I mean it’s just another thing trying to monetize me. So it’s a paradox that what makes it wonderful is the lack of the things that can make it successful.

And with Bandcamp I think the inverse is true. It’s something that, I mean yeah, you can listen to free content on there, but it’s also clearly trying to monetize you. And the problem with the Bandcamp model is, and I’ll just speak for myself now, I won’t claim any universality here, if I’m going to attend a show or want to buy merch from a band I’m going to want one of two things, A, love their stuff or B, the design of their merch is so cool and I don’t think a lot of people will be wearing it. It will be kind of unique to me, that it’s a style thing. It’s like here’s this cool, sort of unique thing that I can kind of get my hands on.

So what that means is for me to be predisposed to even wanting to get merch I need to be listening to the music. I need to be discovering and saying, “Wow, that’s great.” And once I’ve identified that’s great I’m open to the possibility of getting the merch, but if would then have to be really cool and well-designed and not too many people have it or I’m willing to go to the show, but I’ve got to love the music first and I don’t want to be in an interface that’s trying to sell me and push me to shows and get me to buy merch before I even know if I like the music or not. I want to learn the artist. I want to fall in love with the music and then be moved to a monetization platform. And I want that monetization platform to act like Amazon. I want it to be Amazon. I want it to go into my existing credit card, my existing account, my existing stuff. I want the single click purchase, I want the Prime shipping. I don’t want to be in this degraded experience because it’s some vertical sales thing. I want my sales to all be going to Amazon.

Now, I’ve already anticipate in end years, with end being more than one less than seven that’s going to change because I see Amazon adopting a lot of ugly, giant corporate big brother behaviors, but that future state aside at this moment in time I want everything through Amazon, dead simple. I don’t want it through some janky, account infrastructure of some other thing. And so that is going to take a lot of those products and move them right out of the consideration set. For me, that’s the environment in which people need to solve, a company like SoundCloud, needs to solve these revenue model issues. And I just think it’s outside the bounds of their DNA because their DNA is in this really well-crafted software that is great at discoverability, is great as usability, but is horrible at monetization.

Jon:
There are lot of points you made there. Just to pick up on the point you made about SoundCloud’s design. One of the things that I really love about their embeddable interface is the picture of the audio that you get while the sound is playing. So there a wave form there it’s sort of built into their player. I don’t know if the SoundCloud designers sort of were forced to do that on a player. It’s sort of a-

Dirk:
I’m sure they probably weren’t.

Jon:
I mean it’s been used a lot in digital audio workstations. I mean all of your audio editing software uses that and has for years. But to have it in a player took that context that I have for editing audio and sort of put it up on the screen for everybody to see. I thought that was a really unique take and I was really pleased with their embedded player and that’s why we have it on The Digital Life website. On every episode you can see sort of the audio file play through on the SoundCloud player. Once again, I know that there are other audio players that do that, but I thought that was … their attention to detail, sort of the care that that was exhibited in making an audio experience. You can play it on your Twitter feed. You can embed the SoundCloud player there and it just goes ahead and plays if you put in the correct URL when you’re tweeting. So there’s just all these nice things for the sharing of music and of podcasts.

And from the podcasters perspective we’ve found listeners on SoundCloud. It’s broadened our reach beyond the walled gardens that is iTunes. It’s made our podcast audience just a little bit bigger and in a very nice way. And it serves as a repository for all of our episodes. I mean you can see all 216 now episodes of The Digital Life there. So there’s a historical aspect to it as well. So for all those things we’re really, really grateful to SoundCloud. My hope, once again, is that there’s a business model that’s sustains them. And if some of that ends up coming back to us I know I’d be wiling to pay a little bit more for the service. So hopefully between the listeners, the producers, the creators, they’ll find a streamlined way to manage. But we all saw the collapse of so many different high flying audio properties over the last 20 years. I’ve seen this story play out before and once the … we don’t have any cash, cash is burning and we’re not replenishing it, once you’re in that downward spiral I think that’s a tough one to pull out of.

Dirk:
Yeah, I don’t know what the exact headline you said the article was, but once you’re making a posting, don’t worry we’re not closing. You’re probably are closing before all too awful long in the future.

Jon:
Yeah, unfortunately I think that maybe true. So here’s hoping but we will see what the end game ends up being. Listeners remember that while you’re listening to the show you can follow along with the things that we’re mentioning here in real time. Just head over thedigitalife.com. That’s just one L in the digital life and go to the page for this episode. We’ve included links to pretty much everything mentioned by everybody so it’s a rich information resource to take advantage of while you’re listening or afterward if you’re trying to remember something that you liked. You can find The Digital Life on iTunes, for now on SoundCloud, Stitcher, Player FM and Google play. And if you want to follow us outside of the show you can follow me on Twitter @jonfollett. That’s J-O-N-F-O-L-L-E-T-T. And of course the whole show is brought to you by Involution Studios, which you can check out at goinvo.com. That’s G-O-I-N-V-O.com. Dirk?

Dirk:
You can follow me on Twitter @dknemeyer. That’s @D-K-N-E-M-E-Y-E-R. Thanks so much for listening

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