SoundCloud is about to be saved in the nick of time by a pair of investment funds – but the details of the deal, revealed today by MBW, have left some who rely on the platform deeply concerned about its fate.
Very solid industry sources have told MBW that merchant bank The Raine Group and Singapore state investment company Temasek Holdings will each acquire stakes in the business imminently.
Those stakes are understood to jointly amount to more than 50% of SoundCloud’s equity.
In other words, the two finance houses are about to take control of the platform.
We’re told that loss-making SoundCloud would not last long into the second half of 2017 without such investments – which come at a far lower valuation than that the company has bandied around the market in the past few years.
MBW understands that Raine Group and Temasek’s investments both value SoundCloud at $300m in total.
You can therefore make a fair guess that the two parties’ combined exposure sits somewhere around $150m – $160m.
If you’ve been following the SoundCloud saga for a decent length of time, you’ll know that in 2014, the firm’s co-founders – Alexander Ljung and Eric Wahlforss – were trying to sell it to Twitter for $1bn.
Talks between the two parties eventually fell apart, but Twitter did come back to the table in summer last year to make a $70m investment – a deal which apparently valued SoundCloud at $700m.
A few months later, towards the end of last year, sale talks were reportedly started with Spotify and reached an ‘advanced stage’ before Daniel Ek‘s company – like Twitter before it – walked away.
Earlier this year, MBW heard that Google was investigating a SoundCloud buyout for a price closer to $500m, while in June it was reported that Deezer – majority owned by Len Blavatnik‘s Access Industries – was also considering making a bid.
“[This investment] is a shot of steroids in order to make some quick money – it’s not about the long-term health of the music business.”
Both of these approaches have since fallen quiet.
Now, in the eyes of one senior music industry source, SoundCloud is “on the verge of insolvency” – and needs to be rescued.
“SoundCloud plays a unique role in the industry and it’s a great shame that it’s [in this financial state],” said the source, who is close to the company’s situation.
“It’s not like Private Equity will be looking at this deal as a way to contribute to the music industry; they’re unlikely to be thinking about how they can serve artists and songwriters.
“[This investment] is a shot of steroids in order to make some quick money – it’s not about the long-term health of the music business.”
Last month, SoundCloud was forced to cut more than 40% of its worldwide headcount of 420, while closing down its offices in London and San Francisco.
Making the announcement internally, CEO Alexander Ljung said the move would help keep his current team “in control of SoundCloud’s independent future”.
With SoundCloud now set to be majority-owned by financially desirous investment houses, that objective looks questionable.
So too does SoundCloud’s eventual survival in its current form.
In the last set of finances we have for the company, from 2015, SoundCloud posted an operating loss of €48.6m ($54m) and a net loss of €51.2m ($57m).
Both figures were more than double the size of its revenue in the year, which reached €21.1m ($23m).
“Pandora and SoundCloud are in the same situation in a lot of ways.”
Please note: that 2015 operating loss works out at a burn rate of $4.5m every month. At that pace, the $70m received by Twitter in mid-2016 would last not much more than a year.
SoundCloud’s losses are almost certain to have gotten heavier since 2015, too: last year, it entered the subscription streaming market with the $9.99-a-month service SoundCloud Go, before later adding a $4.99-a-month tier.
Fact: every significant company offering standalone subscription music streaming today is making a considerable loss.
“Pandora and SoundCloud are in the same situation in a lot of ways,” one industry source told MBW today. “They both missed the boat on subscription and the bloom has come off the rose.
“There needs to real change [at SoundCloud], not just window dressing.”
Here’s a crazy notion: could there be a situation whereby SoundCloud’s calamitous lack of profitability, well… doesn’t matter quite so much?
What if a major record company bought it?
SoundCloud’s first-on-the-ground relationship with millions of musicians could be of immense strategic A&R value to any large rights-holder interested in being first to frontline signings.
As soon as a bedroom artist enjoyed any level of ‘activity’ online, the major could swoop in and grab first dibs, having been handily tipped off by data they exclusively monitor.
“There needs to real change [at SoundCloud], not just window dressing.”
Doubtless, obstacles would need to be overcome: the fact all three majors (and Merlin) are already believed to own small stakes in SoundCloud being the most obvious.
But it’s an interesting thought: a possible solution to keeping the SoundCloud which people love ‘pure’ – without forcing its business model to change entirely.
Oh, and if you’re wondering whether a major record company would ever deliberately run a loss-making silo on the mere off-chance that it could help them discover the next worldwide superstar… well, you’ve kind of just defined A&R itself.
Alas, that outcome wasn’t to be for SoundCloud which – we understand – is to sell its 50%+ stake to Raine Group and Temasek any time soon.
Once that deal is done, major music rights-holders will once again be answerable to third-parties who control an essential tool for breaking new artists.
(That said, thanks to ‘change of control’ clauses, SoundCloud’s new majority-owners may have to renegotiate licensing deals with major and independent rights-holders all over again.)
Raine Group and Temasek will no doubt be keen to strip back SoundCloud’s business (and harvest data based on its 175m+ users) to make it as sustainable, and sadly as saleable, as possible.
“Temasek has co-invested in no less than three businesses with Tencent.”
Who might eventually buy SoundCloud off them?
One idea: last year, Temasek teamed with GIC to invest more than $1bn in China’s e-commerce giant Alibaba, which has huge ambitions as a player in the global music space.
Another: Temasek has co-invested in no less than three businesses with Tencent – the $250bn-valued Chinese giant which has now signed exclusive licensing lock-downs with all three majors in its home territory.
The SoundCloud story has been full of twists and turns to this point.
Today, handing over the keys to its castle in a sad and vulnerable state, the next chapter awaits.Music Business Worldwide
