SoundCloud Loses Money Faster as it Grows

Here is a brilliant Internet business plan: We get rich by creating a service that goes viral and generates 175 million customers. We then make $.08 a year on each and every one of them! All we have to do is give away $.17 a year to each and every one of them.  Welcome to the crazy world of “SoundCloud,” which has raised $123.3 million from investors and values itself at $700 million. 

SoundCloud has lost money each year since it was founded in 2007. Yet it completed its fourth funding in the spring, with $60 million raised from Institutional Venture Partners and the Chernin Group.  Losing even more money by July, it completed an undisclosed fifth round of financing from German Startups Group Berlin AG.

SoundCloud calls itself an online music and audio sharing platform. It is definitely sharing the venture capital it raises. In its most recent financial filing for 2013, its revenue was up 40% to $14.1 million over the prior year, but its operating loss was up 100% for the year to $29.2 million.

According to TechCrunch, the company had 224 employees at the end of 2013. And SoundCloud had about $54 million in cash after paying off debt maturing this year.  But since the company loses money faster when it grows, it looks like SoundCloud will need to raise more cash in the first half of next year. 

The company claims it will be able to make money from advertising and the sale of premium services it launched in August. SoundCloud also suggested that it would cut deals with record labels for ads from top international brands, like Red Bull, Jaguar and Comedy Central. Yet the Financial Times reported over the summer that SoundCloud’s negotiations with the major record did not bear any fruit.  It seems that Universal, Sony and Warner are all holding out for SoundCloud to be willing to give them better terms by being willing to lose more money.

SoundCloud also has a potential issue with not paying royalties to the labels for the music that is being consumed by its customers now. Music is uploaded to the platform not just by artists, but by consumers, according to the Financial Times. It seems that users may be uploading about 12 hours of copyright-protected audio every minute for free right now.

Some music artists have vehemently complained that SoundCloud is just another form of Napster that rips off the music companies and the artists’ content.  

SoundCloud’s annual statement, quoted by TechCrunch, says that: “We go to great lengths to protect against the use of our platform for the distribution of unauthorized or unlawful material.” Yet one of those efforts has not been using their own software to police what can be sent to their “cloud.” 

It also seems that customers are about as loyal to SoundCloud as the company is to music artists.  In its most recent financial statement, SoundCloud said, “Typical internet users use about four to five different music and audio services during a month. The market is heavily contested by strong incumbents such as YouTube, Apple and Amazon as well as new more focused players. While the group does not expect the market to be a winner takes all opportunity, there are economies of scale and technology developments that need to be monitored closely.”