Home Topics Business Why SoundCloud has the music business right where it wants it.

Why SoundCloud has the music business right where it wants it.

If you’re a regular reader of Music Business Worldwide, you’ll be familiar with the question: If you could change one thing about the music industry today, what would it be and why?

We ask it of nearly all our interviewees. But Michael Weissman, CEO of SoundCloud, tosses back an answer we’ve never heard before.

“I wouldn’t change a thing.”

It’s a response baked in optimism, both for the future of the music industry and his company’s role within it. And the more you understand about SoundCloud’s model, the more it makes sense.

SoundCloud, uniquely, runs two businesses at once.

The first of these is its Spotify-esque, consumer-facing streaming music service, and its correlated SoundCloud Go (or Go+) paid subscription tiers. Despite having a much bigger and diverse music library than the likes of Spotify (there are over 250m tracks on SoundCloud at last count), by and large, there isn’t a major differentiation in this part of SoundCloud’s business versus the rest of the market.

What does differentiate SoundCloud, in a big way, is its second business – its artist-serving business.

SoundCloud now works with around 100,000 artists as a distributor – uploading their music both on SoundCloud and to other rival services (be that Spotify, Tidal, Apple Music etc.), and collecting and paying out their royalties.

“The opportunity for SoundCloud’s ‘Creator’ business to capture more of the market of independent artists is vast and compelling.”

In addition, thanks to its acquisition of Repost for around $15m in 2019, SoundCloud offers a segment of these 100,000 artists additional services via its ‘Repost By SoundCloud’ and ‘Repost Select’ tiers. These additional services include playlist pitching, release planning, artist marketing and even funding (via paid-for advances).

When you think about it, therefore, SoundCloud is a streaming service, a user-generated content platform, a music distributor, and – dare we say it? – a kind of record label all in one.

For now, though, SoundCloud’s artist-servicing business is the lesser element of its company.

SoundCloud’s fiscal filings for 2019, for example, show that its ‘Listener’ business (ads and subscriptions from people listening to music) generated €99.5m annually; its ‘Creator’ business, meanwhile, was around half this size, at €48.1m.

But: (a) SoundCloud’s Creator business is now growing faster on a percentage basis than its ‘Listener’ business; and (b) The opportunity for SoundCloud’s ‘Creator’ business to capture more of the market of independent artists (vs. TuneCore, CD Baby, Distrokid et al) is vast and compelling. Especially because independent artists generated an estimated $1.2 billion globally from their recorded music last year – a figure which was up 34% YoY.

Michael Weissman has made quite the impact since he stepped up from SoundCloud’s President to the CEO role in January.

A month after joining SoundCloud’s C-suite, Weissman secured the services of music industry grandstander, Troy Carter, on SoundCloud’s board.

If that turned heads, Weissman’s next move knocked them backwards. In April, SoundCloud launched what it calls “fan-powered royalties” – more commonly known as “user-centric” royalties.

This move affects the ≈100,000 independent artists who upload and monetize their music to/through SoundCloud direct, by enabling them to earn royalties directly correlated to how much of their music their fans play each month (as opposed to the controversial “one big pot” model adopted on services such as Spotify and Apple Music).

In short, says SoundCloud, this will see some indie artists start earning significantly more from the platform than they did under the old way of paying out royalties.

Earlier this month, Weissman shocked the industry again, poaching Eliah Seton from Warner Music Group. Seton, one of the most senior executives in Warner, left behind his role as WMG’s global independent label/artist boss to take a role as President at SoundCloud, reporting to Weissman.

Here, in his first ever interview as SoundCloud CEO, Weissman sets out his vision for SoundCloud to MBW – and explains in detail why he thinks the ‘Creator’ part of his firm’s offering could be on the verge of exploding…

SoundCloud logoYour launch of “Fan-Powered Royalties” (FPR) came in the middle of fierce industry debate on this topic. Why did you decide to make it a priority and get it launched?

The ‘why’ here is important.

Last year, we ended up interviewing both our artists and our consumers about the idea. Everyone thought streaming already works like FPR. There was clearly a disconnect; the simplicity of having the fan understand how music works told us we need to go ahead and do this.

“FPR is more equitable and transparent than the ‘pool’ model.”

Michael Weissman, SoundCloud

We knew we had enough content, working with about 100,000 or so independent artists directly, to really make a difference. We said, ‘Okay, the fans are ready for this, the artist community is big enough on SoundCloud to do this. It’s time to move forward.’

FPR is more equitable and transparent than the ‘pool’ model. And because of the direct nature of the [payment relationship], you can start to say, ‘How do I engage these fans? How do I make what I’m doing more relevant to them?’ That’s the proactive future change that we hope this will start to slowly build in the market.

In a world where USPs are near-impossible to come by for indie artist distributors, this seems a clever way to leverage your unique advantages as a consumer-facing streaming platform that also services artists. Usually those two worlds seem a little removed from one another.

Correct. That’s part of our vision for SoundCloud.

We see ourselves as a music entertainment business that has both a direct to consumer relationship and a direct relationship with artists, and the connection between these two are where we are zeroed in on and focused. I think we’re uniquely positioned to do that, and there is no other streaming service that’s taken that approach.

Spotify tried to do direct distribution for five minutes a couple of years ago, BUT BACKED OUT. Are you surprised that with the explosion in DIY going on – now comfortably a $1 billion-plus annual business – that other streaming services don’t want that direct relationship with creators? That confuses me.

It’s a big opportunity for SoundCloud. The key piece is we’re a user-generated platform at our core. So we have a flow of content directly uploaded by independent musicians, producers, DJs, that is inherently outside the realm of labels and other rights-holders.

“Our model gives us an inherent advantage [in the world of DIY artists] where an Amazon, an Apple, Spotify, or Deezer are all effectively running on a similar catalog model.”

We work in conjunction with all those parties to make sure that our model holds [in terms of licensed content]. But our model gives us an inherent advantage [in the world of DIY artists] where an Amazon, an Apple, Spotify, or Deezer are all effectively running on a similar catalog model.

What else off the top of your head differentiates you from other services out there?

One thing I definitely want to make clear: We want to be more of a music business going forward. We want to be deeper in the music industry.

I won’t speak for my peers specifically, but I do see [streaming services] trying to move out of music into talk, podcasts, other non-music audio. They’re almost using music, while steering away from the core music business at the same time.

“[Some streaming services are] trying to move out of music into talk, podcasts, other non-music audio… We want to be more of a music business going forward. We want to be deeper in the music industry.”

We see things differently. We think music is a really exciting place to be.

You have more independent artists releasing more music; you have fans interacting with artists differently; we’re just on the cusp of new consumer models. And SoundCloud is at the heart of all of that.

You’re at around 100,000 active artists going through the higher tiers of your services model. That’s a lot, but not in the grand scheme of things. (TuneCore and CD Baby each have AROUND A MILLION ARTISTS going through their distribution platforms.) Do you have a number in mind you’d like to get to?

We’re trying to find the sweet spot between scale and the service offering we provide.

Could we technically support – and may we support in the future – a million or two million artists that we directly have a licence with? Yes. We have this capability through our Repost business and valuable partnerships with DSPs focused on delivering quality.

“Could we technically support – and may we support in the future – a million or two million artists that we directly have a licence with? Yes.”

At the same time, as an artist grows in their career from doing DIY distribution to getting [more] traction with their fans, really starting to scale, there are things those artists need that haven’t yet been displaced by technology: A&R, production skills, songwriting support, social media, PR, radio play, etc..

We’re very aware of that. So it’s about striking a balance between (a) how many artists at scale can we support, but also (b) how many artists can we truly help grow in their career.

With a track record for breaking new artists and our expanding creator services offering, we have a strong base to create more business opportunities together with artists.

The amount of DIY music is exploding: SoundCloud itself saw the volume of monthly new uploaders on the platform increase 60% YoY in 2020. Do you have any other observations on this trend?

Musicians have gone off tour, they’re [using] at-home production suites, things like Splice and all the other sort of tools that are available, and all the plugins and DAWs [Desktop Audio Workstations] and digital instrumentation that’s now available.

But the current construct of the market is not set up to [service this volume]. You have more artists than ever releasing music – with around nine times as many artist-distributed tracks being uploaded as label-distributed tracks. That’s growing faster than the consumer side of music [i.e. the amount of people listening to / paying for music online], so there’s an imbalance.

“In my view, to keep this a healthy ecosystem, the consumer models need to change. We need to evolve from a $10 month all-you-can eat model into direct-to-fan transactions.”

As a result of that imbalance, each incremental artist distributing music now may have a smaller share of the streaming revenue pie. And at the same time, as MBW has written about, the ARPU [in streaming] is coming down.

So in my view, to keep this a healthy ecosystem, the consumer models need to change. We need to evolve from a $10 month all-you-can eat model into direct-to-fan transactions. And that means different modes of monetization – whether that’s being able to monetize music in the Metaverse or [in] other parts of the music value chain that a lot of times the traditional labels have sat outside.

Tipping has BECOME A BIG PART OF CHINESE ONLINE MUSIC SERVICES. Is it ever culturally going to catch on in the States and Europe?

I think it was there, and then we lost it.

Think about it: if I’m a music fan and I want to spend $100 right now online on my favourite artist, it’s actually really hard to do. You can dig through BandCamp, but for you to go buy an Amazon account, plus a Spotify account, plus an Apple account, plus a SoundCloud account… people just don’t do that.

“Think about it: if I’m a music fan and I want to spend $100 right now online on my favourite artist, it’s actually really hard to do.”

So if you’re a true fan, you’re kind of capped in the amount of money you can spend right now. That doesn’t make much sense to me. I think that’s why we’ve seen things like NFTs take off, because there is that desire to [spend money on artists] by fans. We just haven’t built the modes of transaction to enable them to do so.

Those modes of transaction have occurred in other media types: in gaming, for example, they’re well established. And they’re definitely established in some of the Chinese online services. We need to bring those models forward.

It’s our hope that FPR is a stepping stone towards a true direct-to-fan relationship.

Outside of vinyl and tickets, you’re right, it is hard to spend $100 on an artist.

Yes and those two things are physical. We’ve got to create a digital medium between a fan and an artist. Whether that means directly subscribing to an artist’s releases, or showing your fandom through badges and emojis and other things that we’ve seen in the gaming space, there’s got to be a multitude of different models digitally that enable an artist and a fan to interact.

So then it becomes advertising, subscriptions, but also tipping and badges, all of these things need to occur so you can have variability in the pricing.

Right now [in music streaming] you have very little variability in the pricing.

Would you like to make direct artists subscriptions happen on SoundCloud at some stage?

Yes. In an ideal world direct subscriptions make a lot of sense – but it is hard for a single artist to release enough music to retain the customer.

There are, however, other things artists do that fans want to engage with. Particularly as more artists start crossing the line from being just a musician/artists into being an influencer as well.

“FPR sets up a dynamic such that artists and fans have a different relationship.”

FPR sets up a dynamic such that artists and fans have a different relationship. But it has to go two ways: it’s not just the fans coming in to buy from the artist, the artist has to also be thinking about engaging a fan directly.

You’re seeing things like Patreon, Clubhouse, and Twitch – things outside but adjacent to music – starting to develop those models. We are big believers that music needs to move more in that direction.

What other trends do you recommend we keep an eye on tied to this explosion in DIY artist releases and SoundCloud’s role within it?

The way that marketing and promotion is changing, because I think that there’s lots of sophisticated new models that are emerging.

The amount of data that’s out there right now is overwhelming for a lot of musicians. It’s not just ‘Hey, I have access to data’, they actually need to know what to do with it. There’s a lot of noise and very little signal.

“People think of SoundCloud as more of a Western-focused service, but we have huge audiences in places like Latin America and the Middle East.”

As for SoundCloud, I’m very excited by the global nature of what we’re doing.

People think of us as more of a Western-focused service, but we have huge audiences in places like Latin America and the Middle East. Those [areas] are ripe for investment from SoundCloud, but there’s also a lot of [opportunity] for us to figure out partnerships in those markets.

SiriusXM logoYou are well capitalized, with A $75M INVESTMENT FROM SIRIUSXM announced last year. But still, humor us: If we could give you an unlimited amount of money today, so you could snap your fingers and acquire any company of any type, what would it be and why?

It would be SoundCloud! I mean that in a very specific way: Direct-to-consumer businesses that have either UGC elements to them or direct-to-fan elements to them – I won’t name names – in a similar way that we’re doing.

Also, businesses that help to support and grow independent artists careers, whether [those artists release via] distributors or independent labels.

The idea of us being able to build businesses around artists and build businesses around talent is very important to us. And there are dozens of opportunities in both of those cases.

If I gave you a magic wand right now and you could change one thing about the music business, what would it be and why?

I wouldn’t change a thing. I think we’re in the right spot at the right time.

I’m excited to see how we can compete and find ways for SoundCloud to continue to grow. The music industry is headed right where we want it.Music Business Worldwide

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