Pando

SoundCloud's doomed monetization efforts have somehow alienated both small-time creators and major labels

By David Holmes , written on May 22, 2015

From The News Desk

Digital platforms can be divided into two distinct breeds: There are products like Facebook, which despite being immensely popular are rarely described by users as something they "love." Whereas Zuckerberg's social network was once a fun way to connect with old friends and stalk the girl who sits behind you in Chem 101, today Facebook is as much a utility as anything. You don't hear anybody say, "I love the power grid."

Meanwhile, other platforms like Twitter are considerably less popular but inspire far greater measures of devotion from each user. These networks generally place less emphasis on monetization, frustrating Wall Street but delighting early adopters. Generally, the more aggressively a company chases revenue the more likely it is to alienate longtime users, whether by flooding its service with unwanted ads or overhauling its interface to appeal to more mainstream consumers. It's the digital equivalent of gentrification -- power tweeters have even adopted the parlance of Portland's mustachioed, penny farthing-riding purveyors of homemade Kombucha with their rallying cry: "Keep Twitter Weird."

SoundCloud, which is described by many as "YouTube for audio," has for years belonged to that second genus. It offered a massively open and affordable platform for musicians of all shapes and sizes -- from bedroom DJs to Beyonce. In a seminal paean to the platform's vibrant communities of artists and enthusiasts, Gizmodo's Leslie Horn wroteSoundCloud is by and large one of the rare pure and good things on the internet that the world, in an artistic sense, would be worse off without.”

But purity and goodness aren't the kind of returns VCs like to see. And while in SoundCloud's case the company can buy love, it's enormously expensive -- especially when there are 350 million users who adore you. According to Techcrunch, the company's operating losses doubled between 2012 and 2013. And in taking steps to "mature" and legitimatize its business, it's not only threatening to lose the love it worked so hard to earn from some of its most impassioned users -- particularly those operating in the site's vibrant remix and EDM culture who helped build the platform into what it is today. No it's even worse: SoundCloud is also failing to satisfy the money-hungry major labels, who are now pulling more legitimate EDM artists from the platform due to "a lack of monetization options" -- at least when compared to Spotify and other streaming services. And what's more, the company's already gone too far down the road of alienating certain artist communities in favor of chasing ad dollars, that it needs these major labels and the content they own more than ever to survive.

To increase revenues for both SoundCloud and creators who possess enough legitimacy or legal acumen to copyright their work, the company struck a partnership with ZEFR, an LA-based startup that tracks and identifies unauthorized copyrighted content so that the owners of this material either monetize it through ads, do nothing, or have the upload taken down. ZEFR already offers this service to YouTube, and considering that many call SoundCloud "YouTube for audio," it's a logical progression for the company.

Not everybody is happy about SoundCloud's ambitions toward profit and legitimacy, however. The platform rose to prominence on the backs of remix artists, many of whom use copyrighted material in their work. This has resulted in a huge purge of material from DJs large and small. And while copyright owners deserve to be compensated for their work, some of the best and most creative remixes constitute what the courts call "fair use" -- meaning that the new work is sufficiently "transformative" and exists as an independent piece of art.

And this isn't some hipster Molly-popping pie-in-the-sky legal defense, either. Defenders of remix culture include US Representative Mike Doyle (D-PA) who spoke up on the floor of Congress in defense of mashup artist Greg Gillis, better known as Girl Talk. And what's troubling about ZEFR's model on YouTube -- and now SoundCloud -- is that it takes the power to defend a work as "fair use" away from judges and other legal experts and puts it in the grubby little virtual hands of algorithms.

Troubling or not, there's nothing novel about SoundCloud's move to monetize content at the expense of openness and creativity. The company is following the same playbook used by countless Silicon Valley consumer platforms -- platforms that, after achieving scale on the backs of freely-provided and loosely-moderated content, tighten the noose around what content can and cannot live on its platform, if and how that content is monetized, and who gets paid. And while a number of creators are leaving SoundCloud -- either voluntarily in protest or because their remixes are no longer welcome there -- the move is vital to the company's survival, and not just because it improves SoundCloud's revenue margins. No, now that SoundCloud has shifted away from fostering open artist communities and independent creators, the company needs more than ever to keep the major labels happy -- and that means making as much cash as possible.

It would appear then, from a business perspective, that SoundCloud had no choice but to sweeten the pot for these powerful record labels -- despite the fact that labels already earn more than any other constituency whenever a song is played on Spotify or some other platform. That's because they own that precious content -- and withholding it can make or break a startup. There are plenty of digital distribution channels, but there's only one Katy Perry.

But now it appears that SoundCloud's monetization schemes are "too-little-too-late"; and thus its act of throwing independent remixers and other EDM artists under the bus may have all been for naught.

The trouble began earlier this month when Sony Music removed SoundCloud recordings belonging to a number of high-profile artists, including Adele, Miguel, and Kelly Clarkson. The reason, an anonymous music executive told Billboard, was “a lack of monetization opportunities.” SoundCloud spent so much time building a product people love, that it may be too little and too late when it comes to feeding the insatiable maws of the majors. SoundCloud's ad offerings are indeed in their infancy, having launched the first of these efforts, the "On SoundCloud" partner program, just last August. And "On SoundCloud," well, it hasn't exactly set the world on fire. SoundCloud told Billboard -- as if it's somehow proud of this number -- that it has paid out over $2 million in advertising revenue to creators in the nine months since launched its monetization efforts. As a point of comparison, Pandora generated $178.7 million in advertising revenue just last quarter and sent $126 million of that to rights holders as part of the company's "content acquisition costs."

Granted, SoundCloud's monetization schemes are still very limited and involve just over a hundred artists, and so this is absolutely an "apples and oranges" comparison. That said, even if each creator receives more ad money per play on SoundCloud than on Pandora, all that matters to the huge labels -- who wield the most power over SoundCloud's destiny -- are aggregate numbers. They don't care about "artists getting paid." And when it comes to writing big checks to giant record companies, what SoundCloud can offer simply isn't as compelling as Pandora's advertising platform or the huge advances Spotify pays to record companies.

Now this week, in a huge symbolic defeat for SoundCloud, Sony isn't just removing the music of big pop stars -- it's removing music from SoundCloud's beloved EDM genre. So while SoundCloud's monetization efforts first resulted in killing smaller EDM remix artists thanks to their use of copyrighted material, now SoundCloud is losing the bigger EDM artists as well because those same monetization efforts aren't aggressive enough for major labels.

In a series of tweets spotted by Digital Music News, EDM megastar Madeon says Sony is removing all of his music from SoundCloud.

"Thank you SoundCloud for being such a great discovery platform over the past five years," Madeon said. "Well done Sony for holding your own artists hostage."

In short, smaller remix artists who want to be on SoundCloud are getting kicked off by SoundCloud itself. Meanwhile, bigger remix artists are getting kicked off by their own labels. And it's all thanks to the platform's belated and inadequate attempts to sell ads. What a mess.

With Apple planning to unveil its dramatic Beats Music reboot at the WWDC conference next month, YouTube Music Key slowly rolling out to the general public by the end of the year, and the old mainstays Spotify and Pandora continuing to dominate the space in terms of listening hours, the streaming music sector is getting insanely crowded. Maybe SoundCloud could have survived as a platform devoted solely to unlicensed music and supported by subscriptions -- something less scalable but modestly profitable, and therefore without the pressure from investors to cash in on the well-deserved love users feel for the site.

But by chasing the same monetization strategies as more entrenched competitors like Spotify and Youtube -- but launching these efforts far too slowly and far too late, there's likely no room for SoundCloud to succeed as a traditional streaming music play. And as SoundCloud begins to alienate constituents in the music industry both big and small, perhaps the only way forward for SoundCloud is to find an acquirer -- regardless of whether said acquirer operates in the music space or not -- and one that wouldn't mind adding 350 million new users in one fell swoop.

Are you listening, Twitter?

[illustration by Brad Jonas]