SoundCloud Announces New Monetization Play, $100M in Funding

10:17 AM PST 08/21/2014 by Andrew Hampp, Billboard, Ed Christman, Billboard , Glenn Peoples, Billboard
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SoundCloud CEO Alex Ljung

The popular audio platform is introducing new ways of generating revenue, including ads

It’s a new era for SoundCloud.

The audio platform has long been a home to unsigned, independent and even established artists to debut new material — from Lorde’s The Love Club EP (which ultimately earned her a record deal with Lava/Republic) to Drake’s OVO page, which is often the first place the Toronto rapper debuts new material from himself as well as his OVO-affiliated artists. Heretofore, SoundCloud’s revenue was derived primarily from its Pro accounts and private funding. But beginning today, the company has announced a three-tiered monetization strategy that will introduce advertising to the platform for the first time, as well the news that SoundCloud has received more than $100 million in funding since its 2007 launch.

Jeff Toig, SoundCloud’s chief business officer since September 2013, tells Billboard that the company’s growth has come in three phases — first was the creation of tools that have allowed users to upload new content and track its engagement, the second was scaling the audience (175 million unique users globally per month, the company has announced), and then the new third phase. “This is where we start to figure out how to generate revenue and help our creators make money in order to enable them to build careers with us,” Toig says. “When Alex [Ljung, SoundCloud’s CEO] and Eric [Wahlforss, SoundCloud’s CTO] founded the company, they really saw an opportunity to build a business with a global, open platform that would kind of evolve over time.” 
At the center of the new strategy is a partner program called On SoundCloud, which includes a new Premier tier (which is invite-only) for subscribers that will allow them to monetize content of their choosing via select advertising. The new offering reflects SoundCloud’s positioning as a promotional tool for creatives, rather than an all-you-can-eat service for consumers. Until Thursday, advertising had not been part of SoundCloud’s business model. Instead, SoundCloud had offered a “freemium” pricing scheme that charges users for file hosting.

Three hours of audio time can be uploaded for free (the Partner tier).

Premier-tiered content will include advertising from five different ad products — native, audio, display, channel sponsorship and contests. Red Bull, Jaguar, Sonos, Squarespace and Comedy Central are the first five ad partners at launch. An example of the sponsorship model can be found on Squarespace’s sponsor page. Dan Gerber, SoundCloud’s head of sales (and a veteran of Pandora), notes that audio ads will be similar to YouTube, running at a minimum of 15 seconds, with 30-second ads offering the option to opt out after the first 15 seconds. Additionally, display ads will be offered solely on the mobile platform, which Toig reports has seen audience growth increase by a multiple of six in the first eight months of 2014 alone.

Unlike most other music services, On SoundCloud will not launch with agreements from the three major labels. While major-label artists including Beyonce, Diplo, Kendrick Lamar and Drake frequently use the platform to debut new material, sources tell Billboard that 80 percent of SoundCloud’s current uploads are from user-generated content, while 20 percent is derived from labels.

Toig says the company is in “active and ongoing, advanced discussions” with Sony, Universal and Warner Music, but that this week’s launch was meant to illustrate how SoundCloud can be for anyone. “SoundCloud is not just a service that depends on the majors only — although we do work with them and hundreds of their artists all the time, and we’d obviously love to have them onboard,” Toig says. “But there is a much broader creative ecosystem here and we’re really keen to represent that in a full and complete way.”

Instead, initial partners with signed deals include labels finetunes, Red Bull Sound Select, Spinnin and SEED; comedy networks Funny or Die, Jash and AST Records; podcasts Earwolf and StarTalk Radio; publishers BMG and Sony ATV/EMI; independent artists Little Simz, Big Gigantic, GoldLink, Blackbear, Romiti, Jakubi, Cyra Morgan and Oliver Sadie; and audio-based deals with multichannel networks primarily built on YouTube, including Maker Studios, Fullscreen, INDmusic and EDM Network.

Additionally, Toig says, a paid subscription service is expected to be launched in the coming months, which is where agreements with the majors and other labels will likely come into play. While key executives at the major labels and top indie executives say they fully expect to reach a deal with the music service, they say it could be a couple more months until such agreements are worked out and signed. Sources at the major labels and members of Merlin, the independent label rights management group, say that none of them have yet to sign a contract, even though the basic framework to a deal structure has been agreed upon. Some complex deal points still have to be worked out, they say.

“If they are going to get full industry support, there is still some pretty complicated stuff they will have to deal with,” says one industry executive. “It’s not that I don’t think they will get there, but I think they are still a few months away.”

When the subscription service deal is done, it likely will take the shape of other music service deals, sources say. In most cases, a certain percentage — roughly 10 to 20 percent of revenue — is taken off the top to pay for costs in generating advertising and subscriptions, with the remainder of the revenue being split 70 percent with the music industry and 30 percent to the service. On SoundCloud’s Premier tier, available this week, will likely mirror a revenue-sharing model more akin to YouTube, which would see SoundCloud keeping 45 percent of revenue and the remaining 55 percent going to the creators. Toig declined to comment on specifics, noting only that creators would generate “the majority” of revenue from monetized streams.

Like YouTube, SoundCloud also has a user-generated component, where some bands and DJs might put up alternative versions and mixes of songs, while fans may put up mash-ups. Since the site has been heretofore unmonetized by advertising, SoundCloud has managed to skirt infringement by using the safe harbor act of the Digital Millennium Copyright Act, which means complying if a copyright holder serves a take-down notice. The site, however, has drawn ire from DJs such as Kaskade in recent weeks for issuing take-down notices for remixes and mash-ups of copyrighted material.

That’s why the coming months will be crucial for SoundCloud as it legitimizes its business model, which industry sources suggest has been controversial up until now when it comes to skirting rights issues. “SoundCloud has to be good actors with the rights owners because no one will invest one more dollar in the business if they are at war with the content owners,” argues one major label executive. “If they don’t figure out how to monetize, or if they make enemies of the content companies, they will not be long for this world.”

This story first appeared on Billboard.com

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