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Last updated: September 28, 2016 11:17 pm
Spotify, the music streaming service, is in advanced talks to acquire SoundCloud, as competition heats up with Apple for the future of digital music, said people briefed on the discussions.
SoundCloud, which raised $100m in June from a group of investors including Twitter, was last valued at about $700m.
Those briefed about the talks said it was unclear how much Spotify would pay for the Berlin-based company, as they warned that the discussions could still collapse.
A deal between Spotify and SoundCloud, two of Europe’s top tech start-ups, comes as Silicon Valley titans such as Apple and Amazon have recently launched their own music streaming services, forcing independent players to consolidate to survive.
Spotify this month hit 40m paying subscribers a week after Apple Music announced its service had grown to 17m subscribers.
Spotify declined to comment, while SoundCloud could not be immediately reached.
Despite boasting a 200m-strong creative community and 135m tracks, with remixes and new artists coveted by competitors, SoundCloud has never turned a profit.
In 2014, it reported a turnover of €17.4m and an operating loss of €39m. The start-up has not reported user numbers or business health since then.
People close to Spotify management said SoundCloud was viewed as a threat as long as it was considering offering a cheaper, mid-tier subscription service. But when it abandoned those plans, going instead for a standard $9.99 option known as SoundCloud Go earlier this year, it lost its best chance of independent success.
“They’ve been absolutely dobbed by all the pressure from the labels to go in for a cookie-cutter subscription service which doesn’t fit their user base, content or catalogue. It’s an artefact ultimately,” said analyst Mark Mulligan, founder of Midea Research.
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Spotify had “reasonably detailed” talks with SoundCloud last spring about a possible acquisition, but balked at its asking price, said people familiar with the matter. After its Twitter investment, Spotify considered the acquisition again, although talks fell apart after a brief round of negotiations, the people said.
Spotify is getting its ducks in a row for an IPO in the next year, by boosting its paid subscriber base and diversifying content through video and podcasts.
Soundcloud’s biggest strength is the community of creators who built it, with an extensive catalogue of music, such as mixes, hip hop, EDM and DJ sets.
Independent digital music companies are flailing, despite music revenues growing for the first time in nearly two decades, boosted by a 45.2 per cent rise in streaming revenues.
“The big question for the streaming market is whether you can be a standalone company in a category when you have companies like Amazon and Apple looking at music as a loss leader, just to sell more iPhones or Echo speakers,” said Niklas Zennstrom, co-founder of Skype and now-defunct music service Rdio, which was acquired by Pandora last year.
It also draws users into a social network, allowing them to upload and share music instantly. “With Soundcloud’s subscription service, the two services are becoming more similar than they have been before, so a reason [to buy] would be a consolidation of subscriber bases and to combine talent pool,” said Mr Zennstrom.
In an interview on Swedish television, Spotify chief executive Daniel Ek mirrored this reasoning. “The next decade for us is very much about ensuring that even more of these artists can live on their music, and bringing them together with a new audience,” he said. “Today our users say ‘introduce me to new music’. What the artists say is ‘help me finding my audience’. Essentially, that’s two sides of the same coin.”
Rich Greenfield, analyst with BTIG Research, said: “Spotify buying SoundCloud could be a sign they are trying to extend their significant lead in online music, as Apple, Google and Amazon are gearing up to compete more aggressively in music. The next question will be, is Pandora going to be left out and forgotten.”
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