Business News Digital

Spotify in talks to buy SoundCloud as it launches in Japan

By | Published on Thursday 29 September 2016


Spotify is in advanced talks to buy SoundCloud, according to the Financial Times, though the deal is not yet done and could as yet fall through.

Ever since it announced its licensing deals with the record companies, its launch of a premium subscription package, and the expansion of its advertising platform beyond the US, this has felt like something of a make or break year for SoundCloud.

Perhaps it has finally found a viable long-term business model, but it arguably took too long to reach that position, making its short-term survival seem far from assured. The company did secure some new financing, but for sometime it’s seemed like SoundCloud needed to be acquired by a bigger player to secure the time it needs to grow the new model.

But who, exactly, would buy SoundCloud at this point? The licensing deals with the music industry helped make the company more attractive, in that bidders were no longer buying into a potential messy legal battle with the big music rights owners, but having been most recently valued at $700 million, the SoundCloud company is arguably way over priced, given no one has actually, as yet, worked out how to make any money out of streaming music.

Indeed, it is thought that Spotify has discussed bidding for SoundCloud before, but was put off by the price tag. Though there is arguably some logic in Spotify acquiring SoundCloud, even though bunching two massively loss-making streaming services into one doesn’t come without its risks.

But Spotify has always employed a free-sells-premium strategy in order to sign-up the paying subscribers who are at the core of the firm’s business (and, indeed, the record industry’s recent return to growth).

Unlike its big three current or potential competitors in the streaming music space – Apple, Amazon and Google/YouTube – Spotify didn’t begin with a massive online audience which it could try and convert into $10 a month streaming customers.

So instead it used free music to build an audience to whom it could upsell, a strategy which has worked in the main, though which is expensive to run, and which adds tension to the company’s relationships with the record companies.

Acquiring SoundCloud would give Spotify overnight access to a significant audience of free streamers; and although there would be quite a bit of crossover with its current freemium (and premium) audience, that would be attractive in a market where its biggest competitor, Apple, gets to push its music service to anyone who buys an iPhone.

There could also be another benefit. It’s no secret that some record label execs want Spotify to strip back is own freemium offer. And while Spotify has in the main resisted those calls, it too could do with reducing the financial strain of its free level. Could it ultimately use the acquisition of SoundCloud as an excuse to turn off Spotify Free, hoping that labels might offer more friendly terms to a freemium SoundCloud that upsells Spotify Premium?

All that said, it seems unlike Spotify could afford to buy SoundCloud in a cash deal even if the latter’s investors agreed to a price at the lower end of recent valuations, so the question is whether some equity exchange arrangement can be reached. Needless to say, neither side are currently commenting on this morning’s rumours.

Though to be fair, Spotify is far too busy celebrating the fact it has finally launched in Japan, the world’s second biggest recorded music market, where streaming of the Spotify-model is still very much in its early days.

Getting label deals done in a market still currently dominated by CD sales has been tricky to say the least. The service will bring “two million artists around the world to Japan and bring the Japanese artists we all love to the rest of the world”, said Spotify boss Daniel Ek as his service went live in the country.