SoundCloud’s Origins & Insights
How SoundCloud took off in the music streaming market
This is one of a series of posts on the origins of well known startups including Instagram, YouTube, Spotify, and TikTok. The series is an extension of a short essay I wrote called The Seed Model.
As a kid, I found it really hard to find new musicians I liked. My only options real were the radio, my friends, and my parents — which meant I mostly listened to Top 40 hits, Reggae, and Pop music from the 70s. I didn’t get my own CD player until I was in middle school and I didn’t use it very often because I didn’t want to spend my allowance buying CDs. It wasn’t until I got an iPod that I started trying seriously to find music online. Suddenly I went from having no way to find music to having too many ways to find good music. I used every file-sharing service I could get my hands on, then switched over to iTunes, then Spotify, then YouTube, and finally to SoundCloud. SoundCloud was like having a cool friend who always knew which underground artists were about to blow up. It had its ups and downs along the way, but it knew what I liked and consistently delivered new artists I never would’ve found without it.
SoundCloud was founded in Sweden in 2007 by sound designer Alex Ljung and electronic musician Eric Wahlforss. As music creators themselves, they were sick of using email and Myspace to connect with other musicians. Their plan was to replace those outdated platforms with SoundCloud. If they could get enough musicians to join, they believed SoundCloud would do for music what Flickr did to photos and Wordpress did to websites: empower anyone become to become a creator. Musicians would use it to collaborate and share recordings; then eventually fans would use it discover artists and listen to their music with other fans.
Problem 1 — Making music social
As noble as their ambitions were, Alex and Eric had a monumental challenge ahead of them. They were attempting to start a social music app right as the biggest social network (Facebook) and the biggest music app (Spotify) started to ascend. They’d never be able to match Facebook’s breadth of social features or Spotify’s catalog of mainstream artists. So they focused on a segment both of those platforms overlooked: independent musicians. They built their initial community of budding musicians by giving them tools to share music with each other online. Once they had enough musicians, they started focusing on fans and the social experience. They nested commenting in the songs themselves, allowing fans to see how other fans reacted to every part of a song while listening. They let fans make and share playlists with each other. The result was a unique blend of music and social features that no one else had.
Problem 2 — Making money
SoundCloud didn’t seriously start trying to make money until it had over 175m users. By then it was already mired in controversy, as users kept uploading songs they weren’t licensed to distribute. Hosting music illegally put SoundCloud at odds with the major record labels, who had seen this story before with file-sharing sites like Napster. The labels had also already signed deals with Apple, YouTube, and Spotify, so they didn’t need SoundCloud to make money. They demanded even better terms than they got from the other platforms and the initial negotiations stalled.
Without any major labels on board, SoundCloud’s money problems spilled into public view. The company was bleeding cash and it was still unclear how they’d make money. Each failed fundraising attempt seemed to generate new negative headlines and questions about SoundCloud’s viability. It always seemed to be up for sale without any takers, which damaged its credibility with artists and fans.
SoundCloud’s big break came when it replicated YouTube’s business model using pre-roll audio ads, channel sponsorships, mobile display ads, and native content. This model had the added benefit of bringing the major labels back to the table. Warner Music was the first major label to sign on and gave SoundCloud momentum in its new business model. Universal Music and Sony Music weren’t so enthusiastic though. They wanted SoundCloud to reconsider its business model again before signing. From their experience with Spotify, the labels knew that subscriptions paid more revenue per stream than ads, so they wanted SoundCloud to release its own subscription and restrict non-subscribers from listening to parts of their catalogs. SoundCloud accepted and started competing in earnest with Spotify and Apple Music.
Insight 1 — Fundraising is never that easy
The first insight from SoundCloud is about fundraising. Most founders assume that social apps can always raise money as long as they’re growing quickly, so they don’t have to think about making money until later on. SoundCloud is an important counterexample to that narrative. Even with 175m users and rapid growth, SoundCloud couldn’t get investors at a $1b valuation. It went on life support for half-a-dozen years while it figured out its business model and only just turned a profit 15 years after launching. If the team had tried to make money sooner, they could’ve saved themselves a lot of heartache and potentially become a much larger threat to Spotify than they are today.
Insight 2 — Think different
The second insight from SoundCloud is about its positioning. SoundCloud has the largest music catalog of any subscription music service with over 150m songs. While many of those songs have little if any streaming activity, they say something about SoundCloud’s strategy. Instead of trying to beat Apple Music and Spotify head on, SoundCloud competes by helping relatively unknown musicians build followings. Some of those unknowns go on to find mainstream success, but fans associate the service with smaller musicians who they can’t discover anywhere else. By positioning itself in the long tail of music distribution, SoundCloud has a moat that protects it from both incumbents like Apple and new entrants like TikTok.
Insight 3 — Build a product you want yourself
The third insight from SoundCloud’s success is about the strength of its vision. Lots of startups fail because the founders don’t understand their customers well enough to build a product they want. The easiest way to remedy that is to build products that solve your own problems, as Alex and Eric did. They were each music creators themselves and they deeply understood the challenges musicians faced when sharing music online. On the surface, SoundCloud seemed to be in no-man’s-land competing with companies who had the edge. But Alex and Eric’s professional experience gave them confidence that musicians would work with them anyway. By solving their own problems, they carved out a place in a cutthroat market among a sea of more profitable competitors.
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