LONDON (Reuters Breakingviews) - The rewards of music’s digital-streaming renaissance are unevenly spread. Big labels like Universal are booming, while listeners can access tens of millions of songs through relatively affordable services like Spotify. Yet as problems at Germany’s SoundCloud highlight, the loss-making streamers themselves have yet to prove they have an independent future alongside tech rivals such as Apple and Amazon.
SoundCloud, which was the target of an aborted bid by Spotify last year, said on Thursday it was sacking 173 staff – about 40 percent of its workforce – and closing its San Francisco office. Founder and Chief Executive Alex Ljung said in a blog post that cutting costs would help on its “path to profitability” and keep the company in control of its “independent future”.
The Berlin-based company is different from streaming behemoths Spotify and Apple Music, as it relies more on amateur musicians than the output of major artists. SoundCloud’s failure to turn its 175 million unique monthly listeners into a profitable business is nonetheless instructive of the sector’s challenging economics.
Major labels and artists have so far done best from the boom in streaming revenues, which grew at a compound average rate of 48 percent from 2014 to 2016 to reach $4.5 billion, according to Morgan Stanley. Spotify’s revenue last year was more than $3.3 billion, according to filings published by Music Business Worldwide – a 50 percent-plus annual increase. But its cost of revenue – mainly royalties and other payments to rights holders and publishers – was 85 percent of that figure, which means most of the money is going straight out the door. Labels could give the independent streamers a break by cutting royalty rates, but have so far driven a hard bargain.
Unless that changes, behemoths like Apple and Amazon will take a bigger share of the market in the long run, as they can afford to subsidise music streaming with income from other corners of their vast empires. Apple Music had 20 million subscribers at the end of last year, according to Morgan Stanley.
Building a sustainable streaming business model will be difficult for Spotify, SoundCloud and other independents. For the likes of Apple and Amazon, it would just be another string to their bow.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.