The Soundcloud Story

a time. And as you probably know, I am one of the people in charge of the computer and Electronics channels, senior writer for those channels, so I cover all stuff what goes beep, as my former co host Chris Palette would say, and uh, today we're going to talk about a web based service, one of the really popular ones that has suffered some problems recently. In August, this particular service, the streaming music service SoundCloud, wasn't really serious trouble. The

company was teetering the brink of collapse. It was in desperate need of investment money to stay afloat, and for about twenty four hours, the tech world, including myself, watched to see if a rescue line would be thrown to the company or if it would sink, leaving the people who still use the service completely stranded. I guess marooned. Perhaps I should keep using the ocean metaphors. As it turns out, SoundCloud lived to stream another day, but I'm

getting ahead of myself. Where did the service come from, and what's the story behind it and how did it get so close to going under and what pulled it back? At least for now, well ten years before SoundCloud found itself in this precarious position, it was born Alexander Leong and Eric wall Force. And I know I'm butchering their names. They're both Swedish, and my Swedish is as as bad as any of my completely unfamiliar languages. Right, I know

I'm going to butcher names. I apologize from this point forward for all of that. I just know that I'm trying. I might be failing, but I'm putting forth an effort. So Leung and wall Force joined forces to create these streaming service SoundCloud. But let's learn a little bit more about both of them before we get into the company itself. So Alexander Leong was born in the United Kingdom, but he spent his childhood in Sweden. From the sounds of it,

he was quite the little brainiac. He attended Stockholm University from two thousand one to two thousand four, and there he studied such diverse topics as literature, politics, international relations, philosophy, and film music. He went on to study marketing at the Stockholm Technical School from two thousand five or so, and then he took more courses in human computer interaction

at the at the Royal Technical Institute. And this guy would leave me in the dust unless we were to get into a real deep discussion about Chaucer or Milton or Shakespeare. I bet I could hold my own in those cases. But it sounds like he was really interested in a huge spectrum of topics. Now, while he was learning all this stuff, he was also working in a sound design company called A L. C. Lud Design from two thousand to two thousand three. He was a sound

designer and composer for that company. So he was filling his brain with tons of different subjects while also working as a creative professional. Now, he got that job because he recorded an album. He was a musician and decided to record his own music and it got some notice in the professional world, and this company said, hey, why don't you work for us in sound design? Sounds like you're really talented. Uh. He would actually go on to say that he was making quote very very very very

bad music end quote. He did not He really downplays the quality of the work he did back when he was a kid, but it was good enough for him to land this gig, so he was working at the same time as he was studying. Now after his studies were over, Alexander moved on to work with SF Anytime, which was a video on demand service that serves customers in Sweden, Finland, Norway and Denmark. Uh And I looked into SF anytime while I was researching this podcast. I

wanted to see what it looked like. And the library is really impressive, though there are a lot of boomlouts, like a lot of them. Alexander's job at s F Anytime was as a business and product developer. While he was working with s F Anytime, he also founded his own cross media production studio called Young Studios, and he founded a company called acril P, a media production agency.

So as that media production agency, he worked with some clients of some renown a few companies you've probably heard of, like Coca Cola and MTV and Phillips. And this guy's resume makes me tired just from reading it. So he had founded two studios, plus he was working at SF Anytime all concurrently, so he's doing all this work around

the same time. He left SF anytime in two thousand and six, he stuck with the companies he founded acrol P and Young Studios until about two thousand seven, and it was in two thousand seven that he partnered with Eric Walforce to form SoundCloud. So now let's go and talk about Eric. We've learned about Alex. Let's learn about Eric. Well, first of all, there's less information that's publicly available about Eric than there is about Alex. He was also raised

in Sweden. His grandfather was a member of the clergy and his mother directed his local churches choir. Though Eric would say that as a kid he resented being dragged to church, he found it to be intolerably dull. It was only later, as an adult that he began to

develop an appreciation for religious music. He says that even secular people can have an interest in that style of music and its complexities and harmonies, and the various aspects of religious music that you can encounter, particularly things like intricate chance that can date all the way back to the medieval era. He would attend the Stockholm School of Economics for three years, and then he also earned a master's of Science degree from the Royal Institute of Technology

in Stockholm. He later would move to Berlin, Germany. He's an avid supporter of various nonprofit organizations and he does a lot of volunteer work now. In the mid nineteen nineties, he worked as an interaction designer for a company that's called Gate five. Gate five was a company that designed location based services for mobile devices that included stuff like mapping programs, route planning software, personal navigation tools, and content management.

In two thousand six, Nokia would go and acquire Gate five. In addition to his work and technology, he also pursued a love of music. He is known as fours fo r s S a musician who creates music tracks that are experimental in nature. Typically, his work fuses different elements to make something new. You might find a piece that combines elements of jazz, house music, ambient music, and Gregorian chant,

for example. Or there's a piece I love called funk for Nerds that makes great use of piano, bass, guitar, cello, percussion, and glitchy digital sounds to create a really cool vibe. You can actually find it on SoundCloud. So wall Force and Leon met at the Royal Institute of Technology and Stockholm, and the thing that first united them was a common problem, and it was not a problem that involved music, despite the fact that both of them were musicians and both

of them were avid seekers of music online. The initial problem that brought them two together had to do with the Mac operating system. Now, as le Young would explain, he says, I was having this problem where I couldn't sink my calendar with I cal the school's calendar feed. And I go up to this guy with a Mac laptop and I'm like, hey, I notice you have a Mac. Do you know how to do this? And no joke, He's sitting there trying to get the exact same thing

to work. And that's how Eric and Alex met. They met over the difficulty in sinking their personal calendars to their school's calendars using Max software. Just think, if this school had been using PCs instead of Max, SoundCloud might never have existed. It was only through this chance meeting. Who's to say if that's true or not. I mean, the chance meeting part is probably true, but the whole

PC thing is me just being silly. Before long, both young men were running into a different, but equally frustrating problem. Each was interested in composing and recording music, which they could do that was pretty much easy for them. They had all the tools they needed in order to compose and record stuff. But then, how where do you publish it? How where do you host it? How do you get people to discover the work you've created so that they

can actually listen to it and hopefully enjoy it. They decided that it was a problem that they could solve themselves by making their own platform. They decided it was going to be a web based music service that would allow people to upload their tracks and then share them with the rest of the world, and it would give amateurs and independent artists the opportunity to reach audiences and share their work, as well as discover other work that

might serve as inspiration for further musical exploration. It could allow for collaborations and remixes and all sorts of creative expressions, and it wouldn't have all the hoops you'd have to jump through to get your music onto some other services like Spotify. They decided to call this new service SoundCloud, as it would store audio tracks in the cloud of the Internet. So this was an idea to help democratize

music publishing. Obviously, if you're a musician, the traditional route, especially before the web based days, was that you had to get discovered by a music label and have that music label sign you to an agreement where they would produce albums or otherwise, you know, publish your your work so that a larger audience might be able to find it, and it would be up to the music label to promote that and maybe you go on tours to support it, that sort of thing. But not everyone has access to that.

Only a very few people ever are lucky enough to follow that particular pathway. If the web opened up the opportunity to get discovered in brand new ways, entire audiences could find your work based upon your efforts to get it out there. You could publish your work to the web and get that link out and through viral sharing, you could actually become a known quantity and you never even had to speak to a music label in order

to do this. Now, there were some questions about how would you make money from that if you were hoping to make music your career, But from a perspective of actually getting out in front of people, it suddenly became way easier. If only the platform were there, and that's what Alex and Eric sat out to do. They wanted to make a platform where the average person could upload audio and find an audience. That was their goal. So they got to work and they started to build out

this company. They chose Berlin as their headquarters. While Course has said that they chose Berlin because it was a city that was friendly to businesses, meaning there were fewer barriers to get around when you're getting started, and also because Berlin is a city filled with creative people, including artists, musicians, actors, and more. Designing the service itself was no small task. Obviously, you're talking about anything that's based on the web. There

are multiple components that go into play. It included designing the back end of the service, which meant you had to go out and buy hardware that would host the actual files and interface, or you had to rent that space from some other company to actually hold all the physical audio files that would be uploaded to the service.

It also meant creating the user interface, something that would allow people to easily navigate the site, upload audio, discover audio tracks, and all of that would take several months of work. So they started in two thousand seven, but It really wasn't until two thousand eight that they were ready to unleash SoundCloud and allow people to come in and use it once they get the beta testing phase. One goal the two had from the very beginning was

to target a global market. They could have just focused on a service that would cater to Europe or two areas like Sweden, Finland Norway, the areas they had been working in up to that point, but they were very sure that there were artists all around the world who were feeling the same sort of frustration that they had experienced of not having a way to get their work out to an audience. And this wasn't limited to musicians. Any sort of audio work would apply on SoundCloud, so

you didn't even have to make it be music. It could be anything. It could be spoken word, it could be poetry, it could be a lecture series. Any of that was fair game for SoundCloud, and the two set their sites pretty high. They wanted something that people around the world would be able to take advantage of. To get funding to run the business, the two held a

couple of rounds of seed funding. Now the full numbers for the seed funding have never officially been disclosed, but This typically is a relatively small amount of money that a company will will get from angel investors early, early in the right in the phase. It's typically when you don't even have anything to show yet, but you have

a plan. You're able to articulate that plan, explain how you're going to carry out that plan, and you can usually get a small investment up front, and again relatively small. This These are amounts of money that I would consider enormous on a personal scale, but on a company scale, when you think about all the stuff that goes into running a company, it's not that much money in the

grand scheme of things. So based upon interviews, it sounds like the first couple of rounds of seed funding gathered around a hundred fifty thousand euros in one round and two hundred fifty thousand euros in the second round. Again significant to an individual, but in the big scale, it's not much that gave SoundCloud the starting capital and needed to launch. In two thousand and eight, Leon would become the CEO of the company and wall Force would take

on the role of chief technology officer. The co founders were able to get the project running on that amount, but they realized they would need to scale up, and they would need more money in order to do so. If they wanted to be a truly global entity, right and to offer more services to users and to have all the space they would need to hold all the files people were uploading, they're gonna need more money than

just that seed funding round. So they had the decision to make do you concentrate on generating a revenue model, so a business plan where you're actually going to be making money so that you can make your business profitable, or do you first worry about scaling up and getting enough users so that when you do develop your business plan, you're really in good business and you've created something that works at the scale you are at, as opposed to

making something when you're small and then having to adjust that as you grow. So they weighed these options. They said, well, do we want to make money now or do we want to get really big and then figure out how we're gonna make money. They decided to go with option number two, which would mean that they would need to hold a major round of investment funding to get enough to scale at the business. In April two thousand nine, SoundCloud would hold a series a round of investment funding.

So what the heck does that mean? Well, I'll tell you, but not right now. First, let's take a quick break to thank our sponsor. All Right, I promised you guys to tell you what Series A funding means. And this does tie into technology. It's it's beyond technology because this

is for any sort of company. But there are a lot of technology companies out there, startups that have gone through multiple rounds of funding, and I think it's useful to understand what is going on so that when you hear about these different companies and you hear about how many rounds they've been through, you can start asking some tough questions such as does this company actually have the potential to become an entity that will pay back on

that investment. So Series A rounds are typically the first significant round of venture capital financing. This is beyond those seed finance rounds, which were really just to get the business started. Series A and future rounds are more about growing a company so that it can scale up to a certain level. So in return, the investors get a type of steak in the company they're investing in. You know, usually it's a top of preferred stock called Series A stock.

And while there are some variations in this, typically, if you were to buy Series A stock in a private company, should that private company ever hold an initial public offering and turn into a publicly traded company, your Series A

stock would convert into common stock. So if you owned a certain percentage of the company because you had funded it in this round of venture capital funding, you would get that equivalent amount of ownership in common stock if that company went public, and then you could say, all right, well, I'm ready to walk away. Maybe you're making a profit now because the amount of investment you made versus the amount of value the company has once it goes through its I p O. You might have made a mint

or maybe you lost money on it. It It all depends on how well the company is received when it goes through that I p O process. It's a moot point with SoundCloud, it stayed private. It's probably a good idea to take a little tangent here and talk about the realities of getting money in the startup space as a startup company, because there's so many tech companies these days

that trace their roots back to being a startup. I mean, there are some big, monolithic companies that have been around for decades or even a century or more in the technology space. But so Cloud provides a good example of how this can work, though I'll explain how some details have changed over the years to make it more complicated today.

So we begin with this round of seed funding. This is typically a relatively small amount of investment money in the grand scheme of things, and we're talking about a few hundred thousand dollars, typically enough to get a business up and running from basically nothing at all. Now, unless your new business has a killer way to generate significant revenue right out of the gate, you're probably not going

to be profitable at least at first. You might need to scale up before you can put your business plan into play. So it's kind of like that that joke about making it up in volume. In this case, the volume you're talking about is not a volume of products, but the volume of customers. You may need a certain number of users before you can unveil your revenue generating plan to make it a profitable business. And until you get that number of users, you're going to be in

a losing proposition. So you may want to scale your business up before you try and make generate revenue Uh. This obviously varies from business to business, and it absolutely depends upon that revenue strategy. So you might say, once we hit a million users, we will start to make more money than we spend, and that is a good thing. Only of course, your specific number of users could be different from that, and if you don't have any means

of generating revenue, it doesn't work at all. So you would start burning through your cash reserves faster as more people start using your service, because you have to meet the demand of more users. And if you have no way of making money, you're burning through that cash at an increasingly faster rate. So it becomes a double edged sword. You're getting more popular, but you're not creating a way to make money based off that popularity. And meanwhile, that

popularity is placing a greater demand on your resources. So you might keep your business going for a year or more on that seed funding alone, depending upon what you are doing and how wisely you are spending the money. After that, assuming you aren't yet profitable, which is a pretty safe assumption with many startups, you would hold that series A round of funding. Series A funding is typically

on a much bigger scale than seed funding. Seed funding is on the order of a few hundred thousand dollars, whereas Series A can range between a couple of million to fifteen million dollars. That's the range of averages. SoundCloud had its Series A funding and netted the company about two and a half million euros, so roughly around three million dollars. That was not enough to or that was rather enough to not only keep the company in business,

but also to allow it to grow at that time. Now, sometimes, such as with the case of SoundCloud, a company must hold further rounds of funding in order to stay in operation while it attempts to generate enough revenue to support itself and become profitable, or maneuver itself in such a

way that someone else acquires the company. A lot of startups have begun with their goal not being to generate revenue, but to become so enticing that a larger entity comes along and says, hey, that's a nice business you got there, how about I scoop it up for you know, like a billion and a half dollars. How's that sound And you, as the founders at the startup, would say something like, yes,

that sounds wonderful. Please cut me a check. So there are startup companies that, when they get going, the founders their plan is to get big enough so that someone else will come along and acquire them, and then they don't have to worry about making the business profitable because they will have made their money by being purchased by someone else. But there are plenty of other cases where the founders set out from the start to say, we want to own our own business, and we want to

make sure we can make the business profitable. So you see all the different variations. It's not like everyone sets out just to get acquired. So SoundCloud is one of these companies that has held held multiple rounds of funding.

And again, the more rounds of funding a company holds in order to stay solvent so that keeps doing business, the more challenging it can be to convince investors to hand over that kind of money, because if you've been around for in the case of SoundCloud, a decade, and you haven't turned a profit, there may eventually come a question of will you ever turn a profit? Will I ever get a return on this investment I am making?

Or is this throwing money away on a sinking ship that is doomed to be at the bottom of the ocean. To go back to my metaphor from earlier, SoundCloud held a Series B round in two thousand eleven, which is exactly what sounds like. It's like a Series A, except obviously it's the next one. And they held a Series C in twelve, and a Series D and fourteen, and a Series E T sixteen, and this year, just as we were wondering if SoundCloud was going to fall apart completely,

it held a Series F round of funding. The amount raised in those rounds range from ten million dollars back in Series B all the way to an astounding one hundred sixty nine point five million dollars with Series F. That was the largest round of investment fundraising by far in Soundclouds history. Was the one that happened August, with a hundred sixty nine point five million dollars in investments. The company also held two rounds of debt financing during

that same span of years. The first was in January sixteen and the second was in March seventeen. Collectively, they raised about a hundred million dollars for this debt found financing, so all told, if you were to count both the debt financing and all the investment money the company raised four hundred sixty million dollars or thereabouts in various rounds of fundraising and debt financing. Four sixty million dollars has gone into this company without it being able to turn

a profit. Uh, the reason for not being able to turn a profit is pretty complicated. There are actually quite a few. Now I'm gonna step away from SoundCloud again just for a second to mention the fact that startups today are facing a really interesting challenge. On the one hand, there are so many different angel investors out there, people who have the money to pour a good investment into

a small start up just as it's getting going. So there are a lot of For example, there are a lot of people who have founded other companies who are now flush with cash, and often they are looking around to see what other interesting ideas are out there, and the ones that they really like they might support financially in a round of angel investment funding. So this would be that seed funding early on. So there's lots of

seed funds out there. If you are getting your startup going, it's not that difficult to get that initial amount of money that that's smaller round of funding, but obviously that's only going to keep you going for so long before you either need to be turning a profit or you need to seek out a Series A uh venture capital round. Here's the problem. Series A is way more competitive. Series A investors are far more cautious when they're looking around

at properties they might invest in. So it's very easy to get that initial investment and you might stick around for a year or so, but then trying to get a Series A round is much more difficult. So there are a lot of companies that get started to have a promising beginning, like they get a lot of interest right out of the gate, but they are not able to sell themselves to investors at a later date, and

thus they end up going away. There are countless numbers of startups that could have been huge if they had secured a Series A round. Now, there are a lot of people who say that this is not a bad thing. It means that there's kind of a quality control, but it comes after you've already reached the point of launching a company. So from the person who launched the company, from their perspective, it's really kind of dark and scary.

You don't know if you're going to be able to get that next round of funding to keep your business alive and scale it up to the size you wanted to be. But from an investment point of view, you might say, well, this is a good thing because it cuts down on all the companies that would have continued on for years and years and years without ever turning

a profit. And some people would say that SoundCloud falls into that category of a company that has gathered more investment money than perhaps it was warranted, that perhaps it would have been better to see SoundCloud be a noble failure early on, rather than continue on for years and years and years, continuing to gather investment funds but yet not being able to turn a profit. Is that really the case. It's hard to say, because the story of

SoundCloud isn't over yet. Getting back to that story, in two thousand nine, Wired cited SoundCloud as a credible threat to another music based social platform that was online, one called my Space. Hey do you remember my Space? I did an episode about it. Actually, I think I've done more than one episode about my Space. But yeah, my Space used to be a thing, guys, and SoundCloud helped

bury it. Though. I really think any reasonable person would point at Facebook as the real reason my Space ultimately floundered, and these days no one really talks about it at all, even though it's tried to reinvent itself a couple of times since then. SoundCloud, I would say it would be an additional blow, like a little kick on my Space when it was down after Facebook had delivered the massive

body slam. So SoundCloud had all the musical aspects of my Space more or less, something that could duplicate my spaces ability to allow artists to upload their music to a platform, and SoundCloud actually made it much easier for you to get your music everywhere else because of their approach. They were also seeing a lot of success with recognized artists joining SoundCloud groups like Sonic Youth or musicians like Moby We're using SoundCloud to promote tracks or entire albums.

Beck was also using SoundCloud to reach fans online. And one of the things that really set SoundCloud apart was that you could embed a SoundCloud player into another website. You would just get some code that you would put into the HTML of your website, and that would create a little player inside the confines of the website you had built and within that player, you could play the

tracks that you were uploading to SoundCloud. That gave SoundCloud a huge advantage because it could be everywhere instead of forcing users to go to a centralized location to experience music, So you didn't have to log into SoundCloud to listen to SoundCloud files. You could encounter a SoundCloud file on any website at all. If you had a band and you wanted a few of your songs to be available on your website for people to listen to, the just

stream it while they're they're viewing your site. You could use a SoundCloud embettable player to stream that music and your fans will be able to listen to it. On top of that, uploading a track to SoundCloud would generate a unique u r L that you could then share on various social platforms like Twitter, and that helped musicians promote specific tracks and encouraged sharing online. Making music is already challenging, but making your music discoverable is an even

bigger challenge. There's so much con tent going up online all the time, and finding a way to reach your potential audience gets harder with every minute of content that's uploaded to the internet. These strategies helped put SoundCloud on the path to becoming the YouTube of audio files. Every minute, twelve hours of audio content joined the vast amount of audio already on SoundCloud. Now that is dwarfed by the amount of video content that's going up on YouTube every minute,

but still pretty impressive all on its own. One of the neat features in SoundCloud is that you can leave a comment about an audio track and even have that comment associated with a specific moment in the track itself. So the tracks on SoundCloud are represented as wave forms. You see the wave form and you see the progress go from left to right as you play the track. It starts to highlight the track as it's going down

the timeline of this audio track. Meanwhile, you can leave a comment at any point along the track to say something about how that track made an impression on you or what you felt about the choices the artist was making, and it will actually show up at that point along the track, and people can read your comments and see what you had to say about it and digested and decide whether they agree with you or they don't agree

with you. And it's actually a really cool feature. I like it a lot because people can get feedback not just for the audio track, but for the specific decisions that went into making that track what it was, whether it was spoken word or a lecture or music or whatever. And those moments of creativity that resonate with the audience

can stand out. If you are a musician and you create a music track and you change up the tempo or you insert a new instrument and people respond to that moment within the track, you know that you did something right, and you might explore that further with future songs, or you might get some criticism and find out the stuff that people don't like. Now, in my experience, those comments tend to be less helpful and more aggravating because of the nature of the way people tend to word them.

There are nice ways to offer criticism, is what I'm getting at. It's just that most people don't exercise that. They go with declarative statements that aren't terribly helpful and often are hurtful. By May, SoundCloud had hit a million users. In those early days, there was no advertising on the site, so you could have an ad free experience when you came there, and then basic accounts were free. Those free accounts did come with some restrictions. You had a limit

to how many songs or audio tracks you could upload. Really, it was in the amount of time collectively that all took. So your basic free account would include a hundred eighty minutes of audio that you could upload. After you hit a hundred eighty minutes, you hit your limit. Or it also would put a limit on how many contacts you

could have within SoundCloud. So if you wanted to have a bunch of contacts and then every time you upload a new piece of audio it informs those contacts that you've got something new there, you had a bit of a limit there. If you had the Basic Free account, you could choose to enter into a tiered premium account selection. SoundCloud would get a lot of feedback on this. People would argue that the various tears were kind of confusing and messy, and that it made it more complicated than

what was necessary. But if you went to the premium account, it would ease up on restrictions. At the first level of Premium, users could upload up to six hours of audio content at the basic Premium level, so three times what you were rather two times what you were able to do previously with the Basic Free or you could splurge and you can go all the way. With SoundCloud Pro unlimited. That meant that you could have unlimited audio time to upload, so you can upload as much as

you wanted to do. There was no limitation there. But in those early days, there were no other means of generating revenue. That was it. You just had these premium subscription based things, and it really premium accounts that you could uh enter into. But that was the only way that SoundCloud was generating revenue in the early days. In two thousand twelve, the website underwent a major redesign and one of the features that the company introduced was called repost,

and boy did this feature cause some huge problems. A repost is pretty much what sounds like. It's like a retweet or tumblers reblog feature, and the intent was good. It was meant to help users share music discovery viral

e through the platforms. So you know, you discover a track you really like and you repost it, and then the people who follow you see that track, maybe they like it, they repost it, it goes to the people who follow them, et cetera, and that way music discovery could filter through the entire system, but people began to abuse use the system almost immediately. Some artists would repost their own tracks frequently because it would push it to the top of all of their followers feeds. So let's

say you're following a band. Uh, let's say it's ilor Again the Monsters. That's a reference to a live stream I did earlier today about Tetris so I Lori Agan The Monsters has their new surf album out and they've got this one track that they're really promoting. Um, let's call it Soviets in the Sand. Soviets in the Sand as their new track, and they want to get a lot of reaction to this track. So they post the

track and their followers see it. But you know, if you're following lots of bands, it's just like Facebook, those notifications can push that initial announcement further and further down the page, making it less likely that you will actually see it. So the next day Elrigan the Machines, they repost Soviets in the Sand and so now it pops up at the top of everyone's feet again, and they do it again and again and again, and that way it keeps on popping at the top of the feed.

This is a form of abuse, especially if you are not following a whole lot of bands. It just means that you keep seeing the same track getting posted by Ilrigan the machines over and over again. Is not a good user experience. So what was intended to be a way to help music discovery flourish on the service turned out to be a massive pain in the butt. On top of that, you had some artists that were ending

up making deals with other artists. Uh, they were essentially creating an arrangement of I'll repost you if you re post me, and that way they were artificially boosting these numbers. Uh. There were people who are offering to repost tracks for money,

so essentially paid for impressions of different audio tracks. There were people who are paying for listens to tracks because if you're a musician and you've got a track out on SoundCloud, you might want a music label to take a look at your your tracks, and if you have huge numbers, that's going to look pretty attractive to that

music label. It might mean that you get signed. So there were artists out there that were paying a fee so that they would get an artificial boost to their their listen numbers to help out with that, and it all boils down to gaming the system in one way or another. The problem would persist for years before SoundCloud managed to address it, and in the meantime, many artists

and users began to look at alternative services. They did finally come up with a solution to the repost problem in two thousand fifteen, so three years after they had launched it. That's when they established limits to the number of reposts you could actually do, and they stated that breaking the rules could lead to banning or suspending accounts. Well back in two thousand fourteen, so this is after the repost feature had been launched, SoundCloud began to introduce

advertising on its website. This was a big move soundclass. SoundCloud at the time was boasting about dred seventy five million listeners. That puts SoundCloud behind YouTube make but it made it the second biggest streaming service in the world at that time. But they had no system too to pay out royalties to artists who are using the service to reach an audience, So for the early years, artists pretty much accepted this as just part of the system.

SoundCloud gave them a chance to find an audience in the first place, but there was no direct monetization that they could take advantage of in that model. But over time there was a growing expectation among artists and music labels that they should be able to receive compensation in the form of royalty payments. And that makes sense. You might make music because you love it, but if you want to make it your career, you gotta get paid, because most landlords are not going to accept a song

in place of the rent. For more on this topic, see the musical rent. Actually, don't get me started on that musical. I get really grouchy about it. So back to SoundCloud. The company itself had reached a valuation of seven hundred million dollars, but that was from the perceived value of the company, not its ability to make money.

It still wasn't making money. It was making money from advertising and from premium subscriptions, but not enough money to offset the costs of operations, so it wasn't making any sort of profit. Premium subscriptions has only gone so far, and the company was already in the midst of holding numerous rounds of venture capital investments. Meanwhile, music labels were

starting to place larger demands on SoundCloud. The labels wanted the reach of the service, but companies rarely are pleased to give away their products for free, and so SoundCloud turned to web advertising, that traditional revenue generator of the web, and ads would play after a user listen to a certain number of tracks. You listen to a couple, you would get an ad. And when the ads first launched, it appeared only on the US version of sound Cloud

and the various SoundCloud mobile apps. So some of the advertising was visual advertising, you know, the kind of ads you would discover on any sort of app or web page. Some of them were audio ads that would play in between tracks. It all just depended upon what version of SoundCloud you were listening to and where you were. Later on, they would actually roll out this advertising strategy to other

regions besides the United States. Now, alex had made it a point to make sure that artists had control over when advertising would play, so they could actually choose to have some tracks play free of advertising entirely. They could

turn off ads for whichever tracks they wanted. SoundCloud also planned out a subscription plan that would allow users to pay a monthly fee and in return, they would go back to an ad free experience when using SoundCloud, so something similar to what you can find on other music streaming services. You can listen to them for free and get ads, or you can pay a subscription fee and get unlimited listening without any ads. It's pre standard throughout

streaming services now. At that same time, big music labels were in talks with SoundCloud about taking some percentage of the company in return for supporting it. This put the service in a delicate situation. So how do you balance the need to generate revenue to stay in business while also keeping your service as close to the vision you promised your users as you can? And SoundCloud ended up getting a couple of opportunities, but we'll talk about those

in just a second. First, let's take another quick break to thank our sponsor. In two thousan fourteen, SoundCloud got the attention of a little company called Twitter. So talking about companies that have had to hold multiple rounds of venture capital fundraising, Twitter is another poster child. But anyway, Twitter was looking to expand its services, and it already tried to build a music product that would keep people

using Twitter longer per visit. It was called hashtag mu sick and if you don't remember it, that's not a big surprise because it didn't get a lot of traction when it launched. Hashtag Music was a supplemental app that was supposed to focus conversations about music and musicians on Twitter and improve the ability to discover and share music.

But Twitter ran into a problem. There were already a whole bunch of music centric services that were already on the market, And honestly, at some point you just reach a level of saturation which you're not likely to switch from one app to another or add yet another app to your growing list. So a new app has to be incredibly compelling to convince people to adopt it beyond that initial curiosity phase. See also every social networking site

that isn't Facebook or Twitter in the United States. Well, hashtag Music had started off as a different music discovery service called We Are Hunted, which Twitter acquired back in two thousand twelve. So, with the door closing on hashtag Music, but are still eager to get into that music sharing space, the company turned its sights to SoundCloud. Now, this next part of Soundclouds history is shrouded in mystery, or at least it was never made totally public, but the two

companies definitely entered into negotiations to talk about an acquisition. However, it ultimately went nowhere and Twitter decided to back out of the agreement. The general consensus is that Twitter had made an offer based more or less on the seven hundred million dollar valuation of SoundCloud, but that the company wanted something closer to a billion dollars and Twitter said thanks,

but no thanks, and went on its merry way. And it became something of a joke in interviews to ask either Alex or Eric about the Twitter deal and they would respond with an exasperated no comment. Other troubles would follow in two thousand fifteen when labels like Sony Music began to remove some artists work from sound Cloud. So apparently Sony felt that the company was getting less than what it was worth to have the artist music hosted

on SoundCloud service. Also, there were issues with users uploading music that you know, didn't belong to them, so, in other words, there were copyright infringement problems. YouTube has also experienced this sort of thing like a lot, and that also falls into issues with remixes and mashups. Who owns the copyright to that and the copyright infringement issues so quick aside, I think it's a cool point here to share uh that. I think sharing a link to an

artist's work is great. So if there's an artist you like and there's a link to a legitimate SoundCloud file or YouTube video and it leads to that music, by all means share it. It helps get the word out, and obviously if it's an official U SoundCloud or YouTube stream,

then everyone's cool with it. I do not think it's super cool to upload audio that doesn't belong to you and share it that way, because artists put a lot of work into creating stuff, and even if they don't choose to monetize it themselves, it's at least respectful to

point folks toward an official source rather than pirates stuff. Now, I often will hear the argument that sharing creates exposure, but exposure ultimately means nothing to an artist if they're not if they're actually trying to make a living off of their music, Because you cannot pay the rent with exposure.

You can't say to your landlord, hey I'm not gonna pay rent this month, but don't worry, I'm gonna talk this place up to everybody, So you're gonna get great exposure, all right, rant over Sony withdrew artists from SoundCloud in two thousand fifteen, which was the same year that Universal Music Group began working on a licensing agreement with SoundCloud in return for what Business Insider reported was a quote

significant chunk of equity end quote in the company. Now, this would allow other people to actually do those remixes and mash ups because of the licensing agreements, and it also followed in the footsteps of Warner Music. Warner Music had actually made the same sort of agreement back in November two fourteen for a five percent stake in SoundCloud. The negotiations with Universal Music Group took some time. It started in but it wasn't announced as an official partnership

until January. The agreements did have some benefits for users because with those mashups and remixes, getting the licensing meant that people could actually practice their their skills and upload work without fearing of being pulled down for copyright infringement. So people were all on the up and up here now. It did also mean that if you own the copyright to a certain song, you could get the monetization for that instead of the person who made the remix. That

was an issue. So there was still kind of a mess because has not everybody had the same deal, and sometimes you might be mixing artists from two different labels. So it wasn't like everything was smooth sailing from that point forward. Around that time, Spotify began to express an interest in acquiring SoundCloud, but it would also back off from the deal, kind of following Twitter's lead in a way.

It was because Spotify was looking at an initial public offering and getting involved in an acquisition just before an i p O would mean that it could potentially scare off investors. So Spotify ultimately said, you know what, while I would like to remove competition from this field and get access to some of SoundCloud's technology, I'm not sure it's worth the risk to investment if we actually go

for an i p O. Now. During all of this, SoundCloud still managed to really shoot itself in the foot when it comes to try and to find a profitable business model. In July, the company had to lay off of its staff. That meant one seventy three people lost their jobs, and SoundCloud closed down two of its offices, the ones in London and San Francisco, which meant that only its offices in Berlin and New York City would

remain open. At that time, SoundCloud would only say that the company had enough money to last through the fourth quarter, of which many took as a sign that the company would be out of money by the end of the year. Tech pundits then began to suggest that the vultures were circulating SoundCloud as a result. In augusteen, SoundCloud was known to have entered talks with potential investors about another round of venture capital funding. This would be Series F of funding.

It was at this time that people in the technosphere began to say that unless someone swooped in, SoundCloud was doomed. But swoop they did, and boy hawdy it was with a big change. The swoop happened in mid August. An investment bank headquartered in New York called Rain grew coup and a Singapore state owned investment fund called tim Asek provided the moolah that was that hundred sixty nine point

five million bucks i mentioned earlier in this episode. With this investment also came some changes at the top for SoundCloud. There were demands for some changes at the executive level, so Eric Walforce would transition from Chief Technology Officer to a newly created position, Chief Product Officer. Artem Fishman, who was once a vice president of engineering over at Yahoo, would assume the role of CTO. Alex Leung would step down as CEO and become the chairman of the board.

In his place will be Carry Trainer. Trainer was the CEO of Vimeo once upon a time, and Video is the video streaming service that's a competitor with YouTube. This has led some people to speculate that video content might find its way onto SoundCloud, but there's been no confirmation of that so far as of the recording of this podcast.

At this time, SoundCloud has around eighty eight million active users according to similar Web, and earlier report in twenty seventeen showed that SoundCloud had lost more than one hundred million users over the course of a year, and those users were moving on to other platforms like Pandora and Spotify. So is that a hundred sixty nine and a half million dollar investment a wise one in the wake of seeing how many users have abandoned SoundCloud over the past year.

I don't know. I'm not wealthy. I don't make those kind of calls. From my outsider perspective, I would be very hesitant to make such a huge investment. However, that being said, SoundCloud does have some valuable technology, and there are a lot of artists who have used it effectively over the years, and there are a lot of people who still use the service, so maybe it can come

back from that precipice it was teetering over. That being said, my Space tried to do the same thing a couple of times, and it's still kind of an also, Ran, I don't hear anyone talking about my Space anymore, so

I don't know if this was a wise decision. I guess we'll have to wait and see, and maybe in another year or so we'll see another attempt to run around of financing, or maybe they'll actually turn things around and make it a profitable company and it will be generating enough revenue so it can operate on its own.

But so far, that is the story of SoundCloud. It's not the end, and I'd be lying if I said I wasn't kind of hoping for a different result when they were holding this most recent round of funding, only because it would have been convenient for me to say the end on a podcast. I certainly don't wish anyone to be out of a job. I don't want SoundCloud to go away, but it would have been awfully convenient for me in my podcast. So that's it for this episode. Guys.

If you have suggestions for future episode topics, send me a message. Let me know. The email addresses tech Stuff at how stuff works dot com, or you can drop me a line on Facebook or Twitter. The handle of both of those is tech stuff hs W. Remember I stream live, so if you want to see me record an episode live on the air and ask questions, including questions that have nothing to do with whatever I'm talking about, you can do that. Go to twitch dot tv slash

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