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SoundCloud’s revenue turntable

Chess Move

The what: A TLDR explanation of the strategy

Few tools get more mileage here at Strategy Breakdowns than our music streaming apps. 

There’s a good chance you’re listening to one of the “Big 4” (Spotify, Apple, Amazon and YouTube) as you read this newsletter. 

(If you’re a Spotify-er, here’s what we’re listening to whilst writing today’s edition)

Even the most passive fans are likely familiar with one of the most en-vogue discussions in the music industry: royalty payouts.

Unfortunately, what seems like a rudimentary business challenge when taken at face value, the universe of streaming royalties is engulfed in several conflicting factors: 

In April 2021, SoundCloud flipped the script on music streaming royalties. 

They launched Fan-Powered Royalties (FPR), a system that pays artists based on actual listening time from their fans. It's a departure from the pro-rata model used by Spotify and Apple Music, where all streams go into one big pot and get divided up based on total platform listens, which is prone to gamification. 

How FPR works: 

• You’re a SoundCloud subscriber and spent all month obsessing over an underground techno artist

• You didn’t listen to ANYONE but said techno artist

• Your entire subscription fee (minus SoundCloud's cut) goes to that artist – not Taylor Swift or The Weeknd

• Your money goes straight to your techno wizards

This isn't just a tweak to the business model. It's a fundamental realignment of incentives between the platform, artists, and fans. 

And it might just be the remix the industry needs. 

Breakdown

The how: The strategic playbook boiled down to 3x key takeaways

1.  Close music’s value gap

The current royalty model in music streaming has created a significant 'value gap' – a dissonance between what users pay and what artists receive.

Right now, about 1% of the artists receive 90% of royalties. 

Yet, they only generate 70% of total streams.

While this seems unfair, music executives think those artists are supremely important in driving overall platform usership. 

This means, if you spend most of your time listening to a little-known indie band, only a small fraction of your subscription fee actually goes to that band. Instead, your money mostly flows to the top-streamed artists, who you may not even listen to. This results in smaller payouts for lesser known acts, even if they have a loyal following.

FPR reduces the complexity of this ecosystem immensely, by tethering fan dollars to the artists they love. 

By tackling this value gap head-on, SoundCloud is creating a more sustainable environment for indie acts. It's not just good Karma – it's good business: 

• Happy artists = more output

• More output = more fans

• More fans = more revenue 

2. Promote network effects

FPR is more than just a clever new way to slice the pie. It’s about expanding it. 

1 in 4 artists are using both SoundCloud’s FPR and Spotify for Artists. This means the game is not zero-sum. On SoundCloud: 

• Artists get a direct financial incentive to promote their SoundCloud presence

• Fans feel a stronger connection, knowing their listens directly support their favourite artists

• This drives more engagement and potentially more subscriptions

• More revenue flows to artists and SoundCloud

SoundCloud’s FPR model also reinforces itself: 

• Collaborations “multiply” the effects of the different fanbases (traditional spits don’t always work like this)

• FPR enables artists to go “deeper,” instead of chasing virality

• SoundCloud’s social features allow artists to directly understand how creative decisions affect payouts 

• Lesser-known genres become more attractive to creators 

The early numbers corroborate this strategic remaster: in the first full year of FPR, fan engagement with independent artists grew by 30%.

3. Capitalise on transparency

Despite the industry’s best efforts – many artists still feel that streaming payouts are confusing and opaque. 

On SoundCloud, artists get detailed insights into their fans' listening habits, including number of listeners, listening time, and listener location.

It also gives highly-coveted “superfans’ more clarity around how their listening habits directly support their musical benefactors.

This transparency isn't just feel-good PR. It's a competitive differentiator. 

By making its model easy to understand and demonstrably fair, SoundCloud is positioning itself to become a superstar to both artists and fans… 

.. and investors – as they crept into profitability in 2023 for the first time in their 13-year history, while larger peers continue to chase this elusive benchmark.  

Rabbit Hole

The where: 3x high-signal resources to learn more

SoundCloud’s Rockonomics ↗

[30 minute read]

Still skeptical that this new model makes financial sense?

Will Page, the former Chief Economist of Spotify unpack’s his take on why FPR is so important in his acclaimed Rockonomics series, covering:

• Why SoundCloud was uniquely equipped to make this shift

• Success stories from Lil Uzi Vert and Kelow LaTesha

• How this model protects against fraud

This piece was widely cited in the music business community. Worth a read.

Music Streaming’s Dark Horse ↗

[15 minute read]

Jimmy Stone from Leveling Up provides a detailed analysis of SoundCloud’s:

• History and evolution since founding

• Financial fundamentals 

• Long-term outlook and exit strategy

SoundCloud’s Bold AI Integration ↗

[3 minute read]

SoundCloud’s acquisition of Musiio in 2022 marked a fascinating shift in product strategy.

The AI music curation and tagging engine has since powered several unique capabilities and integrations:

• Revamped artist analytics

• Predicting listening trends

• Identification of future hits

• Personalised fan experiences

Watch this space. Cool stuff happening.

That’s all for today’s breakdown - hope you enjoyed!

Written by a couple of folks who spend WAY too much time hunting for new music: Alex McLelland and Tom Alder.

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