There are multiple well-founded rumors abounding that the three major record labels will soon purchase anywhere from 9 to 14 percent of the Soundcloud streaming music service. On the surface this might seem like a natural progression for both Soundcloud and the labels (who have done this sort of thing before), but there’s more here than meets the eye.
First of all, it’s nothing new for the major labels to invest in a distribution network that they have at their mercy. The majors received a piece of Spotify in the deal that allowed it to open shop in the US, and there are reports that they’re currently pushing for its sale at a price as high as $10 billion (good luck getting that price). Then you have the case of Universal Music, which had a 14 percent stake in Beats Music that resulted in a cool $400 million or so payout when it was acquired by Apple AAPL -0.36%.
These kinds of investments are potentially more profitable than the labels core business, at least in the short term. Streaming services need licenses from the labels to operate; the labels oblige in exchange for some cash and a piece of the action, then cash out when the service is sold to a bigger fish down the line. The best part (at least for the labels) is that most of that money heads to the label’s bottom line. The artists who’s music makes this opportunity possible in the first place do see some reward, but it’s pennies on the dollar compared to what their labels pocket.
Twitter-SoundCloud-dealSo here we have Soundcloud, which has gone from a place where indie musicians can store their song mixes for easy fan playback, to a much larger entity currently filled with cover songs and copyrighted loops and samples. The problem is that the company has no license agreements with the majors in place for this content, and have drawn their wrath as a result.
But there’s more. A purchase of Soundcloud was recently seriously considered by Twitter TWTR +2.2% for around $2 billion, who then got cold feet, mostly because those licenses weren’t in place. Of course, this could open up the company to potential ongoing litigation that won’t stop until those license deals, which would begin to get more and more expensive as time went by, were finally made.
Now here come the major labels to save the day. They’ll be happy to give Soundcloud the licenses in return for a piece of the action, and just sit back and wait for Twitter to come around again and everyone goes home happy.
And it’s a good bet that Twitter will come back. Whether Soundcloud would be a good match with Twitter is debatable, but the company has to take some action to gain momentum. Its user base has leveled off while its influence and ability to drive traffic has actually decreased while Facebook’s has soared. The company’s stock price has creeped up recently, but at around $37 it’s still almost half of what it was at its peak of $69 in January. Stagnation is death in the social media business, but an acquisition of Soundcloud could give its stock at least a short term boost.
That said, music has always been an important component of Twitter in that many of the service’s users with the largest followings are musical artists. According to Twittercounter.com, six of the top ten and 19 of the top 30 largest followings are held by music celebs. The problem is that the company hasn’t been able to capitalize on this attribute, and its attempt at an in-house music service (#music) was a disaster. Soundcloud presents a different dynamic however, as it’s user interface and social aspects feel more in line with Twitter right out of the box.
If the major labels buy in and Twitter follows suit, the online music streaming dynamic can change once again. The great thing is that the music business doesn’t stand still for long anymore. The landscape of today may be different tomorrow. Then again, all of the above could fall through, and we’ll have to wait a few more weeks for the next new thing to come to pass.
