Spotify to buy Soundcloud ?

At the end of September, news spread of a possible takeover of SoundCloud by Spotify. Although this might have come as a surprise, SoundCloud has been looking to sell since July at least at a value of $1 billion! However, in June it secured a round of financing valuing it at 30% less. Flipping the numbers, one might get a sense that the company is overreaching. Over the course of two months the firm is supposed to have increased its value by 42% going by the valuations and the sell price. Like many other tech start-ups, it has been posting a widening operating loss as well, going by the most recent figures available.

Spotify has already declined to buy the Berlin based company twice over the last year and a half. So where does the change come from? It seems likely that given the rapidly growing number of Apple Music Users (15 million paid subscribers compared to Spotify’s 30 million), that this is presenting Spotify with a problem it needs to act upon fast. What makes SoundCloud so appealing is that it has recently made deals with major record labels, reducing some of the potential legal conflicts with its business model which relies on, at times, the ability to share music which could be seen as copyright infringement.

Nowadays the music industry, or more precisely the music-streaming industry, relies on algorithms to present users with music that will entice them in the streaming service. The content that is on the sites is largely unchangeable regardless whether its Apple Music or Spotify. But the service needs a unique selling point, otherwise the cost of switching for customer is close to zero. The more a user is drawn into an ecosystem, the less likely he is to change onto a competitors service. What SoundCloud offers is the different music you can’t get from record labels and therefore makes it unique. With such a deal Spotify would be able to establish an unique selling point against streaming rivals by create the best of both worlds; a sleek interface and freedom for creative minds not limited by record labels. This would make Spotify’s streaming service appealing to the 100 million subscribers of SoundCloud, and potentially blow Apple Music out of the water!

The problem could be that even though revenue is consistently growing for Spotify, so is its operating loss. It must be stated however, that from what can be gleamed from the most recent figures, the operating loss growth is slowing substantially. SoundCloud would still add almost 25% to that loss, at only a slight increase in revenue. Not to mention the costs that the integration of the two companies will cost a substantial amount as well if Spotify wishes to draw the most out of the service. Spotify needs to achieve seamless integration of the two services fast; if that is achieved, then the financial figures and other problems will disappear by themselves.

By Tim Knickmann

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