The popular streaming giant isn’t as almighty and all-powerful as it seems.
Even after the celebrity nude photo hacking debacle and subsequent “it’s really not that bad” backlash, there’s still a proverbial storm brewing in one of the Internet’s favorite online cloud destinations. Soundcloud is in a battle for its livelihood to the tune of almost a billion dollars.
And the industry barons with the ability to de-gas the platform are the rights holders with the firmest grip on the music industry already.
In early October, Soundcloud revealed via its annual filings that revenue for the streaming service topped out at $14.1 million, up 40 percent from the year before. Its operating loss, however, was $29.2 million. That’s like building a solid cheeseburger on game day for your friends with a $10 grocery bill and them only bringing $5 worth of flat beer. It’s a financial pitfall.
After raising nearly $123 million from investors and being valued at more than $700 million in an investment round earlier this year, the wildly popular online streaming service has been scrambling to find ways to monetize its services. Going door to door with a tin bucket asking for donations seems implausible, so it’s now looking toward advertising options and offering up subscription services, much like Spotify.
Unfortunately for Soundcloud, to make money that way remains highly illegal. Here’s the hurdle: If it starts making cash via selling ads or other proposed avenues, it must reach a royalty deal with the Big Three — Universal Music Group, Sony Music Entertainment and Warner Music Group — labels who own copyrights to most of the content Soundcloud delivers to its users.
It’s been able to skirt laws and paying the labels so far because of a series of “safe harbor” provisions, which appear in the 1998 Digital Millennium Copyright Act. The provisions essentially protect third parties from what users upload to their servers. To qualify and be protected by them, however, a service provider must have no knowledge of or benefit financially from pilfering content. If the provider does find copyrighted material is present on its server, it must immediately come down.
Streaming providers like YouTube often find themselves within the confines of the safe-harbor provisions and notify the user of the infringing content before taking it down. There is no stipulation, though, that states a company has to notify anyone, and content can be taken away on a whim if it’s even remotely considered to be a violation.
The service and its staff have been expectably mum about the ongoing drama, with seemingly good reason. Asked to comment about its recent actions, a representative responded only with its copyright policy in tow.
It states, “As a responsible hosting platform, we work hard to ensure that everyone’s rights are respected. In the case of rights holders, that means having processes in place to ensure that any content posted without authorization is removed quickly and efficiently, and in the case of users, that means having separate processes in place to ensure that any content removed in error can be reinstated equally quickly.”
How the company is finding the issues with uploads isn’t as low-tech as one would consider, as if there are really 57 interns sitting around listening to remixes all day. Soundcloud actually scans for violations using an automated system that uses complex algorithms to quickly detect if something is illegal. It then rips it down, often without alerting users as to why a track is considered illegal but always directing them toward a standard copy of its copyright policy.
The seemingly random takedowns are where Soundcloud has lost a lot of respect from its online community as it ramps up its policing of violations to appease the labels for further negotiations. The types of artists hit most by the algorithms are those uploading remixes of tracks or DJ sets containing samples of previous work, which often fall into the hip-hop or EDM genres.
Aaron “DJ A-L” Ladley is one of hundreds of local DJs who use Soundcloud as a platform to host music. He readily admits a lot of his uploads contain “what others would see as stealing music” but disagrees with the sentiment. He’s also well aware of the company’s algorithms, and he, like many other musicians online who share similar methods on forums, has perfected techniques to circumvent being caught by Soundcloud’s computers.
“It’s about coming up with five to 10 different intros to figure out how to trick the automatic algorithms,” he says. Or, as most forum members suggest, adding 15 to 20 seconds of white noise to the beginning of a track. “But how do you keep the listener’s attention if you have to chop up the intro like that? Putting all that energy into it, sure, it’s changing music.”
DJ A-L hasn’t felt the brunt of the new restrictive confines just yet, as he’s only had a few older remixes taken down in the past. He says the way he approaches it, however, is a give-and-get ideal that he hopes will work to his benefit in the future.
“Everything I put up on Soundcloud is an act of karma,” he says. “Everything that I have is a free download. Soundcloud works as a network, and my philosophy is to give, give, give to people as much as I can. As a result, hopefully, people recognize that and maybe drop $5 on the next album because they recognized the generosity.”
Soundcloud isn’t being so generous in its offerings to the three major labels, it appears. In July of this year, speculation was optimistic about the entities finally coming to an agreement when Soundcloud reportedly offered a roughly 3- to 5-percent stake along with a percentage of future revenue. As of press time, negotiations have stalled, and major outlets the likes of Billboard and Financial Times report the labels are understandably holding out for much more loot.*
The story rings reminiscent of the recently pulverized Grooveshark and its legal trouble. In September, a judge ruled in favor of the Big Three over a 2011 lawsuit, which claims the struggling company had infringed on copyrights early in its existence. The suit won with claims Grooveshark executives and its staff knowingly uploaded 5,977 illegal songs to build its database. Because it was done with willful intent, safe harbor provisions did not apply, and Grooveshark will pay for its gaffe, hugely.
So far, no information on monetary restitution has been released, but the suit claims damages to be in the billions of dollars. Legislative nail, meet bankruptcy coffin.
Both YouTube and Amazon are new to the music-streaming market, but battling those heavy competitors, and their monetary backings is likely something Soundcloud wouldn’t be able to manage. Still-growing Spotify and Beats haven’t gone anywhere and still hold a viable mouthful of the streaming steak.
How a business model such as Soundcloud’s can manage to run at such an impactful loss with investors willingly shoving money into its pockets is still unsettling. Without the rights to most of its content, it would be best for Soundcloud to pony up the ducats so it can start pulling in revenue from what’s left of its user base. Other companies are quickly jumping to the streaming format, too, which will definitely thrash Soundcloud’s viability to be the self-designated “world’s leading social sound platform.”
Intellectual law is forever altering how musicians approach creativity, and is one facet of the industry that will continue to tighten its hold on unsure frontiers.
What was once a respected destination for independent artists and music fans alike is now reconciling an influential turning point, and both prongs on the forked road seem destined for failure. Go one way, lose the respect of users, turn the other, and the company could be gone for good.
*Editor's Note: Since this article went to print there has been a deal inked with one of the 3 major labels. On Nov 5, 2014 Soundcloud and Warner Music Group announced via a press release the two companies reached an agreement to move forward with plans to monetize the service. "The landmark partnership will create new commercial and promotional possibilities for WMG’s roster of established and emerging recording artists as well as songwriters signed to WMG’s music publishing arm, Warner/Chappell Music," reads the release. "Further, the deal includes innovative licensing terms that will provide WMG and its artists greater ability to manage the availability of content, while providing a path towards delivering additional revenue from user-generated mixes and mash-ups of WMG music."
The deal is a launching point to move forward with the paid subscription service "On Soundcloud" said to be enacted in the first half of 2015.
To contact the writer of this article, Brian Frederick, email: Brian@TheRooster.com