SoundClowd

SoundCloud has struck a deal with Warner Music Group which will see the German streaming service pay royalties to the label whenever one of its songs is played on the service.

Warner is the first major music label to make such a pact with the company which is preparing to launch a subscription streaming service in 2015.

Over the last few years the potential of SoundCloud as a player in the era of the stream has been hyped up by many, with talks earlier this year that it would be acquired by Twitter. But as of yet the company has failed to produce a business model with any promise of significant financial gain.

Currently the company, whose goal it is to become the YouTube of audio, makes the majority of its money from customers who sign up to the “Pro” package, allowing them to upload significant amounts to the platform. It also runs an ad supported free listening service.

There are two significant things to take away from today’s deal with Warner, which is that the music label will not only receive royalties for streams of their songs on the service, but also for streams of mashups and mixes that use spliced up parts of songs from their library.

The other is that the label will reportedly take a stake in SoundCloud of around 3% to 5%, according to the Wall Street Journal.

Warner Music Chief Operating Officer Rob Wiesenthal struggled to estimate how much revenue the label would generate from the deal, but pointed out that SoundCloud has a “passionate following” when compared to other digital music services.

Warner taking a stake in the company mirrors what most major labels have done with services such as Rdio and more significantly Spotify, in the spirit of if you can beat them, buy them.

Which raises concerns as to what lies ahead for SoundCloud’s core users.

At the current time, there is a lot of copyrighted material being used on the service by an array of users. Whether it’s a portion of a song as part of a DJ mix, or a spliced up motif pinched for an electronic mashup, a huge percentage of content contains copyrighted material which is essentially existing illegally on the site. But at the current time, major labels don’t ask for much of it to be taken down unless it’s been leaked before official release, or the artist has personally requested it be removed.

According to WSJ, they see it as advertising that leads to eventual purchase of the song or album.

The question is, how long will this leniency last?

The core SoundCloud user is essentially looking for exposure, and in most cases, is paying a $99/yr premium for it. But if the company goes the way of YouTube, which has seriously cracked down on copyrighted content, making videos unavailable for featuring unlicensed material, what happens to the loyal SoundClouder who isn’t making money out of the service anyway?

The problem with streaming has always been that it’s the artists that suffer. The music corporations will continue to take profits from wherever their content appears, but artists are lucky to make cents out of their streams.

Around 175 million listeners stream via SoundCloud each month. On Pandora it’s about 80 million/mth, and on Spotify its 40 million, with around 10 million paying for a subscription.

Most music labels agree that a paid subscription model is a label’s preference, and labels other than Warner have been wary of SoundCloud.

Lucian Grainge, chairman of Universal Music Group says there is an “opportunity for SoundCloud to create incredible revenue”, but he would first need to hear “what the business plan is going to be” going forward. A sentiment with which many would agree.

As yet, no other labels have moved any closer to an agreement with SoundCloud, as currently there’s no vision as to how it can adequately compensate both music companies and their artists.

In reality, it remains to be seen how any streaming service can.