News: SoundCloud Introducing Ads

Well, we saw this one coming. This morning, CEO and founder Alex Ljung announced the launch of On SoundCloud, a new advertisement platform that will slowly bring audio and graphical ads to SoundCloud tracks and profiles. Yeah, I know–but we’ll get through this together. Although SoundCloud is keeping the program in the US for now, Ljung talked of plans to eventually introduce a subscription premium for users to get rid of the ads. But, thank god, they will only play on SoundCloud’s native website and apps, which means that bloggers like Black Sheep can keep giving you free music uninterrupted. I know that by now you’ve already let loose a few expletives (trust me, right there with you), but before you destroy anything around you in anger, hear me out. I’ll include a few personal SoundCloud favorites along the way.

The reality is, On SoundCloud aims to not only ease relations with the Big Three (UMG, WMG, and Sony Music) and get independent artists some royalties, but to ultimately dig the company out of the financial hole it’s found itself in. Since SoundCloud’s birth in 2008, despite the exponential growth of its user base, profit margins have been miniscule. In 2011, the ‘YouTube of music’ lost $5 million of a total $6 million in revenue. One year later, and the company found itself in the red, clocking in with net losses of $20m, and only $13m in revenue.

But this trend wasn’t unexpected. It’s built into the way that the platform operates. You see, SoundCloud was built from the ground up by musicians and producers themselves. It’s a community-driven environment for sharing and discovery, and it was created to make music accessible for both artists and listeners alike.

For artists, it doesn’t matter if you’re a multi-platinum bubblegum pop superstar or a 15 year old kid making minimal glitch techno in your bedroom–you’re distributing your music and operating on the same platform, no recording contracts or expensive business deals required. What sets you apart is how much of the community you can win over and interact with (the beauty of the ‘share’ button).

And for listeners, it’s (currently) a free and effective way to stay up to date and follow the artists, blogs, and labels you care about, often by directly getting access to content before its official release, or finding recordings that simply don’t exist anywhere else. And that’s exactly why 175 million people from every country in the world tune in to the service to explore every day (4x that of Spotify).

But when your only revenue comes from the small fraction of producers that are actually paying to upload and publicize their own creations, you run into a problem. While a lot of labels use SoundCloud as a tool ‘get the word out’, posting short clips of upcoming songs or albums, there is a large fraction of unlicensed content that leads to royalty losses, and artists have no direct way to make money from SoundCloud plays. But it’s not so easy to police music when so many of those recordings are nested in hour-long DJ mixes or mashups.

Right now, SoundCloud is negotiating with these different labels (particularly the Big Three), reportedly planning to give each a 3% to 5% stake in the company, in addition to a fraction of the platform’s revenue. This is the same exact thing that happened when UMG, WMG, and Sony got , 4.8%, 3.8%, and 5.8% stakes in Spotify, respectively.

Look, I understand the incentive behind this new monetization model when you’re losing money and you hold a very precarious legal position in the industry. To a large degree, SoundCloud is doing this to ensure that their service stays free. But does it have to be audio advertisements?  You can plaster my screen with ads for all I care. Just, for goodness’ sake, don’t get in the way of the music.

For now, you can expect to hear or see an occasional ad from launch partners Red Bull, Jaguar, and Comedy Central in the coming months, and we’ll keep you updated as the process develops. It sucks, I agree. But just try to remember that this will ensure that SoundCloud sticks around, and that a lot of independent artists will be getting paid. What it’s going to come down to is whether or not you’re willing to pay another monthly music service fee. And for what SoundCloud has to offer both listeners and artists alike, I’m willing to make that investment.

Check out the details for On SoundCloud here.