Wednesday, April 17, 2013

Upload And Share Music -- Or Any Noise: The Beauty Of SoundCloud

Turn up the volume: Eric Wahlforss (left) and Alexander Ljung have
attracted 38 million users to SoundCloud. (Steffen Jänicke for Forbes)

Upload And Share Music -- Or Any Noise: The Beauty Of SoundCloud

by Ryan Mac
Alexander Ljung looks a little lost crossing Wilshire Boulevard. The black track jacket and red-streaked Nike Frees are standard-issue L.A., but the cigarette and frown betray the European roots of the 31-year-old CEO of SoundCloud. It’s Grammy weekend, and Ljung, 6,000 miles from home in Berlin, isn’t here to collect awards but to sell record label executives, artists and fans on his growing online platform of audio distribution–which he proclaims as the future YouTube of sound.

Whatever the case, SoundCloud is getting notice. If you’ve listened to a sound snippet on a social network like Facebook or Tumblr recently, chances are you’ve come across the ubiquitous orange waveforms of its media players, whether you tune in to Drake’s latest single or to NPR podcasts. Unlike Spotify and Pandora, content providers for a passive listening experience, “SoundCloud allows anybody in the world to share audio that they’ve created, whether it’s music, to recordings of their kids on their phone to speeches from Obama,” Ljung says. “It also allows anyone to go on the mobile application or the Web and then find these amazing sounds.”

But, like many great ideas, SoundCloud had a tough time getting traction. Creating social platforms for visual media is easier than audio, which is less tangible and a more passive sensory experience. MySpace, originally intended to connect users to musicians, only took off as a person-to-person network before going into rehab under Justin Timberlake. Odeo, the ill-fated podcasting service, never got off the ground until it pivoted to text and became Twitter. The key, say Ljung and cofounder Eric Wahlforss, 33, is turning sound into something people can interact with–hence the comment functions and track waveforms that allow users to “see” their sounds. That, coupled with the ubiquity of smartphones and mobile Internet, lets anyone record, post and directly stream content that once had to be etched onto a CD or downloaded to your iPod.
Alex Ljung and Eric Wahlforss, co-founders of SoundCloud

Today SoundCloud has 38 million registered users, maybe 5% of them paying customers. The freemium model gives you access to a registry of songs, sound bites and podcasts unmatched on the Internet. Nothing is licensed, and all users can upload unique content, provided it’s their own. Audio files are then hosted on SoundCloud’s site in highly visual media players that allow comments and interaction, and which can also be shared as widgets on content platforms from WordPress to Facebook. Want more upload space? For $4 a month you get four hours of sound; $12 a month buys unlimited capacity.

For all that, SoundCloud has not yet cracked a profit. It closed 2011 with 10 million users, losing nearly $5 million on $6 million in revenue. Last year, after tripling its user base, it had roughly $20 million in sales, FORBES estimates.

While studying at Stockholm’s Royal Institute of Technology, Ljung, a former sound engineer, and Wahlforss, an amateur electronic musician, conceived of the idea–a simple sound-sharing tool that would allow the pair to push electronic song snippets between their MacBooks. They bought the domain name for $400. “The things around at the time–cheap file-sending services and MySpace–were just a horrible mess,” says Wahlforss. With SoundCloud, “we were scratching our own itch.”

The two Swedes moved to Berlin in 2007, refining the product in dingy cafes and their shared apartment in the bohemian Prenzlauer Berg district. They had little money–Ljung recalls fashioning desks out of scrap wood found on the street–but they soon had a grassroots following in Berlin’s underground electronic music scene, where artists debuted tracks on SoundCloud.

Fans, yes. Big backers, no. SoundCloud launched in October 2008 with 20,000 users and help from seed investors Wahlforss knew from a previous job at a mapping startup. But there were no bites from venture funds for a Series A round. Even with a small crew of fewer than ten employees, Ljung wondered if the company could survive. They pressed on, deferring salaries before closing a funding round with London-based Doughty Hanson Technology Ventures for more than $3 million in April 2009.

A screenshot of SoundCloud Next
Money and word-of-mouth exposure brought growth. SoundCloud hit the 1-million-user mark in May 2010, attracting mainstream artists like the Foo Fighters, who exploited the site as a promotional tool. A year later users quintupled just before a $10 million funding round by Union Square Ventures and Index Ventures.

Today SoundCloud reaches listeners in 200 or so countries, expanding by about 70,000 users a day. At that pace the company could hit 55 million users by year’s end. Its headquarters are a little nicer these days, too, spread across three offices in Berlin’s Mitte (“central”) district, home to Silicon Allee. (It also has offices in San Francisco.) Loud orange work spaces clash with communist-era buildings and Berlin Wall remnants visible from the windows. The glass conference rooms are named for such prominent musicians as Kurt Cobain and Ella Fitzgerald.

Even lesser-known artists get exposure from the platform: Average plays per musician jumped sixfold over the last 14 months to about 12,000 a month, according to digital music tracker Next Big Sound. In an era when “free music is just part of the deal,” says Ryan Raddon–a DJ better known as Kaskade–SoundCloud is where the community has gathered to upload, promote and share music. “I hope it becomes the industry standard.”

SoundCloud hopes it doesn’t get pigeonholed into music streaming alone. That’s a crowded place where Spotify and Pandora have planted their flags and Apple AAPL +1.52% and Amazon are lurking. Instead, Wahlforss and Ljung are betting there’s much more value in creating a platform where all sound is democratized–and eventually leveraged for business.

To that end SoundCloud recently did a complete redesign, adding features to enhance the social network and keep users clicking through the site. Along with visual improvements like enhanced pictures and sleeker media players, the new version allows for reposting (a sort of retweet), “likes” and a related track function to improve music discovery. SoundCloud is also trying out promoted partnerships to bring additional sources of revenue–giving ammunition to critics who accuse it of “doing a Zuckerberg.”

With heavy hitters now behind it, the site has to make money somehow. A Series C round in January 2012, led by Kleiner Perkins, brought SoundCloud’s total funding to about $45 million. What’s the company worth? The normally chatty cofounders clam up. But, based on projected revenue streams and comparisons with companies like Pandora and Spotify, we estimate its value at $350 million to $400 million, a figure corroborated by sources close to the company.

One backer is way more optimistic. “We think it’s going to be worth as much if not more than Pandora and Spotify and all those guys,” says GGV Capital’s Hany Nada, who is also an investor in Pandora, whose recent market cap was $2.2 billion. “There’s stuff on SoundCloud I can’t find anywhere else.” — Forbes
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