7.13.2017

SoundCloud sinks as leaks say layoffs buy little time

A tense scene unfolded yesterday as user-generated, music-streaming service SoundCloud held an all-hands meeting to explain to employees why it suddenly had to lay off 40 percent of its staff last week.

Exiting team members wanted to know why they weren’t warned, while those who survived the cuts wanted assurance that the cost reductions would keep the company afloat for the long-run.

But as security ominously filed into SoundCloud’s meeting rooms at its offices around the world during the all-hands video conference broadcast from its Berlin headquarters, the startup’s staff discovered they wouldn’t be getting the answers they wanted. Instead, sources at SoundCloud tell TechCrunch that founders Alex Ljung and Eric Wahlforss confessed the layoffs only saved the company enough money to have runway “until Q4” — which begins in just 50 days.

That seems to conflict with the statement Ljung released alongside the layoffs, which noted that, “With more focus and a need to think about the long term, comes tough decisions.” The company never mentioned how short its cash would still last. 

We reached out to Ljung and SoundCloud for this story and PR responded to the request reiterating Ljung blog post. After being presented with the leaked information from the all-hands, SoundCloud PR admitted that, “We are fully funded into Q4,” though it says it’s in talks with potential investors.

But further funding would require faith in SoundCloud that its own staff lacks. When asked about morale of the remaining team, one employee who asked to remain anonymous told TechCrunch “it’s pretty shitty. Pretty somber. I know people who didn’t get the axe are actually quitting. The people saved from this are jumping ship. The morale is really low.” 

Another employee from a different office described the all-hands as “a shitshow” and said “I don’t believe that people will stay. The good people at SoundCloud will leave. Eric [Wahlforss] said something about the SoundCloud ‘family,’ and there were laughs. You just fired 173 people of the family, how the fuck are you going to talk about family?”

SoundCloud co-founder and CTO Eric Wahlforss

Hired just to be laid off

SoundCloud holds one of the most differentiated products in streaming music thanks to its repository of user-created songs uploaded by amateur and semi-professional musicians. That content, including unofficial remixes and hour-plus DJ sets, is missing from the top streaming competitors like Spotify and Apple. At the same time, this content comes with copyright problems and SoundCloud has had trouble monetizing it.

Despite the startup’s financial troubles, Ljung told those in attendance at the all-hands meeting he was adamant about SoundCloud staying independent and there’s no intention to sell the company. That hesitation may have cost a lot of people’s jobs.

Votja Stavik uprooted his life to join SoundCloud at its Berlin office, but was laid off just 10 days before his start date

One of the facts that was most frustrating to SoundCloud staff was that the company continued hiring people into positions that would soon be eliminated, with some workers joining SoundCloud as little as two weeks before the layoffs. Several new hires had quit other jobs, sold their homes, abandoned rights to permanent residency and uprooted their lives in other countries to join SoundCloud’s Berlin office.

A new hire named Votja Stavik was slated to start July 17th, only to have his job cancelled on July 7th just before he moved to Berlin. “So it means we are gonna act like my application to SoundCloud never happened?” Stavik asked Wahlforss. “Yes,” Stavik said the co-founder replied. Stavik is now exploring legal action against SoundCloud because he says his signed job offer included four weeks notice of dismissal, yet “SoundCloud claims they are not going to pay me my salary during those 4 weeks.”

During the all-hands, both sources say it was revealed that SoundCloud had known for months that it had to lay off a large number of people, yet didn’t properly inform the team that it should be cutting costs. “The investors said [the wave of layoffs] was part of the conditions” one source said were in reference to the $70 million debt funding SoundCloud received in March from Ares Capital, Kreos Capital and Davidson Technology after it failed to raise $100 million in venture funding.

SoundCloud’s lavish Berlin headquarters where employees were laid off without warnings about cost-cutting. Images via Factory Berlin (left), and Fraeulein Kimchi (right)

Some of SoundCloud’s offices had catered lunches twice a week and had lavishly stocked kitchens and bathrooms, according to a source. When team members joined, they were given company swag, headphones and brand new Apple laptops. Employees were confused how the company was “blowing through money, but now is saying they don’t have any money. People would have made sacrifices, to be honest. It’s a fun company to work at, but there was no indication.”

A core question from staff during the all-hands was why there wasn’t transparency into the finances or a strict hiring freeze. The message from management was that a hiring freeze would show weakness and lead to people asking questions. That wasn’t satisfying when the company ended up shedding almost half its staff.

Focusing on independent creators, not beating Spotify

It’s been almost three years since SoundCloud updated its user stats, though it still touts that 175 million people listen every month. Yet some analysts believe it to have sunk to as low as 70 million. The company hasn’t given employees any updates on the stats, either, with one telling TechCrunch “I think no one within SoundCloud believes the user number. I think they’ve been going down for a while now.”

Growth of SoundCloud’s subscription services also hasn’t been worth announcing, but the company plans to change its focus.

SoundCloud listener subscription pricing

SoundCloud has a free tier with ad-supported access to 120 million songs, largely from lower-quality independent artists. Its $4.99 per month SoundCloud Go subscription removes the ads and offers offline listening. And its $9.99 per month SoundCloud Go+ tier adds access to 30 million premium songs from big-name artists like what you’d find on Spotify or Apple Music.

In the all-hands, both sources say Ljung discussed SoundCloud getting back to its roots by prioritizing its open creator platform and the mid-tier Go subscription plan, rather than focusing on Go+ and the mainstream music of major record labels.

One source said Ljung explained that SoundCloud is not a giant streaming company and didn’t want to directly compete with the $9.99 plans like Spotify. Our other source said “the plan is to concentrate on the content where they don’t have to pay our part of the money to the labels.” 

Like other streaming services, SoundCloud has to pay a huge percentage of revenue it earns off Go+ premium songs to the record labels. Spotify pays out around 70 percent, for example. Its margin is much better on the user-generated music uploaded to its service. Only a small percentage of creators is eligible for ad and subscription revenue share payouts from SoundCloud, and it pays them a much smaller cut than it does to labels for premium music.

Even at half the price of Go+, the higher-margin Go tier subscriptions could earn SoundCloud sizable revenue.

This plan has a chicken-and-egg problem, though. SoundCloud needs enough subscribers and ad listeners so payouts are high enough to lure the best artists who aren’t on major labels. But it needs the best artists’ content in order to seduce those listeners. Meanwhile, its free tier works fine for most occasional listeners, so beyond synced downloads and skipping a few ads, there’s not much reason to upgrade to $4.99 per month.

And the recent layoffs make everything tougher. Our sources say there were deep cuts to the revenue/monetization and creator relations teams. Beyond closing the San Francisco and London offices, there were significant layoffs in the New York office. The planned rollout of SoundCloud Go subscriptions in South America may be delayed, though some staffers are unsure it will happen at all.

Royalty distribution platforms like Dubset threaten to make some of SoundCloud’s most unique content like remixes and DJ mixes available on Spotify and Apple Music. Those services have continued to rapidly grow thanks to sleek and frequent redesigns while SoundCloud’s clunky interface falters. “Even at SoundCloud, people secretly listen to Spotify because it’s easier,” one employee said.

Can the internet’s record collection be saved?

After 10 years and raising well over $200 million, SoundCloud has failed to build a sustainable business off “the YouTube of music.” Trimming the fat hasn’t necessarily made it fit. If SoundCloud wants to survive, it may need to accept that it should sell to some more established company that could do better managing and monetizing it. YouTube grew into a content juggernaut, but it might never have made it that far without Google’s help. It would need to find as supportive a steward.

Otherwise, SoundCloud must get much more aggressive about identifying its differentiated value — independent musicians — and drop any business like Go+ where it can’t keep up. It would need to deepen its relationship with creators and offer more tools to get them paid, like the booming monthly subscription patronage platform Patreon. Unfortunately, SoundCloud PR tells me “There are currently no plans to make changes to our existing subscription offerings.”

The fate of the world’s biggest collection of basement remixes, bedroom recordings, DJ compilations and all other manner of home-made sound is at stake. The death of SoundCloud would be a sad blow to the independent musicians who are scraping by as it is. And the sale to an exploitative corporation that sees music as at best a side hustle and at worst a loss leader could ruin this canvas for sonic creation.

That’s why it’s so worrisome that one employee of SoundCloud concluded “There’s no strategy.” 

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