How SoundCloud makes it rain ad dollars

“SoundCloud is entering into a new phase where we’re monetizing and supporting artists, and much of the revenue goes back to the artist,” said Dan Gerber, head of ad sales at SoundCloud. “Advertising is definitely going to be a major revenue stream for the company as we continue to grow and scale.”

Founded in 2007, the Berlin-based audio-streaming service has attracted a passionate, young community of music creators and fans, with roots in the electronica and DJ cultures. The platform is home to a diverse range of music, much of which isn’t available on other services. Top music producers such as Calvin Harris and Flying Lotus are active on SoundCloud. It also has a smaller creator segment focused on podcasting and other audio fare. Roughly 65 percent of the total audience is under 35 years old, according to Gerber.

SoundCloud currently has four ad products: standard display ads, audio pre-rolls, native ads for brand channels and custom sponsorships. In the last six months, the company paired emerging artists with Jaguar and Microsoft to create exclusive tracks sponsored by those brands, and ran an “Open Call” music competition with Green Label Sound (part of Mountain Dew). On those artist-driven campaigns, as with more widespread audio pre-rolls, SoundCloud takes an undisclosed portion of the ad revenue and hands the rest to the artists. For pre-roll, artists get “the majority” of the revenue, according to The Guardian.

SoundCloud has grown rapidly over the past year, attracting 39.8 million unique visitors across its site and mobile app in January — a 134 percent increase from January 2014 — according to comScore. That growth suggests musicians and casual listeners alike have a strong affinity for the platform and its community, an observation music industry experts and media buyers echoed in conversations with Digiday.

On SoundCloud, “you have a direct connection, a dialogue with the artist in a way you don’t on Spotify,” said Louisa Ferguson, a strategist at digital agency Huge and writer at music blog Indie Shuffle. “It has really become an incubator for new talent as well as a channel for old talent to throw out one-offs.”

Until last August, SoundCloud relied primarily on creator subscriptions for revenue, charging them a monthly or annual rate to lift or raise upload limits and to access other creator tools. It also collects referral fees when it drives listeners to buy music on on other platforms, such as iTunes or Amazon. But those revenue sources alone didn’t enable SoundCloud to turn a profit. The company’s 2013 financial results showed revenues of €11.3 million ($12.7 million) and net losses of €23.1 million ($25.9 million).

“2015 has to be their breakout year for advertising, because now they’re finally reaching some scale, and I’m sure all their initial investors are ready [to see more revenue],” said John Tuchtenhagen, svp of media at Digitas. “They’ve got a great story and a great audience. I know Digitas has many clients interested in it because it’s young and millennial.”

SoundCloud’s current ad revenue is minuscule compared to music streamers Pandora and Spotify, the latter of which has paid out more than $2 billion to its content partners in royalties. But while SoundCloud’s ad business is still nascent, millennial-focused brands are demonstrating major interest in the platform. SoundCloud is pitching ad packages in the hundreds of thousands of dollars, according to a source, and some brands are signing up to participate at that level. In total, SoundCloud has worked with 11 brand advertisers so far, including HBO, Grand Marnier, Sonos, Squarespace, Red Bull Sound Select and Unilever’s Axe, according to the company.

“We’ve been working with an amazing array of brands in just a few short months,” said Gerber.

SoundCloud has yet to reveal when it will open up its “On SoundCloud” program to a broader community than the initial, select group of U.S. creators and labels. But when it does, entertainment attorney Steve Gordon expects it to alienate a portion the community and attract a slew of rights headaches.

“The DJs in France or Russia who put up music don’t want pizza commercials before their remixes,” said Gordon, who authored “The Future of the Music Business.” “And SoundCloud is violating copyright law right and left by allowing remixes [of content from major labels] by unsigned artists. So the financing they need will go to the major labels, which will screw over the artists. … The labels will take it over and ruin it, just like they always do.”

But SoundCloud envisions a brighter future, one where the company works cooperatively with brands, labels and artists to everyone’s joint benefit.

“We’re getting the word out and evangelizing the platform,” said Gerber. “And once we tell the story, it goes a long way.”

Main image logo courtesy of Red Bull Music Academy (modified by Eric Blattberg / Digiday)