SoundCloud is one of the biggest success stories of the online music world. The music streaming and audio sharing platform has been growing exponentially—it now boasts about 250 million users, and values itself at $700 million. But the company still hasn't found a sustainable business model for its increasingly in-demand services. In fact, it has lost money ever since it was founded in 2007.
The company's financial issues have only gotten more strained with its exponential growth. According to its most recent annual filings, SoundCloud's revenue was $14.1 million in 2013, up 40 percent from the year before. But its operating loss was $29.2 million, up 100 percent. This means the company lost more than double what it made in revenue last year.
In the filing, SoundCloud explains that its costs have run away from its revenues due to growing pains, as it strives to become the market-leading music platform. "This has necessitated investment in technology, headcount and marketing. Our overhead base has increased faster than our revenues," the filing's notes said.
So don't hit the panic button just yet. SoundCloud has several plans for closing its financial gap in the coming years—chiefly, selling ads to brands, and buffing up its subscription-based premium services (which will allow you to skip those ads, à la Spotify).
The company also entered into negotiations with the world's largest record labels, Universal, Sony, and Warner, to discuss ways to obtain licensing agreements from music rightsholders. SoundCloud must obtain licensing agreements and pay royalties for copyright-protected content in order to make money from streaming these audio files.
Right now, users are uploading about 12 hours of audio every minute—much of which includes copyrighted content owned by these major labels. Although SoundCloud has developed a system for flagging and taking down such content, the system has been criticized for being unreliable and somewhat opaque. However, the Financial Times reported last week that the negotiations have ground to a halt, as the labels are all holding out for SoundCloud to give them better terms by being willing to lose more money.
For now, SoundCloud is able to keep afloat thanks to its success in raising money through several rounds of funding. So far, it's raised raised $123.3 million from investors, which allows it to continue operating in the red, at least for the time-being. But with looming competition from Pandora and Spotify, as well as Google, Apple, and Amazon (all of which have recently launched their own music streaming services), SoundCloud is going to have to work out its kinks if it wants to become the "YouTube for audio"—and it's going to have to work them out soon.
Michelle Lhooq is the Features Editor of THUMP - @MichelleLhooq