January

2013

Identify and Examine business strategies used by Alex Ljung and Eric Wahlforss in establishing Soundcloud as the successful business it is today.
In this paper I aim to identify and analyse the business strategies employed by the founders of Soundcloud, in doing so highlighting how the business has successfully grown from a small enterprise to a platform used by millions of people each day.

Elliot Hogg

Elliot Hogg
When looking at how new businesses cope within the music industry today, it is fair to say it would seem like a struggle to achieve success. With large companies such as Warner, Sony, Emi and Universal dominating much of the market, and established SME’s fighting for the small percentage of market share remaining, most new businesses within the industry fail to turn a profit. Research carried out by the University of Tennesse (2012) shows that around half of new businesses fail within four years of operating. However Soundcloud, founded by Alex Ljung and Eric Wahlforss in October 2008, has managed to capitalise on a gap within the industry, subsequently becoming an incredibly popular music-sharing tool, having recently reached almost thirty million users. Soundcloud itself serves many different purposes, such as a social platform for friends to listen to each other’s music, or a way for professional musicians to securely promote their material to the public and record labels. Since the launch of Soundcloud’s Smartphone app, the platform has further broadened its usability to include non- music related audio such as audio books and lecture recordings. Soundcloud’s interface is incredibly simple, accessible and transferable across the Internet via its widget, leading it to become the favoured social sound platform. In a 2009 interview with Wired, Ljung expressed the reasoning behind starting Soundcloud:

We [Ljung and Wahlforss] both came from backgrounds connected to music…and it was just really, really annoying for us to collaborate with people on music — I mean simple collaboration, just sending tracks to other people in a private setting, getting some feedback from them, and having a conversation about that piece of music. In the same way that we’d be using Flickr for our photos, and Vimeo for our videos, we didn’t have that kind of platform for our music. (Van Buskirk 2009) This quote perfectly sums up the gap in the market that Ljung and Wahlforss had identified in 2008. Ljung also gives us some insight into the initial business strategy that he and Wahlforss took when approaching Soundcloud, which is that they would take an existing model, in this case Flickr or Vimeo, and apply it to an online platform for music. Within this paper I will aim to identify and analyse the strategies that Ljung and Wahlforss have put in to action in order to succeed in such a competitive industry. I will also consider the approach Soundcloud has taken in order to combat the conditions and challenges that SME start-ups are faced with.

As mentioned above, the music industry as a whole is an extremely competitive market, especially in the 21st century. Small and medium sized enterprises can find it very hard to

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compete against large organisations. So let us assess how Soundcloud has managed to become so successful in such a competitive market. By contrasting Soundcloud with MySpace, a company that also provides a music-sharing platform, we can determine how Ljung and Wahlforss further satisfied the demands of the market, where MySpace ultimately failed. Previously to the rise of Soundcloud, the dominant music-sharing platform on the internet was MySpace. This is evident as MySpace was the most visited social networking site in the world from 2005 to early 2008, even surpassing Google search in the US in June 2006, according to Hitwise (Townes 2006). Of recent times however, Soundcloud, along with other websites such as Bandcamp, have assumed much of MySpace’s market share. This growth was made evident at Le Web Conference in December 2012, as Wahlforss revealed that Soundcloud had just under thirty million registered users as of December 2012, with almost eighty - thousand users joining each day (Cornish 2012). Within an article on the NME website entitled ‘The Rise and Rise of Soundcloud’, author Luke Lewis (2010) feels the reason Soundcloud has been so successful where other websites such as Imeen and Lala have failed is that ‘its so eminently tearable’. Lewis also points out that MySpace on the other hand has a static music player, which cannot be posted anywhere else. However as Soundcloud acts as a widget, it can be posted anywhere across the Internet. Ljung also highlighted this advantage that Soundcloud has over its competitors within a previously mentioned interview with Wired in 2009:

[MySpace] is kind of cumbersome, and if you put *a song+ up there, it’s only for that platform…There’s a huge audience there, but there are also other places where the artist wants to be. We’re more of a distributed thing. You put it on SoundCloud, but there’s usually the aim of putting that widget on your own page or your blog. [SoundCloud] can automatically tweet every track you upload. We also have a dropbox for artists receiving tracks from their fans, to see if they’re good enough to be an opening act. (Van Buskirk 2009) Soundcloud, like MySpace also incorporates a social aspect into the interface, allowing users to follow one another, much like Twitter. Soundcloud employs the social aspect to its platform in a very effective way, as the platform allows users to easily comment on one another’s content, which is then displayed in a straightforward and organised fashion. Soundcloud’s combination of online audio sharing and social networking is unique as it is done so effectively. The result being Soundcloud has little direct competition, allowing it to attract the majority of those wishing to share audio via the internet. This dominance allows the company to operate much more successfully.

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With simplicity and accessibility in mind, Ljung and Wahlforss decided upon a freemium business model, as opposed to generating income from advertisements. This can be seen as a savvy business move, as advertisements would have undermined Soundcloud’s simplicity, and made the service less appealing to users. In a Billboard interview with Glen Peoples (2011b), Ljung highlights the benefits of paying a fee to upgrade your account and gain extra features:

The people who get really engaged and use the product a lot upgrade to the premium account, where they get additional features like statistics, more widget formats, a bit more control over how they present themselves in the community. It's similar to how Flickr works. (Peoples 2011b)

Ljung explains that again he has taken an existing successful business model from a similar company, and applied it to Soundcloud. This shows good business acumen as Flickr has already proved this model works well within the online sharing industry, thus minimising the potential risk for Soundcloud. Ljung and Wahlforss have been shrewd in the structuring of the different accounts, for example, a free account limits the user to two hours of content, meaning most regular users will eventually pay to upgrade their account, gaining further upload time. The founders have also made a trial period available, a clever marketing ploy to entice users into upgrading their account after having experienced premium features. There are four upgrade options available, however when paying more for a better package the user achieves huge economies of scale, luring the user into purchasing a more expensive package. The way in which Ljung and Wahlforss have structured Soundcloud’s freemium model means that many users will eventually upgrade, and usually opt for a more expensive package, resulting in the business generating larger revenues.

Recently gaining around $50 million in finance, Soundcloud has been able to invest the majority of the money into developing its software, leading to a new platform being released late 2012, further boosting the value proposition for paying subscribers. This has been effective, with paying users of the site steadily growing. In an article regarding Soundcloud’s business model, Paul Resnikoff (2012) points out that unlike Spotify,

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Soundcloud’s business model ‘isn’t predicated or dependent on expensive major label licensing demands’. The company therefore is not dictated by large record labels, and has much more potential for growth. Within an article for Billboard, Glenn Peoples (2011a) also explores the matter of licencing fees, examining how they affect business start-ups gaining investment. Peoples (2011a) explains that many digital music start-ups, such as Soundcloud find it hard to attract capital investors, giving an example that ‘in 2010, the number of VC deals in music startups dropped to 28, with only 10 deals announced in the second half of the year’. Peoples highlights that many investors have stayed away from the market due to expensive music licenses:

Many venture capital investors have been leery of putting their money behind digital music startups requiring costly music licenses. The burden of striking licensing deals, often through large advances to record labels, dissuaded cautious investors in a tight capital market from backing new music companies. (Peoples 2011a)

However Ljung and Wahlforss have managed to avoid this issue by creating a model aimed at attracting amateur, unsigned and small record labels to share and promote content. In 2011, Soundcloud raised $10 million from Union Square Ventures and Index Ventures. Saul Klein, the head of a London based VC firm in partnership with Index ventures made his desire to invest in companies such as Soundcloud clear as he stated ‘we think there's a lot of innovation and format evolution that is still happening’ (Peoples 2011a).

An article within Music Week written by Eamonn Forde (2009) entitled ‘ Media turns to sound of the cloud’ explores the way in which Ljung and Wahlforss have tailored the Soundcloud platform to allow for secure and intuitive promotion of musicians and their work. Forde also explores the way in which large companies such as the BBC and large record labels use Soundcloud for demo submissions to their A&R divisions as well as a promotion channel to traditional media. Forde (2009) argues that Soundcloud has in fact improved the way in which labels operate online: The nature of the technology allows labels to track who is listening to their music and collate feedback on what users are saying about new releases. This allows labels to be more targeted and efficient in their online operations. (Forde 2009)

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As Soundcloud displays numerous statistics regarding the consumption of music, the platform has become a part of most labels A&R division, in some way or another. This In turn has attracted more artists to the platform, as it is a great way for them to promote their work. Soundcloud’s dropbox technology has also been hugely instrumental in drawing promoters and record labels to Soundcloud’s platform. The Dropbox technology allows artists to send demos to record labels in a concise and organized fashion, avoiding the hassle of physical promotion CD’s. In an interview previous mentioned, Ljung discusses the way in which Soundcloud’s dropbox technology is used to facilitate promotion for content owners: The product is being used in a lot of different areas of record labels, for instance they use the dropbox features for A&R'ing or incoming tracks. They use it for internal communications within the label, for prerelease promotion when sending music out to journalists, and also for online marketing. (Peoples 2011b)

With so many options available to musicians wanting to share their music via the Internet, it’s difficult for online digital companies to attract a large amount of users. Also, with platforms constantly being developed and built upon it’s even harder for those companies to maintain a high number of regular users. One way in which Ljung and Wahlforss have approached this is by intergrating as many services with the Soundcloud platform as possible. Glenn Peoples (2012) considers this idea within an article for Billboard, stating that one reason for the company’s large growth is due to the wide range of services that are integrated with its platform. For example, Peoples (2012) points out that Storify, a service that combines information from social media websites as well as music from Soundcloud into multimedia blog posts makes Soundcloud an even more popular platform for online sound. Peoples (2012) then develops the argument further as he states that as this integration creates more popularity for the platform; more services will want to integrate with Soundcloud. Peoples explains that Soundcloud VP Henrik Lenberg has redefined the companies mission statement to facilitate this relatively new position Soundcloud has taken since its redevelopment of the platform and widget technology. ‘*Soundcloud is+ taking the position of being the social sound platform’. ‘For us, everyone involved in sound is a potential partner’, Lenburg explains (Peoples 2012). This is an example of how Ljung and Wahlforss have been adaptable in their business strategy in order to capitalize on changes within the market.

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Another way in which Ljung and Wahlforss have managed to attract a large amount of users is to constantly expand their target market by broadening the ways in which Soundcloud’s platform can be used. One way in which they have achieved this is by developing an application for smartphones, allowing users to record sound sources and then upload them in a simple and straightforward manner. Wahlforss (2012) explains how he and Ljung identified this strategy to increase users within a story wheel celebrating ten million registered users - ‘We realized everybody had a microphone in their pocket’. Ljung and Wahlforss then suggest that this move to create an application, allowing anyone with a smartphone the ability to record and share sound has contributed greatly to the growth of their company. From a business perspective, the move to incorporate smartphone users hugely increased the market potential for the company, not only by increasing the accessibility of the platform, but also by broadening the way in which the platform is used. Within the story wheel, Ljung identifies how the use of Soundcloud has broadened since the launch of the app: The platform started opening up. We started seeing how people created all different kinds of sounds…Now we have 3.3 millions different tags of how people describe the sounds…Its really everything from people recording books…their kids, all the amazing music, politicians. (Ljung 2012)

In conclusion, it can be argued that Soundcloud’s success is a result of Ljung and Wahlforss being able to constantly adapt to the demands of the market. The initial interface gave the market a social platform combined with a sharing service. The smartphone application was then adapted to enable instant recording and sharing of any sound source, which tapped into a huge market for the entrepreneurial duo. Ljung and Wahlforss have been extremely adaptable throughout the rise of their company, recently capitalizing on new found customers by further developing ways in which users can incorporate voice memos, and other forms of audio documentation into the platform. This can be seen as users can now use their laptop or desktop microphone and record directly onto the platform via an Internet browser. These constant developments further emphasize the desirability of Soundcloud, meaning it is constantly growing and expanding, as well as innovating the way in which the world shares its sound.

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References

Cornish, D. (2012, December 04). SoundCloud's CTO explains their new platform, Next SoundCloud. Retrieved January 02, 2013, from http://www.wired.co.uk/news/archive/201212/04/next-soundcloud-launch

Forde, E. (2009). Media turns to Sound of the Cloud. Music Week, October Issue, pp.12-12.

Lewis, L. (2010, September 24). The Rise and Rise of Soundcloud. Retrieved December 29, 2012, from http://www.nme.com/blog/index.php?blog=146&title=the_rise_and_rise_of_soundcloud& more=1&c=1&tb=1&pb=1

Ljung, A. & Wahlforss, E. (2012). Story Wheel Celebrating Ten Million Users. [Video online] Retrieved January 01, 2013, from http://blog.soundcloud.com/2012/01/23/ten-million/

Peoples, G. (2011a). Something Ventured, Something Gained. Billboard - The International Newsweekly of Music, Video and Home Entertainment, 123(8), pp.8-8.

Peoples, G. (2011b). Where the Files are. Billboard - The International Newsweekly of Music, Video and Home Entertainment, 123(16), pp.16-16.

Peoples, G. (2012). Soundcloud’s Gathering Storm. Billboard - The International Newsweekly of Music, Video and Home Entertainment, 124(11), pp.21-21.

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Resnikoff, P. (2012, January 03). Why SoundCloud's $50 Million Round Might Actually Make Sense. Retrieved December 29, 2012, from http://www.digitalmusicnews.com/permalink/2012/120103soundcloud

Tennessee, University of. (2012, July 26). Startup Business Failure Rate by Industry. Retrieved December 30, 2012, from http://www.statisticbrain.com/startup-failure-byindustry/

Townes, F. (2006, July 11). MySpace, America’s Number One. Retrieved January 01, 2013, from http://mashable.com/2006/07/11/myspace-americas-number-one/

Van Buskirk, E. (2009, June 7). SoundCloud Threatens MySpace as Music Destination for Twitter Era. Retrieved January 02, 2013, from http://www.wired.com/business/2009/07/soundcloud-threatens-myspace-as-musicdestination-for-twitter-era/

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