Bad Omen: Spotify Kills Deal with Soundcloud

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The streaming music world has been abuzz since it was rumored that Spotify was participating in negotiations to acquire SoundCloud but it all came crashing down yesterday when sources revealed to TechCrunch that Spotify was backing out of any deal out of concern about a potential upcoming IPO. The source was quoted as saying “[Spotify] doesn’t need an additional licensing headache in a potential IPO year.”

This news should, of course, come as a surprise to absolutely nobody who’s been following our discussion on music streaming since you already know neither Spotify nor Soundcloud have been able to earn a profit and that Spotify’s biggest threat is rising expenses perpetuated by massive competition from Apple, Google, and Amazon who can all afford to spend billions of dollars on what amounts to an almost negligible piece of their respective businesses. So what does this mean for Spotify and Soundcloud?

Probably the death of both companies. Let’s look at the facts:

SoundCloud has obviously been desperate for this deal; this is the third time they’ve been in talks with Spotify about a buyout and all three times Spotify has been the one to walk away. It’s been well known since 2014 that SoundCloud’s expenses were vastly outpacing its revenues and its apparent that despite exhausting every possible revenue stream (how many different accounts can you pay for on soundcloud?) these expenses have become out of control just as competition is ramping up spending. Without a buyout from Spotify, SoundCloud will now likely pursue a deal with one of the big three mentioned above lest it have to completely shut down.

Spotify is almost as f**ked as SoundCloud. The company enjoys the prestige of being able to say that they’re the #1 biggest streaming music service but its clear that allure has worn off on its investors as the company was barely able to raise an additional $1B this year it would have had no problems raising just two years ago. Though Spotify might be able to turn a profit if it could bring up the percentage of its userbase who actually pay for its service (it currently sits around 30% paying users), it faces pressure from competition and rising expenses. They hope to solve all their problems with a highly anticipated Initial Public Stock Offering (aka IPO), a process that could raise many billions of dollars by allowing the public to buy a stake in the company, but in light of recent IPOs and the outcome of the recent presidential election, this process is almost certainly doomed to fail. 

2016 has been host to a string of failed IPOs (where stock went lower than the IPO price and stayed there) and the market doesn’t forget the disaster that was Twitter— another unprofitable internet company that created a lot of pain for many of the institutional investors who were sold by the fact that the company was prevalent, not profitable (the similarities between MAUs and ‘sticky eyeballs’ are palpable). In addition, the election of Orange, anus-faced reality TV star Donald Trump has precipitated a massive cycling of money out of the technology sector into financials and energy (in anticipation of de-regulation of banks and environmental protections). This heavy move out of “growth” companies into “yield” spells nothing but bad news for Spotify who must desperately attempt to come on the market at the worst possible time. BUT WAIT because if that wasn’t enough to spook investors, Trump has made clear he doesn’t care for net neutrality and will undoubtedly appoint a leader to the FCC who will either not enforce or completely roll back net neutrality rules which is great for AT&T and terrible for streaming companies like Spotify and Netflix who transmit massive amounts of data that will have to compete for limited bandwidth.

It’s unclear what an exact timeline is going to look like here with SoundCloud but we can easily expect Spotify to try going public sometime in 2017. It would be the end of an era to see these companies go but without a doubt, the world will keep spinning (that’s a DJ pun!). Besides, someone will be around to pick up the pieces (like Apple, or Amazon, or Google)… it’s just amazing to realize that Bandcamp may end up the ultimate winner of the streaming music wars with their dedication to the basics and keeping things simple. That’s got to be a testament to something! In the meantime… I’ll be cancelling my subscriptions before assets start getting sold off. Who knows, maybe things will turn around… but if 2016 hasn’t exactly instilled the most hope… in any of us.

Stay warm fam.

Bad Omen: Spotify Kills Deal with Soundcloud