SoundCloud, a popular music and audio-sharing service, is in discussions to raise about $150 million in new financing at a valuation that is expected to top $1.2 billion, according to two people with knowledge of the negotiations.
The Berlin company is raising significant capital as it moves to ink licensing agreements with the major record labels and compete with deep-pocketed rivals such as Spotify, which raised $250 million late last year, and Beats Music, now owned by Apple.
It will also mark a significant milestone for the seven-year-old company, founded by Chief Executive Alexander Ljung, a former sound designer, and CTO Eric Wahlforss. Ljung and Wahlforss created the service to be a kind of YouTube for sound, a place where established and aspiring musicians, as well as audiophiles, can upload and share clips with the SoundCloud community. The bulk of the content on the site is music, including DJ sets, and song remixes, but there is also a wide variety of audio files, such as podcasts and comedy clips.
According to the company’s data, the service attracts more than 175 million unique listeners each month, while content creators are uploading about 12 hours worth of audio every minute. In contrast, Spotify has more than 50 million users, with 12.5 million of them who pay about $120 a year for unlimited access to music.
Unlike standard, music-streaming services which charge listeners a monthly fee, SoundCloud has long relied on the creators for revenue, charging monthly subscription fees based on upload volume. This year, it began showing ads to listeners, and has plans to launch a subscription service for listeners beginning next year.
Despite its popularity, however, SoundCloud has struggled to lock down key agreements with the big record labels.
The major record labels – Vivendi’s Universal Music Group, Sony 6758.TO -4.02%’s Sony Music Entertainment and Access Industries’ Warner Music Group – use the platform to promote their records and scout new talent, but they have been frustrated with SoundClouds’ latent efforts to monetize their content, which exists on the site in the form of complete songs, as well as in user-made remixes and mash-ups.
Warner Music is the only major label to have inked a licensing agreement with the service, signing up as one of SoundCloud’s “Premier Partners” this fall after SoundCloud promised to launch a paid subscription service next year. The deal allows both Warner Music and its publishing division to collect royalties for the songs they’ve opted to monetize on the site. Warner is also taking a small stake in the company.
But Universal Music and Sony Music aren’t earning money from the site, and their licensing negotiations with SoundCloud haven’t progressed for months, according to people familiar with the matter.
Some executives at the major labels are dubious about SoundCloud’s business model, and have logistical concerns as well, such as how to pay out their artists when only fragments of their songs are streamed in mash-ups, these people said.
Since the introduction of ads, SoundCloud has begun sharing revenue with about 60 “Premier Partners,” including indie labels and artists, who are selected on an invite-only basis and get special promotion rights. Most users can’t monetize their content, though, and must pay fees as high as $135 per year to upload significant amounts of material.
With a large cash infusion, SoundCloud will have further leverage to iron out its business model and negotiate its deals with the record labels. Prior to this round, it raised about $60 million late last year at a $700 million valuation. That round was led by Institutional Venture Partners and the Chernin Group and included several existing investors, such as Kleiner Perkins Caufield & Byers, GGV Capital, Index Ventures and Union Square Ventures.
Earlier this year, Twitter considered buying SoundCloud but backed out of the talks.
SoundCloud has hired Allen & Co. to manage its latest round of financing, two people with knowledge of the deal said.
