SoundCloud is reportedly closing in on deals with the major record labels that would trade equity in the startup for the ability to continue sharing copyrighted songs via its popular music player, app, and site.
The company is currently discussing giving Universal Music, Sony Music, and Warner Music 3-5 percent stakes in the business, as well as a percentage of future revenue, reports Bloomberg, essentially to prevent the top three labels from suing the Berlin-based platform. Sources say the agreement would value SoundCloud between $500 million and $600 million, though the timing of any announcement is unclear because some labels are closer to inking the deal than others.
So far, despite heavy customer usage estimated at 12 hours of audio uploaded every minute, SoundCloud has not yet figured out a promising, sustainable business model. Most usage is free and advertising is nonexistent. As such, until the company's income reaches a certain benchmark, it will pay the labels based on how many times a song is played. This report follows word in June that SoundCloud is looking at ways to monetize its content and pay some of its most popular artists.
As YouTube prepares to enter the streaming game as well — meeting Spotify, Beats, Amazon, and others there — what SoundCloud may bring with it is a large and loyal user base that's been forming since 2007, attracted by a free and simple means for artist promotion and discovery. As Bloomberg points out, that's the same reason why the majors haven't tried to shut the system down, despite it operating without licensing deals on the music it plays.
Equity deals such as this are proving common and lucrative for record labels working with new startups. Universal had a 14 percent stake in Beats Electronic before Apple purchased the company for $3 billion earlier this year and also controls a 5 percent stake in Spotify and a 47 percent stake in Vevo. Warner has also reportedly held stakes in Spotify and Beats, and some of the labels owned part of YouTube until Google purchased it in 2006.