SoundCloud: adorable as a puppy, but watch that rug

SoundCloud is a bit like Twitter, and they're both a lot like puppies. Adorable disasters that can't easily be trained not to spoil your rug.

Hear me out. Twitter is incomprehensible to many civilians but beloved by a core of obsessive users among celebrities, politicians, journalists and financial traders. Its product is as easy to use as a canoe with a hole in it. Growth has stalled, leaving its shares worth about half their IPO price and prompting it to be put on sale. SoundCloud is privately owned but in a similar boat.

In fact, the Berlin-based music and podcast sharing platform is even worse off. It’s unprofitable, probably permanently so, despite a promising start as a home for independent artists and DJs and the recent launch of a paid streaming service.

Cloudy Skies

I love puppies. And I love SoundCloud and Twitter despite their flaws, lack of business acumen, and strategic pirouettes. For users, they are an antidote to over-corporate, soul-crushing Facebook and Apple. As businesses though they are, well, not great.

Bigger Apple

Spotify is going head-to-head with deep-pocketed Apple in streaming.

So news from the Financial Times on Wednesday that Spotify, the biggest music subscription service, is considering buying SoundCloud initially made my heart leap. Maybe Spotify – growing revenue rapidly but unprofitable given the 75 per cent or so of sales it pays to music labels for licence fees – can save SoundCloud? (By the way, Twitter invested $70 million in SoundCloud’s June funding round that valued it at $700 million.)

Yet things are never that simple. Whether this deal happens and whether it's any good for buyer or seller will depend on how it's structured, the price and what Spotify does with SoundCloud afterwards. Spotify will no doubt have the stronger hand in negotiations given SoundCloud's state. The streaming sector is getting more crowded and harder for standalone services competing with the riches of Apple and Amazon. But could Spotify preserve what's good about SoundCloud, while squeezing out more revenue and profit? Given that Spotify is barrelling towards an IPO, a move for SoundCloud mustn't derail that mission.

Some free advice to Spotify chief executive Daniel Ek if he goes ahead: keep the two apps separate, so the 200 million or so SoundCloud contributors keep making it special. Do bring some of its content onto Spotify, especially the podcasts and independent artists that bring in revenue with lower licensing fees. And do plug Spotify's strong ad sales operations into SoundCloud. Don't, though, overpay in the name of scale, since synergies could prove an illusion. Even without a premium, that $700 million valuation looks rich, seeing as 2014 sales (the last published) were just €17.4 million ($19.5 million).

Some free advice to SoundCloud: be careful about accepting a stake in Spotify by way of payment. No one really knows how much that'll be worth until the market has a chance to vet Spotify's financials. It raised $1 billion in March via a convertible bond, and is believed to be valued at about $8 billion on paper, but public markets can be less forgiving. The venture capital funds that back SoundCloud are among the savviest in Silicon Valley, including Union Square Ventures, Index Ventures, Kleiner Perkins Caufield Byers, so hopefully their desire for an exit won't cloud their judgment.

Puppies do eventually grow up into dogs, who bring happiness and companionship to their owners. The same can’t be said of many acquisitions.

– Bloomberg