SoundCloud’s Open Innovation Approach to Reinventing Itself: Survival Instinct?

SoundCloud is on the brink of extinction, can open innovation help them build a better product?

As the music industry continues its’ global digital transformation, and a revenue recovery trajectory driven by an increasing share of streaming revenues, the conversation has been dominated by two main competitors: Stockholm-based publically traded Spotify leading the way with 36% global market share of streaming revenue and 83 million paying subscribers and Apple Music gaining with 19% share and 44 million paying subscribers[i]. In the realm of music publishing, the industry continues to be led by the “Big Three”: Sony, Univeral Music Group and Warner. SoundCloud, a Berlin-based online audio publishing and streaming platform which predated its’ streaming competitors, has been unable to make a meaningful dent in this emerging ecosystem, neither as a streaming service nor as a publisher. With an estimated 76 million monthly users, a mere 100,000 paying subscribers, and a valuation that is now $150 million after a 2014 high of $700 million[ii] – where should SoundCloud pivot to next to achieve growth?

Source: Music Watch

The fundamental problem that SoundCloud has failed to solve for throughout is two-fold: (1) what is the adequate business model and value proposition that enhances my attractiveness and competitiveness to artists and users in an increasingly consolidated music industry, and (2) how can I leverage my ardent artist user base to spur further adoption and network efforts? And it is at the intersection of these two questions that SoundCloud can best generate learning and relevant new product development through Open Innovation. SoundCloud’s advantage over its’ competitors lies in its’ engaged and passionate resident artists and users, such as early adopter and brand champion Chance the Rapper[iii]. These heavy users are best positioned to give constructive feedback to SoundCloud as to how they interact with the platform, what works and does not work, and barriers to greater adoption by their network. In addition to its’ user base, SoundCloud can also work with other nodes in the music industry such as artist management teams, record labels and casual listeners to discover creative solutions to the problems outlined above.

As a company in crisis, SoundCloud’s modus operandi has been reactionary and they are working to salvage their valuation and cash position in the immediate short term. Having acknowledged a lack of compatibility between their previous iteration of a monetized business model, a subscription streaming service similar to Spotify, and their users’ needs, Spotify worked directly with indie artists and distinguished SoundCloud alumni to understand their needs. They held conversations with their most ardent artists and found direct monetization as their main pain point. They then co-created the solution with this group leading to the development and launch of SoundCloud Premier for creators in October 2018. SoundCloud Premier offers industry-leading revenue sharing, instant availability, a direct connection with fans, and fast payouts.[iv] This product launch has been widely perceived as a positive step forward and as addressing a key user need. However, Spotify detailed a similar approach less than a month later in their quarterly report[v], which calls into question the sustainability of SoundCloud’s position on this front. In addition to this example of NPD sourced by an open innovation approach, SoundCloud has also been engaging with consumers directly to source new insights and ideas. Consumers demanded greater social integration, in line with the global trend of music consumption converging into overall content consumption, and SoundCloud responded with Instagram story integration[vi]. This move serves to address a consumer need as well as increase awareness and adoption through the network effects of social media, targeting some of the problems identified above. In this instance, SoundCloud is a laggard behind Spotify as they had incorporated this feature first. Despite an evolved product offering harnessed via open innovation, SoundCloud is unable to sustain an advantage due to the network effects of its’ larger competitors and a market-delayed product development cycle.

Source: Route Note

In order to build a sustainable competitive advantage in this increasingly consolidated market, SoundCloud should harness Open Innovation to dive deeper into the listener experience, and uncover drivers and solutions for greater adoption and use. SoundCloud’s “creator-first” perspective is essential but must be complemented by an equal focus on driving more listeners to this platform. In the medium term, SoundCloud should also explore machine learning to improve the recommendation algorithm for listeners and data analytics for artists, leading to more relevant and targeted offerings and increasing the stickiness of the platform for all users.

Open Questions:

  1. Is SoundCloud able to sustain any product advantage considering the deep network effects of Spotify and Apple Music?
  2. How relevant is Open Innovation in sourcing the future of creative content consumption? Do consumers know what they want?

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References

[i] IFPI (2018). Global Music Report 2018: Annual State of the Industry. [online] Available at: https://www.ifpi.org/downloads/GMR2018.pdf [Accessed 12 Nov. 2018].

[ii] Nicolaou, A. (2018). SoundCloud on track for growth after financial rescue | Financial Times. [online] Ft.com. Available at: https://www.ft.com/content/2985ef90-3561-11e8-8eee-e06bde01c544 [Accessed 12 Nov. 2018].

[iii] HipHopOverload.com. (2018). Chance The Rapper Has Saved SoundCloud, after reports of bankruptcy. [online] Available at: https://www.hiphopoverload.com/chance-the-rapper-says-he-has-saved-soundcloud-after-reports-they-were-running-out-of-money/ [Accessed 12 Nov. 2018].

[iv] SoundCloud newsroom. (2018). SoundCloud Premier Monetization Program Opening to Hundreds of Thousands of Original Music Creators. [online] Available at: http://press.soundcloud.com/169082-soundcloud-premier-monetization-program-opening-to-hundreds-of-thousands-of-original-music-creators [Accessed 13 Nov. 2018].

[v] Sanchez, D. (2018). Spotify for Artists Will Charge for Certain Services, Daniel Ek Says. [online] Digital Music News. Available at: https://www.digitalmusicnews.com/2018/11/06/latest-spotify-for-artists-freemium/ [Accessed 13 Nov. 2018].

[vi] SoundCloud newsroom. (2018). SoundCloud Makes it Easier to Share to Instagram. [online] Available at: http://press.soundcloud.com/169376-soundcloud-makes-it-easier-to-share-to-instagram [Accessed 13 Nov. 2018].

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15 thoughts on “SoundCloud’s Open Innovation Approach to Reinventing Itself: Survival Instinct?

  1. Ali, thank you for your article! I hadn’t thought about SoundCloud looking to rely more heavily on its userbase as a source for innovation. SoundCloud certainly has a unique position and user base as you had pointed out. I was especially fascinated by the creator-focused product that just launched in October. As they work to monetize their solution, I think there may be additional value in doubling down on the tools that SoundCloud offers its creators. Kerry Trainor, the new CEO, was quoted saying that it “is built from the creators, out”. Aside from the features that you mentioned, are there some products that SoundCloud could co-develop with creators that would aid in music production? Or features that would help them better collaborate with other creators?

  2. Thanks for the post Ali! It seems to me that Soundcloud is a dying brand for the following reasons: (i) what are the incentives for the artists to join Soundcloud vs. the competition, besides potentially cost? It seems to me like bigger players may have a cost advantage with the ability to undercut Soundcloud on price; (ii) The major decline in user base may also be a result of irreversible negative brand perception (e.g., if I’m an up-and-coming artist, I want to be associated with a prestige music platform); (iii) If the competition can easily replicate Soundcloud’s open innovation tactics quickly and more effectively, how will Soundcloud win market share (i.e., unrecoverable from being stomped out of the market by Spotify and Apple’s resources).

  3. Ali – great article. You pose two interesting questions – I’ve always thought of soundcloud as a raw platform for artists to showcase their work and invite others to comment and express their thoughts on their creative products. However, spotify has basically offered a similar platform, albeit without the crowdsourcing aspect of commentary and feedback (sans the 5 star rating system). What’s interesting to me is your question on whether consumers are aware of what they want with the usage of open innovation with regards to creative content consumption. I’ve found the majority of music recommended to me by spotify to be in the ballpark of what I’d be interested in but hardly a homerun. Of all the streaming services, Pandora, surprisingly, has been the one that I’ve felt has been most able to capitalize on machine learning and crowd sourcing to curate a playlist that is more aligned with my tastes. While I think open innovation will be very relevant to the industry as a whole going forward, I’m unsure if Soundcloud is the platform that would be able to benefit from the most from that trend. The company needs to work to figure out what they’ll stand for among its competitors going forward.

  4. Thank you for the interesting article Ali! I remembered using Soundcloud in the past but also felt it had lost its advantage against other competitors in the industry. I found it interesting that the integration with Instagram came from sourcing consumer’s concerns, but I also agree with you that some of these advantages could be easily replicated by the competitors. I would be curious to see if relying in open innovation is the correct approach to ensure the survival of Soundcloud, given that its consumer base is reducing so essentially its source for open innovation is also been diminished.

  5. Thanks for the great read. I wholeheartedly agree that Soundcloud should invest in a better music recommendation feature. There are just so many hidden gems out there. With regards to network effects, perhaps Soundcloud could move away from the boring middle to gain a smaller but stronger following in niche markets. For example, many bedroom DJs used to host their mixes on SC before mixcloud came along. Indie electronic music producers are also another category that warrants some attention. For many of these independent creatives, Soundcloud remains one of the best avenues to share their work with the world.

  6. Really great article, thanks for sharing! As an avid user of SoundCloud (and as a paying member), I feel the pain… I’d argue that SoundCloud’s biggest issue is the lack of clear product delineation – right now, they’re charging on both the supply side (artists pay to increase upload limits), and demand side (users pay to access more songs). But neither is a compelling option that scales with their user base growth. The upload limits are too high for most artists to need to pay to use the platform, and SoundCloud Go is essentially useless to consumers because the ‘exclusive’ tracks on the site can be found in a boot-legged version elsewhere… on their own site! A better model might be to create a marketplace for direct purchasing of music, similar to that of BandCamp. I’m rooting for them!

  7. To your second question, I think SoundCloud has a unique opportunity to partner with external innovation labs as partners as well as its own community (users, creators, employees) to engage in bottoms-up open innovation for its core strategy and business model. Given the rise of emerging technologies, I think SoundCloud has the ability to leverage AI or AR/VR (for recommendations, discovery or experiential offerings) in significant ways that enhance its values. It doesn’t appear that SoundCloud has fully taken advantage of its crowdsourcing capabilities but could potentially positioned to shift towards more of an open innovation model.

  8. Thanks for the interesting read, Ali. For me, SoundCloud’s best bet for long-term viability is to get in good enough shape, in profitability and cash flow terms, for Spotify to come knocking again, as they did two to three years ago. Open innovation might be a way to achieve that, but the management team will certainly need to create operational efficiencies and better monetize their services if they want to achieve such a transformation in a meaningful time horizon. To that end, even though consumers may not know what they really want, open innovation could certainly help in identifying incremental (rather than transformational) improvements they could introduce to create brand loyalty to a certain extent and gain a small part of the market share they have lost over the past few years.

  9. Ali, your article was an extremely enjoyable read! I am going to put forth an extreme perspective and suggest that open innovation might not be as impactful in SoundCloud’s situation given how entrenched Spotify and Apple Music have become in today’s industry. I think incumbents do have the advantage where music consumers are a little more sticky than in other industries.

    What I do find fascinating however is that the solutions to the music industry often focus on the very tail end of the value chain, with folks like Spotify, Apple Music focusing on being music distributors. SoundCloud could have a competitive edge in that it nurtures indie artists, to help them attack a different part of the music industry: making music sound professional.

    Another really interesting startup is Landr (https://www.landr.com/en/) who is tackling the music “mastery” (or music engineering to make your music professional sounding) using machine learning and artificial intelligence. This space, which represents a big painpoint for small indie artists who do not want to/ cannot afford to pay high label or music studio fees has remained largely undisrupted. SoundCloud, with its already semi established brand name and position in the market with its relationship to rising musicians could potentially address other parts along the value funnel of music making, aside from distribution, which is concentrated with competition from established players like Apple Music and Spotify.

  10. Great article Ali!
    I agree that SoundCloud has no competitive advantage compared with other players in the industry and I`m skeptical about the value that open innovation can bring to the platform. The change of business model to subscription changed the value proposition and vision of being the Youtube of sound and shifted their position to a direct competitor to streaming giants such as Spotify and Apple Music. I believe that open innovation in this case generate great ideas that are incremental to the business rather than disruptive. In addition, the outputs from those ideas usually dismisses the capabilities and competitive advantage of the company to execute the proposed projects . In SoundCloud`s case, disruptive innovation may be the only way to preposition themselves in the market and therefore I believe the open innovation may not add value to the sustainability of the business.

  11. Thanks for the post Al! I agree that a better recommendation system would be necessary for Soundcloud. For such music platform with lots of indie musicians, exploring more right music to the right listeners is critical, as the platform can increase the user engagement / retention that eventually turns into the higher LTV. Or I think they could strengthen their position as the testbed of the new musicians and offer better service for creating music, and communciating with listeners.

  12. Thanks for your thoughts, Ali! As a long time user, I love SoundCloud for finding ‘new and hidden gems’. I enjoy the act of crawling from one artist to the next, clicking through other users playlist, adding arcane new mixes to my favorites. I may be offering me-search here, but I value the lack of great recommendations from SoundCloud. The treasure-hunt makes makes every great find even so much more worth it.

    Assuming many users are like me (and that’s a bad habit) I believe that SoundCloud is in a particularly bad place to monetize on the consumer side. The moment I hit a paywall for exclusive tracks, I turn to google, find the artist’s .com and listen to their track there.

  13. Thanks for the great read Ali. Given how quickly the music landscape is changing, I think it is too late for Soundcloud to pivot to a pure streaming model and go after the same consumers as Spotify. In order to monetize their huge non-paying user base, they will need to either improve their ad monetization model or offer a different (and more compelling) subscription tier and / or value proposition.

    In my opinion the best way to do that would be to target independent artists (who need to use 3rd party services to put their music on Spotify) and offer ancillary services (such as marketing and promotion) that are not currently part of the platform today.

  14. Thank you for sharing an interesting article! One thing comes to mind, as an advertising person, was the survey method called “Social Listening”.

    Basically Social Listening is the process of tracking the conversations around some topic or brand or product in the internet, and utilize it for assessing brand health check or for developing new product idea.
    (This article talks about what Social Listening is: https://sproutsocial.com/insights/social-listening/ )

    I suppose when it comes to open innovation, it is very important to watch what consumers are actually thinking and to proactively analyze what they are talking so that companies can find not only “unmet” needs but also “unfelt” needs from the consumers. In my view, counter-intuitively, Open innovation cannot happen passively or automatically but happens with proactive effort to actively interact and find some “clue/seed” of innovation from the consumers. Said that, I felt SoundCloud could have invested more in doing so, such as Social Listening.

  15. Utilizing open innovation for SoundCloud to source their future of creative content consumption is an extremely interesting proposition. I would argue that open innovation is present in many of today’s stronger digital businesses, with the evolution of products being dictated by the changing use cases of users. As an example, YouTube noticed how creators began uploading singles to their platforms and users would listen to playlists of songs rather than watch videos; in other words, they began using YouTube as a music streaming platform rather than video streaming platform. With this observation and through additional user testing, YouTube launched its YouTube Music service and app. While this may not be a direct form of open innovation, I feel as though YouTube indirectly sourced the future of their content consumption through a bottoms-up approach, developing a product vision by monitoring both creator and user trends. With this example, I 100% believe SoundCloud, similar to YouTube, should take on this approach in their product development process; however, they have be clear about their differentiation from other streaming services, noticing how their specific users use SoundCloud differently from other similar services.

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