Coverage: Spotify drops plan to buy Soundcloud, plans IPO

Music streaming service Spotify has dropped out of purchased Soundcloud and is now exploring an initial public offering, according to multiple business news reports.

Anna Nicolaou and Matthew Garrahan of the Financial Times had the news:

The companies were in advanced talks on a deal in September, the FT reported, as Spotify looks to compete with Silicon Valley titans such as Apple and Amazon in the competitive streaming market.

However, the deal has fallen through because Spotify did not want to slow its path towards a flotation with the costs and licensing agreements needed to buy SoundCloud, according to someone familiar with the matter.

SoundCloud and Spotify declined to comment.

SoundCloud, which raised $100m in June from a group of investors including Twitter, was last valued at about $700m.

This was not the first time the rivals considered combining: Spotify had been in talks to buy SoundCloud last spring and again after Twitter bought a stake in the company. However, the discussions ultimately fell apart because the two could not agree on a price, said people briefed on the matter.

Spotify is looking to shore up its finances and reorganise as it prepares for an IPO in the next year. The company has boosted its customer base — which reached 40m paid subscribers in September — and diversified content through video and podcasts.

Jon Russell of TechCrunch said the Spotify IPO isn’t a sure thing:

Spotify hasn’t officially said it will go public in 2017, but there has been plenty of speculation, including a funding round with incentives tied to a listing. The source said Spotify went cold on SoundCloud because “it doesn’t need an additional licensing headache in a potential IPO year.” That’s in reference to the complexity and financial cost that comes with negotiating with music labels, something that is hugely important to SoundCloud, which has a far larger catalog of tracks than other services because it caters to creatives, indies and remixers.

Neither Spotify nor SoundCloud had responded to requests for comment at the time of writing. We’ll update this story if and when they do reply.

Spotify is reported to have declined to acquire SoundCloud two other times over the past two years, the FT said, with a proposed price apparently the sticking point on those occasions. Beyond expanding Spotify’s ad network and userbase, a deal was seen as key to strengthening its position as well-funded competitors ramp up their music services. Spotify passed 100 million users this summer, of which more than 40 million are paying, but others are pushing hard. Apple Music this week hit 20 million subscribers just 18 months after its launch, while Amazon recently opened Music Unlimited in the UK, Germany and Australia, its first expansions outside of the U.S.

Steven Musil of CNET notes that competition is increasing in the music streaming business:

The breakdown in negotiations comes amid intensifying competition for streaming-music customers. In the last three years, consumers have shifted from digital downloads to memberships that charge a monthly fee for unlimited access to tens of millions of songs.

Spotify currently dominates the market with 40 million paying subscribers worldwide, up from 30 million paying subscribers in March, according to market researcher Statista. Apple has been catching up fast, saying earlier this week that had surpassed the 20 million subscriber milestone just 18 months after its launch.

SoundCloud is a popular source for music, with about 175 million unique visitors a month compared with the 100 million active listeners for streaming music service Spotify. Often referred to as the “YouTube for audio,” it differs from services like Spotify and Apple Music by allowing people to upload tracks.