Should Twitter Crack Open Its Nest Egg To Acquire SoundCloud?

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Moving Tech’s Moral Compass From The Inside Is Harder Than It Looks

SoundCloud might be the YouTube of music, but that doesn’t mean Twitter should play Google and acquire it. There are better ways to spend the $2 billion from its IPO than on a music startup which won’t necessarily improve its core service. [Update: And now SPIEGEL ONLINE, a German news outlet from SoundCloud’s home country, says Twitter is not buying SoundCloud. SPIEGEL reports that Twitter did in fact consider buying the startup, but sources familiar with the matter tell it Twitter decided against going through with the deal.]

MoPub. Now that was a smart acquisition at a price tag somewhere around $350 million. Twitter knows a lot about what people are thinking about but has limited room to show marketing messages. Pouring its targeting data into MoPub so it can sell better ads elsewhere strengthens both.

SoundCloud, on the other hand, makes a lot less sense. Peter Kafka of Re/code reports that sources familiar with both companies say Twitter is considering it.

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The service lets anyone upload audio that others can stream or download. People follow each other (yes, like Twitter), and it’s popular with both up and coming DJs looking to host their mixtapes and big name artists trying to generate buzz. SoundCloud earns money by selling pro accounts that lift the limits on hosting and downloads, and with its fledgling native ads like image slideshows and suggestions of whom to follow.

Founded in 2007, SoundCloud has risen to fill the hole left by Myspace, becoming a highly functional homepage for musicians looking to promote themselves. Last July it had 40 million registered users and served 200 million total users including unregistered listeners each month. By October 2013, that number was 250 million, so it’s safe to assume it’s close to 300 million now. That’s swift growth that shows SoundCloud has big potential.

SoundCloud’s latest $60 million funding round from January reportedly valued it at $700 million. Twitter would likely have to pay a significant premium or even multiple on top of that to buy the startup. Twitter raised about $2.1 billion in its IPO and is still losing money overall, including $132 million in Q1 2014. Twitter also has a $1 billion credit line if it wanted to borrow money. All together, buying SoundCloud could burn a big chunk of Twitter’s cash, or at least cost a significant amount of its current $18.9 billion market cap in stock. Is this really the best use of its war chest or equity?

Twitter Could Own This Era’s Myspace Music

Twitter is eager to expand its audience outside its own service, Kafka suggests. Buying SoundCloud could do that. Meanwhile, Twitter could bring advertising infrastructure to SoundCloud. Kafka cites alignment because the music service with the most links shared on Twitter is SoundCloud, likely from artists tweeting their streams and homepages.

Screen Shot 2014-05-19 at 8.44.25 PMFrom a higher level, the argument for the acquisition might be that it would aid Twitter’s push to be a next-gen media company. It already hosts images and has Vine for video. SoundCloud could let it control music too. SoundCloud is how many musicians forge a deep connection with their fans, and Twitter could thrive by owning that connection. The ongoing democratization of creation tools necessitates a service for sharing original sounds online.

Twitter could build better promotional tools for musicians on SoundCloud. That way, when artists tweet links to their pages, it gets both high quality content in the Twitter feed and traffic to SoundCloud that it can monetize. Twitter already lets SoundCloud music be played in-line from its feeds through its cards, but interactivity is limited and could be improved if they were one company.

The ideal situation would see Twitter providing SoundCloud with the muscle and runway to become a YouTube-esque publishing platform. Artists would be incentivized to drive traffic there because they’d receive a share of the ad revenue. The issue is that music is often in available many places like streaming and download services, not just SoundCloud. If the two could really succeed in making SoundCloud content shared on Twitter the way artists distribute music directly to fans, the deal could be a good move. But that will take nimble execution.

Still, these synergies might not add up to be worth the price to Twitter.

Twitter Needs To Focus Before It Diversifies

I spoke with several top music tech executives today, and none could come up with a compelling reason why this would be a smart buy for Twitter.

It already tried to make music a bigger part of its service with its We Are Hunted-powered #Music standalone app. That app crashed and burned, though, as users had plenty of other ways to discover music. Twitter shut down the app a few months ago to concentrate on conversations about music in its main app. So while rocking out might be important to people’s lives, they might not look to Twitter for it.

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Trying to bolster audio’s place on Twitter by jamming in more SoundCloud might not fare any better. SoundCloud is not a user-generated content-driven service. It’s largely professionals and semi-professionals who upload the music that powers it. While Twitter and Vine might be ruled by “influencers”, the average person can still tweet or shoot a video. Most people have zero they could post to SoundCloud.

Instead, they’re listeners, many of whom play tracks in the background as they surf the web or are on the go. They won’t be so easy to monetize with the visual ads that Twitter knows best, and people despise audio ads. Plus, a fair amount of the content on SoundCloud isn’t properly licensed. Cracking down on that to make it more ad friendly could hurt SoundCloud’s street cred.

Twitter could build better promotion tools for musicians without buying SoundCloud if it wants more music content shared to it. And if it wants to be a media company, music doesn’t seem like the best fit. It’s not inherently snackable the way photos or short video clips are, and people seem reluctant to pay for it like they pay for games or streaming video services like Netflix. Twitter already has strong relationships with artists, and it might inherit a more troubled relationship with record labels from SoundCloud.

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While SoundCloud was truly special a few years ago, and still hosts remixes and mixtapes you can’t hear elsewhere, the rise of clean, standardized legal streaming music services like Spotify has reduced its value proposition when it comes to big name artists. Mainstream listeners who want no-hassle access to popular songs can consistently find them elsewhere on services built for listening, not discovery or fan-artist connection. Or on YouTube, whose familiarity, SEO, and browser-based status often make it the quickest way to hear a song. SoundCloud won’t be the exclusive provider of content with mass appeal. That makes it tough to build a media empire on.

Buying Instagram could have given Twitter user-generated, snackable, exclusive content with tons of reach, but that ship sailed to Facebook long ago.

I get why SoundCloud would want this deal. It could give its music huge reach through Twitter’s network, and get monetization help from Twitter’s business team. Without its own ad business shining bright, SoundCloud might find it tough to wow investors with an IPO. A source tells me the major labels are seriously squeezing SoundCloud around licensing, and some in the record business are intent on maiming or killing the company. That makes achieving an exit now even more lucrative, though SoundCloud’s growth means it could become worth a lot more, provided it can survive.

70dea90873e8a0f92fd582b4d04cfd4bIf Twitter was a bigger company with all its ducks in a row, the acquisition might be a better move. When it bought YouTube, Google already had its search ad and AdSense businesses humming, and was working the kinks out of Gmail and Maps. YouTube was only a year old and had raised less than $12 million. Twitter is still trying to stabilize its core product, and while it’s making great early progress with advertising, the business still needs time to ramp up and make the company profitable. SoundCloud is seven years old, and has raised $123 million. It might be a good acquisition, but not for Twitter right now.

It would be for tough for Twitter to make the decision to save the money when it sees Facebook drop $19 billion on WhatsApp. And if Twitter doesn’t buy SoundCloud, maybe Facebook or Google will take advantage of their size and snatch it up.

Still, Twitter needs to stay focused. Focused on making its service more consistently appealing to new users who don’t have a built-in audience, making its feed manageable so veterans become more and more engaged, and improving its ad targeting and measurement to prove return on investment to advertisers so they buy huge campaigns. SoundCloud does none of these. Twitter might be best off saving its money to hire and acquire companies that could make its core service fly higher, rather than just adding another bird to the flock.

[Image Credit: Len Peters/Flickr via NHPR]