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The Inside Story Of SoundCloud's Collapse

SoundCloud was once a platform beloved by listeners and creators, whose leaders hoped to revolutionize the music industry. Hamstrung by management mistakes and fierce competition, they never did. Here's the story of how it all came crashing down.

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If you want an example of when SoundCloud’s mission to be a free-for-all music sharing venue collided with its desire to go mainstream, the time it accidentally banned Justin Bieber is a pretty good place to start. In late April 2014, a user named "Sir Bizzle" posted a song titled “We Were Born for This” on SoundCloud. The sparse acoustic track sounded so much like Justin Bieber that listeners assumed that it was the Canadian pop star. It quickly racked up a few thousand plays, and chatter on social media, before SoundCloud flagged the profile, assuming Sir Bizzle was an imposter with an ill-gotten Biebs jam, and took the song down.

Using SoundCloud’s online complaint form, Sir Bizzle asked that the track be reinstated. The company declined his appeal, noting that the account’s associated address, “123 everywhere street,” was clearly bogus. Sir Bizzle responded with a selfie — of Justin Bieber holding a notepad with a greeting to SoundCloud’s employees.

“OMG OMG OMG I JUST SAVED BIEBER!” wrote one employee on an internal email thread after verifying that it was the artist and restoring the song. The company’s community and artist relations teams jumped into overdrive to placate the world’s biggest popstar. Three days later, Bieber’s label, Island Def Jam Music Group, rehashed the issue, issuing a takedown notice for the tune before retracting the statement after learning that the artist himself had posted the tune.

Former SoundCloud employees familiar with the Sir Bizzle incident point to it as an encapsulation of the company’s promise, missed opportunities, and inability to coherently work with an entrenched music industry. Three years after Bieber’s selfie, SoundCloud has squandered its position as a maverick, but beloved audio platform and failed to build a meaningful business.

In a music era dominated by Spotify, SoundCloud has been, at the best of times, a startup in stagnation, and, at the worst of times, an organization in disarray. Once harboring aspirations to be the YouTube of sound, the Berlin-based company has struggled to remain viable, hamstrung by management missteps, an ineffective business strategy, and a stubborn music industry that would rather it had never existed.

In early July, SoundCloud laid off 173 people — some 40% of its workforce — shuttering satellite offices in San Francisco and London in an effort to stave off bankruptcy.

According to more than a dozen current and former employees who spoke to BuzzFeed News, SoundCloud’s July layoffs were inevitable, the result of some 24 months of turmoil. Those workers spoke on the condition of anonymity, citing nondisclosure agreements and the fear of damaging personal relationships. In their view, SoundCloud is now a company in search of an identity — and money. One source close to the company, which has struggled to find an acquirer, told BuzzFeed News it is close to securing a new round of funding at more than $100 million. If it does, that person said, Soundcloud’s board may seek to remove company cofounder Alexander Ljung as CEO and make him chair.

SoundCloud declined to make Ljung available for this story. A company spokesperson also declined to comment.

With a valuation that at one point was expected to surpass $1 billion, SoundCloud was a web property unlike any other. Part audio streaming service, part social network, it offered a hub for creators to upload, share, and discuss nearly any kind of sound. It hosted bootleg remixes, spontaneously recorded Drake tracks, and bird songs. It provided a rich library of content for users hungry for audio offerings outside of the mainly standardized catalogues of Spotify, iTunes, and Pandora. In February, the company boasted that it had 150 million tracks, about five times the amount on Spotify or Apple Music.

“We really see ourselves as creating something new — something that doesn’t exist,” Ljung told Forbes in a 2013 interview, alluding to similar online services including YouTube for video and Flickr for photos. “Our main competition, if you will, is that it doesn’t exist in the world yet, and we’re trying to create that space.”

SoundCloud’s downfall, according to many former employees, was largely the result of a strategic misstep — a move to compete head-on with the giants of the music-streaming world. With the March 2016 launch of SoundCloud Go, a $9.99 per month subscription service, SoundCloud was a late entrant to a ferociously competitive streaming music space and with an array of services that offered no differentiation from incumbents like Spotify and Apple Music. It was a blunder, and its mismanaged rollout exacerbated the management and cultural issues that weighed heavily on the company.

“No one comes to SoundCloud to listen to The Beatles’ catalogue,” said one investor. “SoundCloud did exactly what its users didn’t want it to do.”

Images provided to BuzzFeed from sources

A series of emails shows how SoundCloud employees reacted to Justin Bieber uploading a new song under the name "Sir Bizzle" in April 2014.

SoundCloud began as pet project for Ljung, a Swedish sound engineer, and his KTH Royal Institute of Technology classmate Eric Wahlforss. As amateur musicians, they built the tool to share audio snippets with each other at school. Upon realizing there was nothing like it, they bought SoundCloud.com for $400 and moved to Berlin in 2007, sharing the service with other artists and producers they met in the city’s electronic music and techno scene.

When SoundCloud moved out of beta and launched publicly in October 2008, it had 20,000 users and two inexperienced but enthusiastic founders who did everything to keep the site from crashing. It scooped up $3 million in funding the next year led by Doughty Hanson Technology Ventures, and passed the 1 million registered-user mark in May 2010. Artists flocked to SoundCloud for its ease of use and its cool factor. Listeners followed the artists, spreading the company’s gospel every time they commented on a track or shared one of its wave-form media players on a social network.

SoundCloud never had a problem attracting people — by July 2013 it had 40 million registered users. Its issue was building a business around that traffic. While the company’s original revenue stream centered on selling accounts with more upload space to professional users, driving the majority of its $14.1 million of revenue in 2013, its founders set their sights on monetizing with ads. But SoundCloud, which lost $29.2 million that year, was handcuffed from the start, said multiple employees.

In the early days, the company’s hands-off approach to regulating uploaded content allowed it to gain momentum, but that changed when rights holders and music labels began to take notice. More than half of the material posted to SoundCloud at the time was not authorized and cleared by the proper rights holders, according to two former employees. The company took no responsibility for the material uploaded and designated it as user-generated content — though employees were well aware that “gray area” material was frequently posted. Further complicating the matter were posts of remixes, songs with label-owned samples, and DJ sets — all staples of the SoundCloud ecosystem — that could have been subject to rights claims or legal issues.

There was such a lack of clarity around material, said multiple employees, that the company’s general counsel advised them to avoid acknowledging that some of the site’s content might be under copyright. SoundClouders were asked not to favorite tracks, a common way of saving music, from their personal profiles, or to put links to audio tracks in company emails. Some workers made fake profiles to freely peruse the site.

But by 2013, relationship-building with the entrenched music industry was well underway. The company hired talent from Amazon Music and other companies to negotiate with the three major music labels: Universal Music Group, Sony Music, and Warner Music Group. The idea was to develop long-term licenses for their content and, until they were in place, stave off any potential legal escalations.

“Deals with the labels would have allowed us to have monetization,” said one former executive, who explained that no ads could be run across label-owned content without a revenue-sharing agreement.“We needed to make sure that we could grow unencumbered without a lawsuit.”

But SoundCloud underestimated the time frame for those deals — severely. Two years would pass before the company had agreements with all three major labels in place, and it was able to ink them only after expending enormous effort making its service palatable to the music executives on the other side of the negotiating table.

In the midst of those talks with the labels, Twitter inquired about an acquisition in spring 2014. Having missed on an opportunity to scoop up Instagram, the social network coveted SoundCloud’s user base and saw it as a tool to help a core group of power users — musicians — connect to fans. Former executives remember Twitter Chief Financial Officer Ali Rowghani meeting several times with the company, with some employees hoping for a scenario like Google’s 2006 acquisition YouTube, in which a larger company scooped up a startup and bankrolled it in spite of the legal risk.

On the morning of May 19, Ljung called a handful of SoundCloud executives to say that papers of intent would be signed that day. But the deal collapsed.

With SoundCloud holding out for just under $2 billion, Twitter balked, sources said, put off by the heady price tag, music industry headaches, and the discrepancy between SoundCloud's monthly visitors and its registered users. (Many people listened to SoundCloud’s content, but never registered with the site.)

“Alex and Eric were devastated,” said one person familiar with the negotiations.

By the time acquisition talks with Twitter collapsed, Ljung and Wahlforss had been leading SoundCloud for seven years. The company employed more than 220 people, many of whom the founders had personally interviewed to cultivate a built-for-artists-by-artists culture.

Among them was Jeff Toig, a former VP at mobile provider Cricket Wireless and founder of on-demand digital music service Muve. Ljung tapped Toig as SoundCloud's chief business officer, hoping his music industry experience would come in handy hammering out licensing deals with the major labels. He gave the Harvard Business School grad reign over advertising sales, marketing, and business development.

By all accounts, it was a terrible move. Toig very quickly became a controversial figure at SoundCloud, known for publicly berating some of his reports and playing favorites with others. “He would carry a football around the office under his arm like a prop and he threw it to you to indicate that you were in the gang,” said one former SoundCloud employee. “He never threw it to women.”

Several SoundCloud employees who spoke with BuzzFeed News characterized Toig as “a bully” who “created fear” at an organization once known for its flat reporting structure and the approachability of its executives. Three workers noted that he sometimes addressed women in the office by pet names like “sweetie.” Others recalled Toig shouting at an employee during a video presentation for not using his preferred PowerPoint style: size 10 Arial font with a black background.

“To be a good CEO, you have to hire people that are better than you at certain things, and Alex was trying to do that,” one former SoundCloud employee told BuzzFeed News. “But Jeff wasn’t that guy… many felt like he was poisoning the well.”

Indeed, some reported Toig's behavior to SoundCloud's upper management or filed complaints to its human resources department. One reported incident occurred during an Aug. 2014 photoshoot with a major news outlet, during which Toig was asked to suck in his stomach and puff out his chest. “You mean stick my tits out like the women on Madison Avenue?” he replied, according to multiple people in the room.

Toig declined comment for this story. SoundCloud declined comment on his tenure at the company.

Based in Berlin, Ljung and Wahlforss had an ocean between them and the goings on in their stateside offices, whose operation they’d entrusted to Toig. The chief business officer was also tasked with closing three major label deals ahead of the scheduled August 2014 launch of SoundCloud’s advertiser program.

Ex-employees recall Ljung sometimes skipping important business meetings because he thought Toig could handle them. By that time, the SoundCloud cofounder had scooped up several entrepreneurial awards and adopted a more extravagant lifestyle. He attended the Grammys; he went deep-sea diving with sharks in the Bahamas; he partied with DJ Steve Aoki in Ibiza. And he Instagrammed all of it, irking employees worried that he’d disengaged from the company. One former employee who left in the summer of 2016 remembered a photo of Ljung taking a private jet. “People were like, that should be going to my salary,” they said. Investors were similarly put off. “He let it get to his head and he lost his focus,” said one.

By August 2014, it was abundantly clear that the SoundCloud’s advertising program, which would allow artists and labels to collect royalties, would not launch as planned. Despite Toig’s promises, not a single major label had agreed to a deal. The project launched with a eleventh-hour pivot to focus on independent creators, with Toig later apologizing at an all-hands meeting for failing to sign the majors. (By March 2015, Toig was out of the gig; he was later tapped as CEO of Tidal Music, where he lasted for nine months.) Ljung assured everyone in attendance that the label arrangements would eventually get done. A few days later, he flew to California and went off the grid. It was time for Burning Man.

In November 2014, SoundCloud closed a deal with Warner Music Group, giving the label an undisclosed cut of revenue from ads, a 3%–5% stake in the company and protection against past copyright infringement from the label. More importantly, the company, which by then had 175 million visitors, announced plans to add a subscription music service the following year, a crucial shift in strategy. Ljung and Wahlforss had long maintained that SoundCloud was not trying to be Spotify.

“Ads were supposed to keep us ‘free and open,’” said one former employee, referring to a favorite phrase of Ljung’s. The subscription service meant “we weren’t just going to be ad-supported.”

Some employees and artists simply didn’t understand the value proposition of a subscription offering. Why would anyone would pay for SoundCloud if they already have Pandora or Spotify? “People went to SoundCloud for free music,” DJ Justin “3LAU” Blau told BuzzFeed News. “That was the whole point of it — to find underground free shit.

SoundCloud’s quest to build a business and find legitimacy in the eyes of labels divided the company and alienated long-time users. Internally, workers noticed a distinct shift away from creators and toward listeners. Internal key metrics changed from “tracks posted” to “number of minutes listened.” Meanwhile, the company’s short staffed engineering team focused on developing products that could better track copyrighted content. When SoundCloud killed its record button, the move was interpreted by some as a sign the company was less focused on creators. Soon it would stop supporting groups, a feature that allowed like-minded users to congregate on the site and share or comment on the tracks posted to it. Groups had spawned new genres, like SoundCloud rap, and collectives like the Disquiet Junto, a sound experimentation group that developed ambient songs based on weekly prompts from founder Marc Weidenbaum.

Weidenbaum and other hardcore SoundCloud users mourned the loss of Groups. “SoundCloud had created a place where musicians were also fans,” he said. “Lots of companies give up on who got them started. I’m not sure, especially in the arts, how long you can survive when you forget where you started.”

By 2014’s end, SoundCloud was still struggling to sign licensing deals with Sony and Universal, and its failure to do so was costing it dearly. That December, the Wall Street Journal reported that the company was looking to raise $150 million at a $1.2 billion valuation. Sources in position to know told BuzzFeed News that the deal came close to closing, but fell apart the following summer after Ljung and Toig failed to secure licensing agreements with the two remaining major labels.

As licensing negotiations dragged, the labels increased the pressure SoundCloud and used their own artists as ammunition. In May 2015, Sony pulled tracks from artists including Adele, Miguel and Passion Pit, leading electronic producer Madeon, who had developed a large following on the site, to criticize and confront the major label on Twitter. In August, UK licensing company Performing Rights Society For Music sued SoundCloud for unpaid royalties. It was the first major lawsuit to scare executives at the company, said multiple employees.

The stalled deals also affected internal operations at SoundCloud headquarters in Berlin. Though the $150 million round never closed, managers had been instructed to double the size of the company’s 150-person engineering team. Engineering leaders who'd joined SoundCloud expecting to recruit top talent to their projects were suddenly told there was no budget to do so. Some product releases were delayed; Others were shelved completely. According to one former SoundCloud Berlin employee, a lack of direction from Wahlforss, who served as chief technology officer, made things worse, with some engineers going rogue and rebuilding their colleagues’ work in their preferred programming language.

Meanwhile, Ljung continued to travel the world. In May 2015, he spoke at a Burning Man–esque festival outside of Las Vegas called Further Future. In June, he showed up in an ad campaign for Italian luxury company Salvatore Ferragamo. When SoundCloud employees from around the world flew to Berlin for an August retreat, he was nowhere to be found.

“He was barely around,” said one employee who attended the event. “I remember everyone feeling disappointed that he wasn’t there. I mean, what the hell, this was a time for the company.”

SoundCloud kicked off 2016 with a $35 million round of debt financing in January. Together with a small round of layoffs the preceding fall, the transaction saved the company from near-bankruptcy. Two months later, with recently inked licensing deals with Universal Music Group and Sony locked down, SoundCloud was finally able to launch its SoundCloud Go subscription product.

SoundCloud Go arrived late to a highly competitive market with little to distinguish it from formidable incumbents like Spotify and Apple Music. Though the company had toyed with a monthly subscription price of $4.99, it settled on the industry standard $9.99. Featuring much of the same label-owned content as its rivals, SoundCloud Go was hardly a compelling value proposition. SoundCloud has yet to release any figures on the number of subscribers to its paid service, but one former employee told BuzzFeed News that the count had not broken into the millions by the time she left in September 2016. SoundCloud declined comment. (Last March, Spotify said that it had more than 50 million subscribers.)

The debut of SoundCloud Go did little for company morale. At meetings, leadership touted the product’s successful launch as “landing a plane” in an attempt to focus its “pessimistic” workforce, said one person. “Then suddenly it became about landing multiple planes, and in the correct order for us to survive.”

By the time Spotify started sniffing around SoundCloud in Sept. 2016, the company was in rough shape, having lost $54 million the previous year. The Swedish streaming music giant met several times with Ljung and his team, with an eye towards inking a deal that would bolster its catalogue with SoundCloud’s hard-to-monetize, but highly differentiated content. Sources familiar with the negotiations say talks reached an advanced stage, but collapsed with Spotify unwilling to move forward on a more than $600 million transaction so close to its upcoming IPO.

Today, SoundCloud appears stuck in no man’s land, according to former executives and employees. Though the company found validation with the major labels and launched a me-too subscription music service, former employees and music industry executives argue it bungled a great opportunity by losing sight of what made it unique: serving as a listening platform for non-label controlled content. Jake Udell, the CEO and founder of TH3RD BRAIN, a management company that represents artists like Gallant and Grace VanderWaal, said that SoundCloud used to be the first place he’d go to post music of his up-and-coming acts.

“Back then I would have to fight the labels to have songs on SoundCloud,” he said. “Now it’s not even part of the conversation.”

In other words, SoundCloud needs to once again to demonstrate its value to artists as a tastemaker and platform to connect with listeners. But now it’ll have to do that with a significantly smaller staff. Ljung, who is still CEO and recently returned from a 2016 sabbatical that was heavily criticized by former employees, seems to have realized that. In a company blog post, he noted that he’s put the company’s priority back on creators. “We’re on our path to profitability and in control of SoundCloud’s independent future,” he wrote.

Whether Ljung sees that future through as CEO or observes its execution from afar as chairman is an open question. With SoundCloud looking to close a $100 million round this summer, sources say the company’s board may be considering bringing on a new CEO.

Whoever that is, former employees hope that person will be able to rediscover what made SoundCloud so special to them in the first place.

“Working at SoundCloud was very personal,” said one former worker who left in the summer of 2016. “There were a lot of blood, sweat and tears put into that company. Then things changed and it was like, ‘What the fuck? Is this really happening?’”

CORRECTION

Jeff Toig's preferred PowerPoint style is size 10 Arial font with a black background. An earlier version of this story misstated the color.

Ryan Mac is a senior technology reporter for BuzzFeed News and is based in San Francisco. He reports on the intersection of money, technology and power.

Contact Ryan Mac at ryan.mac@buzzfeed.com.

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