Is Your Business Model Capable Of Driving Profitability As Well As Growth?

If your business is having trouble making the turn from growth to profitability, it may be because your business model is more an attraction for curiosity-seeking passers-by, rather than solving the needs of paying customers.

SoundCloud, the music streaming company, provides a helpful example. There are many articles that take a deep dive into the particulars of the company’s journey with artists and listeners and competitors. But it’s useful to step back from all that and look at four simple questions every business should ask regularly:

1. What’s the product?
2. How do we make it/buy it/access it?
3. Who are our customers and how will they use the product?
4. What’s the value proposition and where will the revenue come from?

SoundCloud has certainly been successful in terms of “growth” — the holy grail of internet companies. At the beginning of 2016 they had 175 million subscribers compared with competitor Spotify’s 75 million. But now we’ve been hearing rumors since the beginning of this year about SoundCloud’s impending closure. Consider these facts and statements attributed to and about the company in recent days:

1. Announced it’s “fully funded” — through 4Q of this year, that is.
2. Just laid off 40% of their employees.
3. Looking for new sources of investor capital. Fast Company says they “just need some cash.” They’re reported to be in discussions with Chance The Rapper, a SoundCloud loyalist, perhaps to get him to invest some money to keep them afloat.

Sounds like a struggling startup. But this is a company that’s been in business for ten years!

What is their product? Well, the obvious answer is music. But what kind of music? SoundCloud started as a kind of audio version of YouTube, providing a place where new artists could upload new music. Then, to counter competition from Spotify, it introduced its Go options, charging listeners for access to hits by big name artists.

How do they make it/buy it/access it? When it started ten years ago, SoundCloud paid nothing to the new artists who were happy just to have a place to showcase their songs. But now, burdened by heavy licensing fees for hits from the majors, it’s now saying it’s thinking of “getting back to its roots by prioritizing its ‘open creator’ platform …rather than focusing on …the mainstream music of major record labels,” presumably to reduce outlays for license fees. Does that mean abandoning its Go platform, and going back to being just a free listening place?

Who are their customers and how will they use the product? Primarily, it’s a non-paying listener base that has different ideas about music than it did ten years ago.

Back in 2007, young internet users were eager to discover new music by artists they’d never heard of. Today, millennials are no longer content to “just listen.” They’re hunting for music to create their own personally curated soundtracks for online messaging and interaction to enhance the impact of their messages.

Consider this quote from a recent article posted on Medium:

“When you post a 4 minute YouTube video to Facebook, nobody listens. Ok, maybe that 1 dude that always reacts with a lot of emoji, but nobody else. When you insert a short clip combined with an interesting visual into your Instagram Stories, you have a captive audience.”

What’s the value proposition and who will pay for it? What is SoundCloud doing for listeners, artists and potential advertisers? Like other “content hosting, distribution and discovery” companies, it’s trying to find a place as a “middle-man” in the void left by the vacating old-school record labels.

For years, people talked about the labels as the “bad guys” in the music business. After all, who were they to try to “get between” the artists and the listening public and try to make money? What did they bring to the table that entitled them to a piece of the revenue pie from music sales?

When you step back from the specific activities of the record labels of earlier days, you can see that their primary contribution was to convince the public that recorded music was a product with real value worth paying for: They found, hired and paid people to write songs, discovered and signed artists and matched them up with songs, produced recordings, paid for manufacture and distribution, advertising and promotion.

People cheered at the demise of the labels — the fall of the “bad guys.”  And that euphoria was due to the fact that big changes in technology meant that many of their value-adding activities were no longer necessary. Artists could make their own recordings of their own songs on their own laptops and listeners could access the music easily on the internet.

Even though they celebrated their independence from the labels, artists found they still needed somebody to connect them with audiences who would actually pay for the music they created.

Instead of pumping up the value of recorded music, the main effect of hosting companies’ presence in this middle space has been to convince listeners that music is ubiquitous, like the air we breathe, and not worth paying much if anything for. And it shows in their lack of profitability.

• YouTube had everyone convinced it was about to become a viable business and Google paid $1.65 billion to own it. That was back in 2006. It’s still questionable whether it has turned a profit.
• Pandora convinced Wall Street it had found a niche in music curation and recommendation (“if you like that, you’ll like this”) and its IPO valuation was $2.65 billion. That was in 2011 and the company had been in business since 2000, and had yet to turn a profit.  And it still hasn’t, and the outlook’s not good. Plus, they’re facing competition from Amazon’s new music streaming service.
• Spotify launched in 2009, and profitability is still proving elusive, owing to huge amounts spent on licensing fees.

Like the other content-hosting services, SoundCloud’s business model has been kept alive by optimism and investors’ capital, and by a view of customers’ needs that’s stuck in 2007, focusing on sign-ups and celebrating growth, but never really coming to grips with how to become a profitable business.

And that’s going to take more than cost-cutting and trying to solve 2007’s business problems and customer needs.

The moment-by-moment, it’s-here-and it’s-gone environment of internet communications has not only changed the way customers use music, but has even altered the standard for what’s considered “good music.” That’s likely to affect the way artists write and perform.

From the same article on Medium:

“The (Instagram) Stories format could further affect music, because it stresses the importance of making an impact with a song, even if people hear just a few seconds of any part of it. Good music has that already, so fingers crossed: we’ll see much more great music made.” (Emphasis added.)

If they want to be a sustainable business, SoundCloud will have to bring something more to the table than hosting a virtual town-square where un-auditioned artists put up whatever they happen to create for listeners who happen to wander by.

As a first step, they’ll have to actually dig in and take stock of how their listener base is using music right now, how artists are creating it and decide what value they can bring to the table.

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How are your customers using and interacting with your product right now? What do they need to use it more effectively? Is your business model still aligned to promote customer intimacy so they value your product enough to pay for it?