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It鈥檚 been a challenging year for SoundCloud. And its last quarter hasn鈥檛 made things any easier on the music-streaming startup.

Amidst a streaming war between Spotify, Apple Music, Pandora, and others, SoundCloud鈥檚 orange cloud is greying. , it鈥檚 seen a 听补听, and multiple reports ( and ) have explored the possibility that it might run out of money by the year鈥檚 end.

The news has not been good for SoundCloud. (When contacted, SoundCloud declined to comment on its聽financial situation.)

So what comes next for the music company? The answer to that question is anchored on three points:

1. The economics of streaming for non-label players.
2. SoundCloud鈥檚 efforts to expand past its original, core user base.
3. Its efforts to stabilize聽allegedly difficult financials.

We鈥檒l approach each topic respectively to get a handle聽on how it will impact SoundCloud.

Streaming 101

To understand SoundCloud鈥檚 current financial situation, we have to understand streaming economics.

Streaming companies license material from two main sources: major labels and independent artists. In SoundCloud鈥檚 context, it鈥檚 the first content source which matters. Major labels set the standard royalty rates which services like SoundCloud must pay for access to their critical libraries.

It is notoriously difficult to pin down what a private music streaming company is paying in royalties. For companies like Spotify and Soundcloud, royalty payouts can total of a company鈥檚 revenue.

To that point, rates released in reference to Spotify over the last few years have been all over the map. In 2013, its own accounting of its royalty payout structure, which detailed that ~30 percent of generated stream revenue stays with Spotify while the other roughly 70 percent went to labels, publishers, and others. There was no mention of聽any additional costs.

In August 2016, however, that ~84 percent of Spotify鈥檚 topline went out the door for 鈥渞oyalty distribution and other costs.” Again, those other costs were not defined. Music Business Worldwide then followed up on its first statement and calculation with the note that Spotify鈥檚 precise royalty payout is believed to be just under 70 percent.

In 2017 alone, TechCrunch reported that Spotify鈥檚 royalty payout was 70-72 percent,聽鈥攍ike catalog geography and free vs. paid streaming鈥攃ould bump the royalty payout as high as 84 percent. All this was before Spotify鈥檚 new deal that聽 in exchange for windowing. The aforementioned 鈥渆xtenuating factors鈥� are so important to acknowledge precisely because they affect so much of any music company鈥檚 catalog.

So is Spotify鈥檚 royalty payout less than 70 percent, 70 percent even, 70-72 percent, greater than 70 percent, or even up to the low 80s? No one really knows except Spotify and the labels. Even using Spotify as a bar for understanding SoundCloud鈥檚 royalties leaves us convoluted

Of course, streaming services have an interest in limiting their payout rates, but streaming companies don鈥檛 have much leverage due to an imbalance of power. If SoundCloud or Spotify don鈥檛 have a major label鈥檚 catalog, either one could immediately start to shed subscribers to competing services not locked into the same label fight. In music streaming, platform diversification only flows in one direction.

Shifting Priorities

The streaming cost matter puts SoundCloud鈥檚 recent strategies into context.

SoundCloud licensing content in the independent world, a much different paradigm than Spotify or Apple Music. Because it built its success on independent material, SoundCloud wasn鈥檛 beholden to the major label oligarchy for material.

Priorities shifted when SoundCloud changed direction and pursued major label content on top of its independent catalog.

It signed deals with every major label, leading to a new direction for the company. , SoundCloud responded with the stark 鈥渘o comment鈥� on how much equity it may have provided to labels for access to the respective catalogs. Additionally, most of the deals hinged on SoundCloud releasing an to directly compete with Spotify and Apple.

By summer 2016, SoundCloud had evolved into another major label distribution platform. This effectively posed the conundrum of potentially alienating its initial userbase, which might not have been inclined to see another mainstream music service as necessary in the first place.

Compounding the mainstream content conundrum, SoundCloud鈥檚 new catalog was the same mainstream content that its direct competitors were distributing. Further, SoundCloud was now compelled to build a new product to directly compete with Spotify, putting it in a position where it held less power for the content it licensed while burning money at a ridiculous rate.

Challenging Financial Realities

All that sums to the company鈥檚 current financial situation.

In order to understand the company鈥檚 fiscal situation as it stands today, it behooves us to remind ourselves what we know about its past performance.

As I , SoundCloud鈥檚 financials in December of last year were as follows:

Revenue tracking upward ():

• 2010 – $1.8 million.
• 2012 – $9.6 million.
• 2014 – $19.6 million.

With losses ballooning ():

• 2010 – $2.01 million.
• 2012 – $14.9 million.
• 2014 – $44.2 million.

Based on the new numbers, SoundCloud鈥檚 revenue saw a 10 percent increase from $19.6 million in 2014 to $22.5 million in 2015. Its losses, however, increased dramatically by 81 percent, from $44.2 million in 2014 to $54.6 million in 2015.

Debt and Irony

Most recently, SoundCloud raised an . With this round of debt funding, it鈥檚 likely that SoundCloud is trying to follow Spotify鈥檚 example by doubling down on their growth numbers long enough to find an exit. The problem with this strategy is that SoundCloud is nowhere near as big as Spotify, perhaps lowering its M&A potential. While this strategy presents challenges for Spotify as well, the analogy ends right there, since SoundCloud鈥檚 debt is barely a pittance of Spotify鈥檚 $1 billion debt raise.

casts a shadow of doubt on its smaller rival as well. If the company most obviously in line to acquire it has its own challenges to contend with, it鈥檚 clear that its attention will be on its own IPO, rather than a bail-out acquisition of SoundCloud鈥攅ven at a fire-sale price.

Unfortunately, the reality for SoundCloud is this: the company has extremely unwieldy financials, and its main competitor鈥攖he company most likely to acquire them鈥攋ust delayed its own IPO in order to figure out its own financial situation

Uncertain Future

The faster that SoundCloud tries to shift to become more like Apple Music and Spotify, the more it runs the risk of highlighting it wasn鈥檛 trying to be like the standard streaming services at all.

Whether or not the summer will bring back the orange in our grey cloud remains to be seen.