Why it matters: Over the past year, free digital music streaming service SoundCloud has been attempting to “go legit” and stave off mounting outrage from the music industry by negotiating royalty agreements for the millions of songs on its service, the vast majority of which are unlicensed. On June 4, 2015, SoundCloud announced that it had reached a royalty deal with Merlin, a consortium that represents approximately 20,000 independent record labels. This followed the announcement in November 2014 that SoundCloud had reached a royalty deal with major label Warner Music. SoundCloud has been unsuccessful in its negotiations with the two other major music groups, Sony and Universal Music, however, and recent rumblings (since disputed) indicate that copyright infringement lawsuits may be imminent.

Detailed discussion: SoundCloud is a Berlin-based free digital music streaming and sharing service that was founded in 2008. SoundCloud describes itself on its website as “the world’s leading social sound platform where anyone can create sounds and share them everywhere” and has said that its service is accessed by approximately 350 million people on a monthly basis, and, on average, at least 175 million people “click play” at least once. SoundCloud is popular with independent musicians and labels because the service allows them to premiere and publicize new music, which can be easily shared via Facebook, Twitter, and other social networks. New Zealand singer/songwriter Lorde is just one independent artist who rose to fame after posting songs such as “Royals” on SoundCloud. SoundCloud has increasingly come under fire from the music industry because most of the millions of songs on its service are unlicensed and therefore “non-monetized,” i.e., they don’t generate royalties. SoundCloud’s CEO Alexander Ljung has indicated SoundCloud’s intention to create a premium subscription tier while maintaining an ad-supported free tier (similar to Spotify). To this end, SoundCloud has been attempting to enter into license agreements with the major and independent labels and artists that would provide for the payment of royalties and, in some cases, the purchase of an equity stake in the company.

SoundCloud’s licensing attempts with the major labels have been met with mixed results. While it successfully entered into a licensing deal with Warner Music in November 2014 that reportedly also had Warner Music purchasing a 5% equity stake in the company, negotiations have broken down with Universal Music and Sony, leading Sony to pull tracks of many of its biggest artists, including Adele, Kelly Clarkson and Kesha, from SoundCloud in May 2015. On June 4, 2015, SoundCloud announced that it had entered into a licensing deal covering approximately 20,000 independent record labels through Merlin, a consortium that negotiates the digital music rights for these smaller companies.

But all this may be too little, too late. According to a June 22, 2015, Digital Music News article, “multiple executives close to the situation” have indicated that “Universal Music Group, Sony Entertainment and the Recording Industry Association of America (RIAA) will soon be filing lawsuits against SoundCloud for ‘massive copyright infringement.’ ” As for SoundCloud’s recent seemingly positive deal with Merlin, the Digital Music News article points out that Merlin had signed a similar deal with the now defunct music streaming service Grooveshark, “essentially validating the company right to the bitter end.” On the other hand, a June 24, 2015 Billboard article raises doubts that SoundCloud will soon be buried under an avalanche of copyright infringement lawsuits, stating that “sources with knowledge of the situation at Sony Music and Universal Music Group say they have no knowledge of any imminent litigation against SoundCloud.” We will monitor this fluid situation and report back.

Click here to read the Digital Music News article dated 6/22/15 titled “Exclusive: SoundCloud Bracing for Massive Copyright Infringement Lawsuits…” by Paul Resnikoff.

Click here to read the Billboard article dated 6/24/15 entitled “Majors Have No Plans to Bury SoundCloud Under Mountain of Litigation, Say Sources” by Andrew Flanagan.

For more on this matter, read the following: (1) New York Times article dated 6/4/15 titled “SoundCloud Reaches Royalty Deal With 20,000 Record Labels” by Ben Sisario; (2) Digital Music News article dated 11/5/14 titled “WMG Signs Licensing Deal with SoundCloud, Will Get 5% of the Company” by Nina Ulloa; and (3) New York Times article dated 8/21/14 titled “Popular and Free, SoundCloud Is Now Ready for Ads” by Ben Sisario.