Several months' worth of wrangling amounted to nothing after Spotify decided to withdraw from the negotiating table in the bid to acquire SoundCloud.
This has surprised industry observers since previous reports indicate that talks between the two parties are already at an advanced stage last September.
Spotify Is Going Public
According to TechCrunch, sources privy to the negotiations revealed that Spotify's decision is largely driven by its desire to go public next year.
This goal seemed to have complicated the company's position. The takeover of SoundCloud will purportedly entail additional licensing headache in a period where the company would also grapple with the challenges in an IPO year.
Particularly, the dilemma seemed to have stemmed from the complexity and cost of negotiating with music labels, which abound in the SoundCloud platform. The latter hosts numerous tracks produced or owned by independent creatives and musicians.
Why Acquire SoundCloud
SoundCloud's acquisition appears to be primarily motivated by a desire to expand Spotify's user base. This could be driven by two key variables.
First, since Spotify wants to go public, it wants to bear on the market with its strongest position possible. SoundCloud is one of the biggest names in the music streaming industry, and its website claims about 175 million unique visitors monthly. Spotify could only boast of 100 million active listeners.
SoundCloud's acquisition, therefore, could have meant a drastic expansion for Spotify as an entity.
Secondly, Spotify is being inundated with growing competition on all sides. To make matters worse, some of these emerging rivals bank on deep war chests such as Apple Music and Amazon's Music Unlimited. Integrating SoundCloud would make it more attractive to investors.
It is also worth noting that Spotify got in talks to acquire SoundCloud twice in the past already. The negotiations bogged down due to disagreements on pricing. This problem did not surface in the latest takeover failure, which could mean that it was probably not a major issue. This is significant since Bloomberg reported in July that SoundCloud owners value the company at around $1 billion.
It is not yet clear what SoundCloud's position was during the negotiation. However, one can turn to its recent financial struggles to conclude that it is in dire need of investors if not buyers.
While the company's revenue continues to increase year-on-year, it still manages to lose millions annually. In 2014, for example, it reported that it lost $44 million. Analysts stress that for SoundCloud to continue, it is imperative to raise more funds.