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The Spotify and SoundCloud deal may not happen, but it makes plenty of sense

A tech/media deal that doesn’t make you scratch your head.

Spotify Press Announcement
Spotify CEO Daniel Ek
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Peter Kafka covers media and technology, and their intersection, at Vox. Many of his stories can be found in his Kafka on Media newsletter, and he also hosts the Recode Media podcast.

Some theoretical tech + media tie-ups don’t make sense. But not all of them.

Take Spotify plus SoundCloud, for instance. The Financial Times says Spotify is in “advanced talks” to buy SoundCloud. People I talk to say the talks are more talk and less action — maybe there will be a deal, maybe there won’t.

But this is one that should happen, given the right terms. Putting the two companies together can be a plus for both sides, and doesn’t require some miracle for the combination to keep working.

The logic: Buying SoundCloud helps Spotify bulk up in advance of its IPO, with a service that complements — but doesn’t replicate — the one it has. Selling to Spotify gives SoundCloud, which built a popular service but not the business operation it needs to support it, a way out.

Start with the theoretical seller: SoundCloud appears to be stalled. It has been raising money at the same $700 million valuation since 2014 — which was also the last time it released a user number.

It has repeatedly looked for buyers, including Twitter, which talked about buying the company two years ago but ended up investing in it this year.

Meanwhile, it has only nibbled at a business model. It has a small service for prosumers who use it to distribute music and an embryonic ad sales business.

But until this year, it didn’t have a subscription offering, and the one it finally launched will have a hard time getting traction.

But SoundCloud does have a loyal base of users. Two years ago, it said it had 175 million of them — though that number doesn’t mean registered users, so it’s likely overcounting — and many of them appreciate it because it’s not like Spotify, or Apple Music, or the other guys.

Instead of the 30 million tracks that most services offer, SoundCloud says it has 125 million. Many of them are remixes, or EDM tracks, or audio that isn’t musical at all, like Howard Stern replays. If you’re hanging out on SoundCloud, you’re there for a reason: It has stuff you can’t find anywhere else.

So it’s entirely plausible for Spotify to buy SoundCloud and keep all of that uniqueness intact, while plugging in support like a real ad sales operation, which did more than $200 million last year.

Meanwhile, those new users give Spotify a new set of free users and a new set of potential subscribers — both useful as it prepares to go public.

Equally useful is the added weight a bigger user base gives it when it negotiates with music labels, who take home the vast majority of Spotify’s revenue every year.

So if the price is right, this seems like a plausible bet for Spotify. SoundCloud will want something north of $700 million, so its most recent investors can claim a return. But it also wants a sale, so there’s wiggle room.

Spotify also has flexibility when it comes to currency. Earlier this year, Spotify raised $1 billion and suggested that one reason it got the money would be for M&A. But it could also use some of its equity and tell SoundCloud’s owners that those shares will be worth much more in the next year or so, after an IPO.

SoundCloud investors may be skeptical about those predictions, since they know how difficult the music business can be. But that’s exactly why they’re willing to sell.

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