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Money-losing startup SoundCloud may have found an exit—sell itself to another money-losing music startup

Music streaming is a tough business to be in. Even the biggest names lose money. It’s an even tougher business to get out of, as exits have been scarce. That might soon change if SoundCloud is indeed in “advanced talks” to sell to rival Spotify, as the Financial Times reported on Sept. 28 (paywall). 

Both SoundCloud and Spotify are unprofitable—but both have raised substantial sums of capital and boast large catalogs, brokered with the major record labels. But while Spotify is said to be preparing for a public offering next year, SoundCloud just pivoted to a subscription-based business model, the very model Spotify is best known for.

SoundClound’s last funding round in June, which included investment from Twitter, pegged its value at $700 million. Spotify could pay between $700 million and $2 billion for SoundCloud, according to Mark Mulligan of Midia Research, which tracks the streaming industry.

The logic behind the deal goes like this, as recounted by Skype co-founder turned VC Niklas Zennstrom to the FT: Independent streaming firms are now up against offerings from tech giants like Apple and Amazon, so they can’t afford to be competing for users among themselves.

If a bigger indie streamer buys a smaller one, consolidating their user bases, that gives them both better odds of long-term survival against the tech conglomerates. There are added benefits to this specific deal. SoundCloud has a loyal userbase of independent artists who upload their music to the platform and social networking features, which would enhance Spotify’s offerings.

SoundCloud declined to comment. Spotify didn’t immediately respond to our query.

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