It wasn’t all that long ago that the major record labels–Universal, Sony and Warner–seemed to be on the ropes, their power usurped by dozens of nimble indie labels. Many predicted that the majors wouldn’t be, well, major for much longer. But if you’ve been paying attention to the way the music industry has rolled over the last couple of years, you’ll have noticed that the majors are still very much major.
So what’s behind this reversal of fortune? Hint: Streaming music services. Forbes takes a look.
Last October SoundCloud–a free music-streaming service with a massive 175 million monthly users–appeared to be running out of cash. News broke that the Berlin-based company had lost $29.2 million in 2013, and when a rumored $2 billion buyout bid by Twitter fell through, it looked like music’s hottest startup might be in danger of going bust.
Then something strange happened: Warner Music Group became the first major record label to strike a licensing deal with SoundCloud, instantly legalizing scores of songs posted to the service. More surprisingly, Warner acquired up to 5% of the company, adding to funding that’s passed $120 million; the company is now valued at over $1.2 billion.
Yet despite the credibility they bestowed on each other, Warner and SoundCloud have largely eschewed talking about the partnership–neither side would comment to FORBES–and have zealously guarded the terms. Why? A source with knowledge of the agreement says the record company acquired its SoundCloud stake at a discount of about 50% from what other investors paid. And such details illustrate a quiet revolution in digitization of the music industry that all sides seem to prefer go unnoticed .
Left for dead by most investors and pundits, the surviving Big Three labels–Warner, Universal and Sony–have quietly muscled out stakes of the hottest digital entertainment startups, including 10% to 20%, collectively, of the established streaming services, such as Spotify and Rdio. Terms are similarly stark for younger startups: The labels take stakes for free or on the cheap, and then often give themselves the right to buy larger chunks at deep discounts to market later on. It’s not just streaming: The labels have gobbled up pieces of startups ranging from choose-your-own-adventure music video purveyor Interlude to song-recognition giant Shazam–valued at $1 billion in its latest round–which counts Carlos Slim, the second-richest man in the world, among its investors.