Banding together: Why Spotify might buy SoundCloud

Two music streaming giants become one

Spotify, the largest music streaming service in the world, may purchase one of its rivals soon.

A new report from the Financial Times (subscription required) says Spotify is in "advanced talks" to buy SoundCloud. The deal could cost Spotify a cool $700 million (about £538 million, AU$910 million), based on SoundCloud's current valuation. Spotify is currently valued at $8.5 billion (about £6.5 billion, AU$11 billion).

While SoundCloud is a great place for artists to share and engage with their communities, the streaming music service has failed to gain traction against competitors like Spotify (40 million paid users), Apple Music (15 million subscribers), Google Play Music and Tidal.

The service currently has 175 million users, according to Billboard, but it's unclear how many of those pay $10 a month for the SoundCloud Go service, which gives users access to exclusive tracks, offline playback and an ad-free experience. So, while SoundCloud has lots of users, its rivals have lots of members who are also willing to pay.

Good for Spotify, better for SoundCloud

With Spotify's plans of going public next year, its purchase of SoundCloud would make sense. The deal would take one of Spotify's competitors off the market, as well as giving the service access to a larger library. Spotify may even use its SoundCloud acquisition to strike deals directly with artists themselves.

While Spotify's revenue doubled in 2015, it still didn't see any profit, largely because of the expensive licensing fees for music. According to the International Business Times, Spotify pays more than 70% of its revenues to record labels.

For SoundCloud, an acquisition would mean a clean exit from the music streaming business. In February, SoundCloud revealed it would need more investor money just to stay afloat.

"The Group's business plan shows that further capital investment will be required in the next 12 months to fund the business until it is forecast to become cash generative at an operating level," reads SoundCloud's 2014 financial reports. With such a broken business model, a clean exit is all SoundCloud can hope for.