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Here’s Why SoundCloud Will Likely Look to Be Acquired Soon

January 9, 2017, 4:07 PM UTC

In the digital music industry, it is the best of times and the worst of times. The streaming music business is still growing at a rapid pace, according to the latest Nielsen numbers, but virtually no one is making any money doing it. The latest example is SoundCloud, the Berlin-based music service, which has warned that it could run out of money this year.

In financial results filed last week with Britain’s regulatory agency, the company said that while its revenues grew strongly last year—climbing by about 21% to the equivalent of $22 million—its losses grew at an even faster rate, increasing by more than 30% to $52 million.

In a note included with its results, SoundCloud co-founder Alexander Ljung said that if the service’s newly launched subscription service is not successful, it could make it more difficult for the company to raise additional funds from investors, and this in turn could result in SoundCloud running out of money before the end of 2017. As Ljung put it:

“The risks and uncertainties may cause the company to run out of cash earlier than that date, and would require the Group to raise additional funds which are not currently planned. These matters give rise to a material uncertainty about the Group’s ability to continue as a going concern.”

In public comments, Ljung says he is still optimistic about the company’s chances, telling Fast Company that he expects significant revenue growth next year. But the picture painted by SoundCloud’s financial results is not a pretty one.

The company launched its $9.99-per-month subscription service, SoundCloud Go, in the U.S, U.K., and Germany last year. But it is competing in a crowded market, trying to go head-to-head with giants like Spotify, Apple (AAPL), and Google (GOOG). The reality is that the economics of the streaming-music business has made it all but impossible for smaller players like SoundCloud to survive.

Although SoundCloud closed the year with about $13 million in the bank, this is a tiny fraction of the sums that are required to run a major music service. Spotify, which is one of the largest services with more than 100 million users, pays out about 85% of its revenues in licensing fees to record labels and other rights-holders, and last year lost close to $200 million.

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Pandora (P) is another small player that has felt the same kind of pain as SoundCloud, despite the fact that it is also one of the oldest digital-music services around. Initially launched as a radio-style service—which allowed it to play music without having to cut deals with labels—Pandora recently tried to transition into a full-fledged streaming service by acquiring the bankrupt company Rdio.

Doing this has led to a flood of red ink, and after struggling to avoid an acquisition and dealing with multiple executive departures and the slow launch of its subscription service, the company is said to be looking at a sale to satellite provider SiriusXM (SIRI).

Spotify needs to pay record labels more money. Watch:

One factor in SoundCloud’s favor is that three of the major record labels own a stake in the company, albeit a relatively small one. According to a recent report by the site Music Business Worldwide, Sony Music, Warner Music, and Universal Music each own between 1% and 4% of the company’s shares.

That ownership means the record labels at least have a stake in helping SoundCloud to find an exit of some kind—if only so that they don’t lose all the money they invested. Several of the major labels also own stakes in Spotify, which is hoping to go public this year, despite its massive losses.

Spotify was said to be discussing a potential acquisition with SoundCloud last year, but Bloomberg said the deal fell apart after the two companies couldn’t agree on a price. Now Google is said to be looking at a potential purchase of the German company to help beef up its Google Play subscription service. And the consolidation of the digital music business continues.