Previously, I and examined how those figures looked before an IPO filing. Now we can see how those numbers look in context.

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This filing bolsters prior reports that Spotify would forego a traditional IPO in favor of a direct listing, a method of going public that has left many scratching their heads. For those unfamiliar with it, a direct listing is a way allow a firm’s shares to begin regular trading while avoiding the normal IPO roadshow process.

When asked about the direct listing strategy, IPO expert of told Crunchbase News that there are a few reasons companies might choose to pursue the strategy. It typically boils down to the fact that the company may not be “strong enough” to transact a traditional IPO due to these reasons:

1. The company’s growth (or lack thereof).
2. The company’s size (in terms of revenue).
3. The general climate of the industry.

So do these reasons provide Spotify grounds to go direct, especially considering how much money could be left on the table? Let’s find out.

1. Company Growth

Spotify has the kind of crazy growth that companies dream of. As its subscriber numbers have gone from 50 to over 100 million users, Spotify’s valuation has . It’s worth remembering, though, that while the total subscriber number sits somewhere north of 130 million users, approximately .

So Spotify is big enough to attract attention and generate a lot of excitement. In fact, because Spotify is such a well-known company to go public, an IPO roadshow seems to be precisely what it would want. More attention and more hype might mean more money on gameday.

2. The Company’s Size

This kind of fast-paced growth also contextualizes the music company’s size in terms of its revenue. According to Daniels, the size of a company’s revenue will dictate how larger institutions view it; if the revenue looks too small, larger institutions could deem the company too early or too risky, and therefore might be uninterested. But given Spotify’s outsized growth, though, perhaps this is a reaction to its continued unprofitability (as of yet).

3. General Industry Climate

Daniels also noted that in some direct listing cases, the decision to forego a traditional IPO could be something as simple as a timing issue. Industries go through hot and cold periods, and a cold period could convince a private entity to forgo the public process.

However, this doesn’t typically apply to the music industry. Because of , music companies tend to be more well-known among public investors than, say, a company which perhaps works on tooling or shipping. Therefore, Spotify has no reason to think that the climate would change at all between now and an expected 2018 IPO date.

Going through Barrett’s list of reasons, we can see that Spotify’s direct listing doesn’t pass muster on these grounds. But there are two outside arguments that augment the viability of direct listing: saving money on the IPO process and stopping the clock on Spotify’s convertible debt raise.

Saving Money

Outside of Barrett’s outline for going direct, Spotify could limit costs by foregoing a normal, pre-IPO roadshow. However, that this doesn’t make much sense. The money which Spotify would save on an IPO roadshow is negligible compared to the amount it would ultimately raise in a normal IPO.

But there are other ways Spotify can save money.

Stopping The Clock

Last year, Spotify took on convertible debt from Dragoneer and TPG, . According to , by listing directly, Spotify could essentially “stop the clock” on these debt-conversions, and presumably, save itself tens of millions of dollars.

As a refresher, under the terms of these notes signed in 2016, Spotify was required to pay 5 percent annual interest, a figure that grows by 1 percent every six months for a total of 10 percent. Investors could then convert the debt into equity at a 20 percent discount of Spotify’s IPO price. If there were no IPO within a year, the discount at which investors could eventually buy back stock would increase 2.5 percent every extra six months.

The Questions Left Lingering

All of this leaves a lingering question: if neither of the two most-cited arguments hold water, does the decision to direct list have anything to do with Spotify’s $20 billion valuation? There have been, as of late, multiple sources which have raised concerns, and opining . Spotify did not respond to a request for comment.

The streaming market also faces stiff competition. Apple can subsidize its music service until the end of time through its phone and computer sales. , and launch. , and its post-IPO performance doesn’t bode overwhelming optimism. All of this is now against the backdrop of a filed by Wixen Music Publishing against the streaming music company.

Additionally, here are a few numbers we don’t know which will impact Spotify’s business model long-term:

1. What Spotify royalty rates are. It has been reported the company pays anywhere from 58 percent to 83 percent.
2. How often Spotify needs to renegotiate royalty deals with the major labels.
3. What the percentage stakes each major label owns of Spotify.

We’ll see how things roll out by the end of Q1.

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The developments weren’t without .

SoundCloud’s current situation brings us back to our prior thesis: namely that the company’s shift into the major label paradigm was a tactical error. And due to that mistake, SoundCloud lost its focus on an exploding demographic in the form of independent music, which it initially showed signs of controlling.

Rising Red Ink

Let’s run the numbers quickly. As I noted in my previous piece, Soundcloud’s revenue has . In 2010, the company recorded $1.8 million in top line; in 2012, $9.6 million; and, in 2014, $19.6 million.

But those gains came . Soundcloud lost $2.01 million in 2010; $14.9 million in 2012; and $44.2 million in 2014.

The trend of impressive losses continued into 2015, when SoundCloud’s revenue increased by 10 percent to $22.5 million. Unfortunately, for the company, its losses grew by a larger 23.5 percent to $54.6 million in 2015.

And according to a recent Music Business Worldwide , even post-cuts, Soundcloud won’t cut expenses to fully ameliorate its rising costs and royalty payments.

Major (Label) Gamble

Its cuts in staff are indicative of a larger problem. Namely, SoundCloud’s royalty payments are expensive. If Soundcloud’s payout to the major labels is similar to Spotify, it could of its subscription-sourced top line; in related topics, SoundCloud has consistently on how much the major labels own of the company.

Adding to its financial picture, SoundCloud a to keep its doors open.

While major label deals grant SoundCloud access to the world’s most popular catalogs, the royalty payments accompanying that catalog can be a .

The accompanying costs are high. For example, growth only accounts for one factor in determining a royalty payment. Other factors can range from the labels’ own fiscal bottom lines (which no streaming service can control) to the labels’ employment of a in their streaming contracts.

Major label content is also available through an array of streaming options: Spotify, Apple, (now) SoundCloud, Pandora, Tidal, and so forth. Given the number of services offering major label tunes, access to that content doesn’t make a streaming service unique. Rather, it gives the major labels outsized influence on a streaming service’s content offerings.

In Soundcloud’s case, the new major label paradigm likely impacted the now-beleaguered music streaming company in two ways:

1. Major label deals changed SoundCloud’s value proposition. Due to its major label deal, Soundcloud could sell the same major label content as Spotify and Apple. SoundCloud would no longer be the home only for independent audio,  putting a pin in what arguably made the streaming service unique.
2. The major label deals now required SoundCloud to pay the same piper as Spotify, Apple, and others.

All of this amplified SoundCloud’s already-noted strategic shift, and potential misstep: moving away from the independent music demographic—.

Up until autumn 2015, SoundCloud primarily and user-generated content. But in the time it took SoundCloud to switch paradigms from the independent universe to the major labels, the market had changed. Whereas independent material up to 2015 was considered disinteresting to general consumers due to niche appeal, , independent music streaming revenues made up $5.1 billion of the industry’s total haul of $16.1 billion. In fact, the independent market outsized Universal’s cut by more than $500 million.

Multiple arguments can be made about what has led the independent demographic to become the largest pie of the streaming-revenue pie. What’s clear, though, is that the old trope that’s been widely circulated about independent music—that nobody cares and it doesn’t make any money—is likely false.

From 2003-2012 alone, the independent landscape . And it’s that market that Soundcloud likely ceded ground on due to its deals with major labels.

What Ifs And Takeaways

All this underscores SoundCloud’s decision to start down the major label path.

If it had made the same job cuts and office closures in 2015 that have now been enacted, then Soundcloud might look very different. The company might have been able to close the gap long enough for the numbers to show—as they are now—that independent music is a real area of growth in the music universe.

If that had happened, it might have given financial-credence to its massive independent catalog, independent-enthusiast userbase, and independent reputation. But the major label paradigm is ; it’s very, very hard to back out of once you’re in.

Of course, all that assumes that Soundcloud would have been able to settle lawsuits and figure out a way to monetize its gigantic repository. Assuming it could, SoundCloud might now be the clear frontrunner in its own arena of music, almost completely removed from the whims and dynamics of the major label world which Spotify and Apple have to contend with.

What’s important to recognize now is that the music universe is multidimensional, and, with the explosive growth of independent content, it’s adding new layers by the day. SoundCloud’s plight should encourage—not dissuade—future would-be music-tech startups or entrepreneurs and investors. Let Spotify and Apple battle it out for the major label world; the independent universe is growing quickly anyway.

Whether it’s too late for Soundcloud to take advantage of that growth will depend on its ability to navigate its choppier, less-funded, waters.

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Amidst a streaming war between Spotify, Apple Music, Pandora, and others, SoundCloud’s orange cloud is greying. , it’s seen a ������, and multiple reports ( and ) have explored the possibility that it might run out of money by the year’s end.

The news has not been good for SoundCloud. (When contacted, SoundCloud declined to comment on its financial situation.)

So what comes next for the music company? The answer to that question is anchored on three points:

1. The economics of streaming for non-label players.
2. SoundCloud’s efforts to expand past its original, core user base.
3. Its efforts to stabilize allegedly difficult financials.

We’ll approach each topic respectively to get a handle on how it will impact SoundCloud.

Streaming 101

To understand SoundCloud’s current financial situation, we have to understand streaming economics.

Streaming companies license material from two main sources: major labels and independent artists. In SoundCloud’s context, it’s the first content source which matters. Major labels set the standard royalty rates which services like SoundCloud must pay for access to their critical libraries.

It is notoriously difficult to pin down what a private music streaming company is paying in royalties. For companies like Spotify and Soundcloud, royalty payouts can total of a company’s revenue.

To that point, rates released in reference to Spotify over the last few years have been all over the map. In 2013, its own accounting of its royalty payout structure, which detailed that ~30 percent of generated stream revenue stays with Spotify while the other roughly 70 percent went to labels, publishers, and others. There was no mention of any additional costs.

In August 2016, however, that ~84 percent of Spotify’s topline went out the door for “royalty distribution and other costs.” Again, those other costs were not defined. Music Business Worldwide then followed up on its first statement and calculation with the note that Spotify’s precise royalty payout is believed to be just under 70 percent.

In 2017 alone, TechCrunch reported that Spotify’s royalty payout was 70-72 percent, —like catalog geography and free vs. paid streaming—could bump the royalty payout as high as 84 percent. All this was before Spotify’s new deal that  in exchange for windowing. The aforementioned “extenuating factors” are so important to acknowledge precisely because they affect so much of any music company’s catalog.

So is Spotify’s royalty payout less than 70 percent, 70 percent even, 70-72 percent, greater than 70 percent, or even up to the low 80s? No one really knows except Spotify and the labels. Even using Spotify as a bar for understanding SoundCloud’s royalties leaves us convoluted

Of course, streaming services have an interest in limiting their payout rates, but streaming companies don’t have much leverage due to an imbalance of power. If SoundCloud or Spotify don’t have a major label’s catalog, either one could immediately start to shed subscribers to competing services not locked into the same label fight. In music streaming, platform diversification only flows in one direction.

Shifting Priorities

The streaming cost matter puts SoundCloud’s recent strategies into context.

SoundCloud licensing content in the independent world, a much different paradigm than Spotify or Apple Music. Because it built its success on independent material, SoundCloud wasn’t beholden to the major label oligarchy for material.

Priorities shifted when SoundCloud changed direction and pursued major label content on top of its independent catalog.

It signed deals with every major label, leading to a new direction for the company. , SoundCloud responded with the stark “no comment” on how much equity it may have provided to labels for access to the respective catalogs. Additionally, most of the deals hinged on SoundCloud releasing an to directly compete with Spotify and Apple.

By summer 2016, SoundCloud had evolved into another major label distribution platform. This effectively posed the conundrum of potentially alienating its initial userbase, which might not have been inclined to see another mainstream music service as necessary in the first place.

Compounding the mainstream content conundrum, SoundCloud’s new catalog was the same mainstream content that its direct competitors were distributing. Further, SoundCloud was now compelled to build a new product to directly compete with Spotify, putting it in a position where it held less power for the content it licensed while burning money at a ridiculous rate.

Challenging Financial Realities

All that sums to the company’s current financial situation.

In order to understand the company’s fiscal situation as it stands today, it behooves us to remind ourselves what we know about its past performance.

As I , SoundCloud’s financials in December of last year were as follows:

Revenue tracking upward ():

• 2010 – $1.8 million.
• 2012 – $9.6 million.
• 2014 – $19.6 million.

With losses ballooning ():

• 2010 – $2.01 million.
• 2012 – $14.9 million.
• 2014 – $44.2 million.

Based on the new numbers, SoundCloud’s revenue saw a 10 percent increase from $19.6 million in 2014 to $22.5 million in 2015. Its losses, however, increased dramatically by 81 percent, from $44.2 million in 2014 to $54.6 million in 2015.

Debt and Irony

Most recently, SoundCloud raised an . With this round of debt funding, it’s likely that SoundCloud is trying to follow Spotify’s example by doubling down on their growth numbers long enough to find an exit. The problem with this strategy is that SoundCloud is nowhere near as big as Spotify, perhaps lowering its M&A potential. While this strategy presents challenges for Spotify as well, the analogy ends right there, since SoundCloud’s debt is barely a pittance of Spotify’s $1 billion debt raise.

casts a shadow of doubt on its smaller rival as well. If the company most obviously in line to acquire it has its own challenges to contend with, it’s clear that its attention will be on its own IPO, rather than a bail-out acquisition of SoundCloud—even at a fire-sale price.

Unfortunately, the reality for SoundCloud is this: the company has extremely unwieldy financials, and its main competitor—the company most likely to acquire them—just delayed its own IPO in order to figure out its own financial situation

Uncertain Future

The faster that SoundCloud tries to shift to become more like Apple Music and Spotify, the more it runs the risk of highlighting it wasn’t trying to be like the standard streaming services at all.

Whether or not the summer will bring back the orange in our grey cloud remains to be seen.