SoundCloud joins the music streaming mainstream with advertising

SoundCloud, a popular destination for music on the Web, is going commercial.

The site has attracted millions of users with free streaming audio and no ads. But its days as a commercial-free service are coming to an end.

Late on Wednesday, the Berlin-based company said it will start placing ads on its service as part of a broader effort to generate revenue, some of which will go to record labels and artists that sign up for its advertising program.

“We’re trying to help creators make money with us, and advertising is one way to do that,� said Jeff Toig, the company’s chief business officer.

The switch from ad-free may seem like crossing over from punk rock to top-40, but it shouldn’t come as a surprise from the company that has raised $100 million from investors including Kleiner Perkins Caufield & Byers, Union Square Ventures and Index Ventures.

Ads have become the norm for the crowded streaming music industry, and the decision to include commercials puts SoundCloud in the company of other streaming services including Pandora Media Inc. and Apple’s iTunes Radio.

SoundCloud is often described as YouTube with just the audio, and the commercials on SoundCloud will be another similarity with the Google-owned video site. Even companies best known for their on-demand subscription services, such as Spotify and Rdio, have ad-supported versions for users who opt to not pay monthly fees.

SoundCloud, founded in 2007, counts 175 million people worldwide who listen to its tracks each month. Musicians, including major artists such as Lorde and Drake, have used it as a portal to share their latest tunes and DJs have used it to make their remixes and mash-ups go viral.

Now artists who sign up for the advertising program can make money from those tracks, though the roll-out will be gradual. So far, the program is available to labels and artists only by invitation. Those currently on board include record labels such as Red Bull Sound Select, Spinnin’ Records and Seed Records and independent artists such as Little Simz and Big Gigantic.

Advertisers at the outset include Red Bull, Jaguar, Sonos, Squarespace and Comedy Central, the company said.

“Over time we will roll this out across the creator community,� said SoundCloud’s chief executive and founder Alex Ljung, in a written statement.

SoundCloud is also expected to introduce a subscription-based service for people who want to listen without ads in the coming months. YouTube is also preparing to launch a subscription-based streaming option.

But SoundCloud has yet to make licensing deals with the three major record labels, Universal Music Group, Sony Music Entertainment and Warner Music Group.

The companies have been in talks for deals that would let labels get royalties from plays on the service and take equity stakes in SoundCloud, according to people with knowledge of the situation. Toig said the company already has strong relationships with labels, which often use the service to promote new music.

“We’d obviously love to have the major labels on board,� said Toig. “We’re in advanced discussions with the majors on how to bring them into the program, and those are coming along.�

What remains to be seen is whether the addition of commercials will alienate the 10 million people whose creations are heard on SoundCloud every year. Reactions on SoundCloud’s blog have been mixed so far. The company depends on the contributions from its largely independent community that uploads 12 hours of music and audio every minute.

SoundCloud announced the advertising model as part of a three-tiered program for music and audio creators. The free tier lets users upload tracks and receive certain stats. The next level, a paid service, gets users more upload time and additional tools.

“Our belief is that the user base will understand that the introduction of ads is really about paying the artists they love,� Toig said.

Follow Ryan Faughnder on Twitter for more entertainment business coverage: @rfaughnder