This could be the start of the age of consolidation in the music streaming wars

SoundCloud CEO Alexander Ljung
SoundCloud CEO Alexander Ljung. Flickr/Sorosh Tavakoli

Spotify isn’t making any money. It’s not even close to profitability. Its most recent accounts show it made a $194 million (£149 million) loss in 2015.

And if you thought that was bad, German music streaming startup SoundCloud’s finances may make you wince. It lost €39.1 million (£33 million) on revenues of just €17.3 million (£14.9 million) in 2014.

It’s no surprise, then, that The Financial Times reported on Wednesday that Spotify is in advanced acquisition talks with SoundCloud.

Spotify has a business model that’s all about hooking in free users through its ad-supported tier, and then (hopefully) converting them into paying every month for the service.

SoundCloud could help funnel more people into Spotify, while keeping itself as a slightly more niche streaming site focused on original content by DJs and smaller artists.

There have been rumours of consolidation in the streaming space for years. Hans-Holger Albrecht, CEO of music streaming service Deezer, warned in an interview with Business Insider in January that consolidation is on its way.

“It’s still going to be the number of players I anticipated. Four or five big ones,” he said. “You see clearly Spotify, Apple is there. Rdio got acquired now. Whether it’s just US or embedded in Pandora is still to be seen. And then you have to say whether the other big guys will do more greater moves. Nothing has changed in that respect.”

There are three established players in the world of music streaming: Apple, Spotify, and Google. They (probably) aren’t going anywhere soon. But smaller streaming startups can’t afford to keep losing money every year.

It was reported in June that Apple held acquisition talks with Tidal, the music streaming service owned by Jay Z that has been struggling financially. And that certainly wouldn’t be the first time a large streaming site bought a smaller competitor. Pandora acquired the assets of Rdio in 2015, and Google acquired streaming site Songza in 2014.

It’s expensive to run a music streaming site and lose money every year. Apple, with its $231 billion (£177 billion) cash pile, can afford to run Apple Music at a loss for a long time. But smaller music streaming startups will reach a point where they have to make a choice: Start making money or sell up.

It looks like SoundCloud may have already reached a decision, and it won’t be the last startup to do so.

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