SoundCloud has signed its first deal with a record company in what marks a significant move for the world’s second biggest streaming music service after YouTube.

Despite having 175m monthly unique listeners, the platform has not paid royalties to artists or labels since it was founded in 2008.

However, Soundcloud’s deal means that artists on Warner Music Group labels will now be paid royalties.The deal has been made possible by SoundCloud’s decision to introduce a subscription service next year, which will generate revenue along with advertising that will be seen by non-paying users.

Rob Wiesenthal, Warner chief operating officer, said: “[SoundCloud] has a rare ability to drive music discovery while enhancing the connection and collaboration between an artist and their following. Our deal will foster that relationship, while providing a powerful range of income opportunities for WMG’s artists and songwriters.”

His colleague Jonathan Dworkin said the partnership would allow SoundCloud to expand and bring in funds while preserving the elements that had made it so popular: “It’s a win for artists, for rights-holders and for consumers.”

Some artists use the service to make additional songs or remixes available to fans that have not been officially released, while others upload mashups or mixtapes.

Alexander Ljung, the founder and chief executive, said he expected the deal to generate significant revenue for Warner and its artists.

Royalties paid to artists by streaming services have become a bone of contention throughout the music industry, with Taylor Swift deciding to withdraw her music from Spotify because of the small amount of revenue it generated. Spotify has some 40m users, but only a quarter pay £10 or $10 a month to avoid advertising and be able to download songs to mobile devices for offline play.

However, SoundCloud pays artists even less than the average of $0.007 per song play generated by Spotify. Swift criticised that sum in an article she wrote earlier this year for the Wall Street Journal.

Warner, the smallest of the three global record companies, will not licence its entire catalogue to SoundCloud in the deal. Its artists include Kylie Minogue, Ed Sheeran, Coldplay and Bruno Mars.

Soundcloud has also held talks with Universal and Sony Music. Two music publishers, Sony/ATV and BMG, are already partners in the scheme known as OnSoundCloud that will introduce advertising for certain artists, starting initially in the US.

The company’s move could generate anger among users. One warned on Twitter: “All those ad-less streams of music you were enjoying on SoundCloud … Days r Numbered.”

SoundCloud revamped its mobile app in June to reflect the fact that two thirds of its listening comes on smartphones and tablets, up from just 50% at the start of the year.

• This article was amended on Wednesday 5 November 2014. SoundCloud has 175m unique listeners a month rather than users. This has been corrected.