Tomorrow, Apple introduces its own music streaming service. It seems to be the right moment to explore how the music streaming industry splits its revenue.
Ready? Let’s go.
Is this about the whole music streaming industry or just Spotify?
I’m focussing on Spotify but the thoughts probably apply to all other offerings as well.
So… how much does Spotify pay rights holders?
According to its own website for artists, Spotify pays out about 70% of its revenue to rights holders. Those rights holders then pay the actual artists according to their own contract terms.
This doesn’t look too bad! So what exactly is unfair?
Glad you asked! The devil is in the detail. Spotify uses roughly the following formula to split its revenue:
The interesting part here is part two of the formula, the Artist’s Spotify Streams divided by Total Spotify Streams which Spotify describes as calculating the artist’s popularity or market share . The problem is, in a nutshell, that it does not matter how many streams a user listens to, each stream counts the same. Those users who listen to the most streams also exert most of the influence over how much rights holders and, consequently, artists get paid.
What does that mean in practice?
Imagine the following simplifying scenario: There are two users, let’s call them Alice and Bob, and two artists, let’s call them Amazing Rock and Junk Pop. Just for the sake of argument of course. So Alice loves listening to Amazing Rock. Because she is a workaholic she has only time to listen to 100 streams per month. In contrast, Bob likes to listen to Junk Pop and, because he’s a student, he has a lot of leisure time. Hence, he listens to about 5000 streams per month. Alice and Bob each pay $10 to Spotify. Now Spotify splits its revenue of $20 according to the formula quoted above; for the sake of simplicity we disregard taxes. Spotify takes 30% or $6 to cover its own costs. This means that $14 remain to pay rights holders. Amazing Rock gets $0.27 and Junk Pop get $13.73.
Wow! That does not seem right!
Exactly! It also means that your subscription fee pays for artists that you don’t give a shit about.
What? Are you fucking kidding me?
Nope. See those artists in the Global Top 50 charts that you never listen to? You pay for them!This is true if you listen to fewer streams than the average stream count per user.
It sucks! But maybe that’s just how a flat rate model works?
While it is true that a flat rate model often means that those who use a service less tend to cross-finance those who use it more, I believe that this is not the right model for music streaming. It simply gives “power listeners” too much power.
So what would be a fair revenue split model?
In my opinion the customer that pays the subscription fee should also have decisive influence over which artists receive his money. This model is much closer to traditional album sales where the customer knows that his purchase supports the actual artist. With Spotify’s current royalty system this is not necessarily true.
Are there any other benefits to a fairer system?
In fact there are. Changing the formula could also fix the problem that indie labels are getting almost nothing from Spotify.
Cool! How does the improved royalty system look like?
We only need to adjust part two of the current formula a bit. Instead of
we should instead use
where N is the total number of users.
What is the advantage of this alternative formula?
This improved formula would make sure that the subscription fee of any customer is distributed according to his own listening habits and not those of others. Another way to describe it: If you pay $10 a month, Spotify would still take $3 out of them but the remaining $7 would be split according to your listening habits, and not according to the listening habits of others.
By the way, this is similar to how flattr works, a micro donation service.
Got it! So why is Spotify not using this formula?
That is a good question.
Notes [ + ]
|1.||↑||This is true if you listen to fewer streams than the average stream count per user.|