Music Royalty Payments becoming a headache?

Suppose I subscribe to Spotify and only stream MY OWN songs for the whole year (painful as that would be).

Spotify just earned $120 from myself, and let’s assume will pay out 50% ($60) of that amount back to my distributor. My distributor will take 20% and then pay me the rest ($48) right? ABSOLUTELY WRONG!

Big chance I will get close to zero depending on how many times I streamed my songs. While this is an extreme example, it illustrates the point of what currently is becoming a big issue for the music industry.

Currently the way that the royalty pie is split up, used by Spotify, Apple, and YouTube, is based on streams of a track as a percentage of all streams. Put simply Taylor, ED, Billie and the top end crew are going to get a big chunk of my subscription money even though I have not played one of their tracks. This is called the “service centric model” as the calculation is based pro rata on the number of streams across the whole service.

To be fair, the method when originally proposed made sense as it was a way to get the subscription model up and running, and not complicate something that already looked pretty complicated compared to the world of downloads and CD’s.

However, with the subscription model now in full flight and successfully generating billions of dollars, the calculation is coming under increased scrutiny.

The alternative is the User Centric Model, which calculates royalties on each users’ streams and the individual amount paid. Sort of what I described at the top of the article.

As you might expect, the criticism of the Service Centric Model has generally been coming from indie labels and indie artists.

A Finish study in 2016 calculated the impact of both models using a sample of 50,000 tracks and 4500 artists. The researchers found the majority of artists, around 90% of them, get only a few individual streams. The mid-tier, about 10% of the artists, get dozens of streams. And then the top tier is only 0.4%, but they get the most streams.

In the service centric model, this top tier got around 10% of the total revenue that was collected from the users, but in the user-centric model, that same top tier only got 5.6% of the total revenue. The mid-tier sort of earned the same. So, the User Centric model moves money from the top tier to the bottom tier as you might expect.

Interestingly, last Friday (January 24), a group of managers and lawyers representing some of Germany’s biggest artists wrote a joint letter to the leaders of the four largest music rights companies in the market — Universal, Sony, Warner and BMG.

According to F.A.Z, the artist reps say there is “an urgent and fundamental need to review and, if necessary, restructure the billing and remuneration model in the area of streaming”. This suggests that they may be seeking a switch to a ‘user-centric’ style of payment from the streaming services, who have to date been reticent to embrace this model.

So now we have criticism also coming from the top artists as well. It should be known that the physical market held up well in Germany, and many of the artists involved in this letter where the biggest sellers of CD’s, so they are just starting to catch up to the pinch felt by the rest of the world.

DSP’s (except Deezer so far) would prefer not to go near a user centric model, as I would expect the major labels. The cost and method of the calculation would be significant, as pointed out by Spotify’s Will Page in a lengthy and complex report. I am sure the CIO of Spotify was in Will’s office all week prior to the issue of that report, saying “come on Will get me out of this”.

As Will also pointed out, the per stream rates on royalty reports would vary widely as each user essentially generates their own per stream rate depending on how much they stream. That would confuse the hell out of the process.

The answer may lie more around how do artists create “discrete revenues” on the main streaming services. In that regards the movie industry has already laid out a pretty good model.

It seems I am always paying to rent new movies and new TV shows on top of all my subscription payments. If the music industry and DSP’s could come up with a model whereas the basic subscription is paid, but artist are allowed to load up discrete time limited content packages at a small extra charge to consumers potentially around new release and special editions, it might solve the problem of discrete revenues to artists and also go towards growing global music industry revenues.

Subscription prices have never been raised since these service inceptions, so this could be a fairer way to do it and solve the User Centric Model dilemma at the same time.