Spotify re-positions two-tier licensing (we are getting closer, and it can be even better)

Spotify released a blog post laying out how it wants the world to understand its new two-tier royalty system. The positioning is clear, leading with the statement that it will drive “an additional $1 billion toward[s] emerging and professional artists” and the PR push included several supporting quotes from the independent sector (with no major label quote to be seen). Positioning-wise, this is certainly now a case of ‘where it started’ (reverse Robin Hood) and ‘how it is going (everyone is a winner). Of course, the truth lies somewhere in between, but we are getting to a better place and there are some really important positive points made by Spotify. 

The main benefits outlined by Spotify are:

• Reducing fraud (financial penalties for actors that manipulate streams)
• Cutting back on ‘noise’ (increasing the minimum stream length to two minutes)

The cumulative impact of these measures will be more money going into the royalty pot for ‘honest hard-working artists’. This is all positive and represents part of a much needed recalibration of the wider model to tackle the long-term rise of unintended consequences of the streaming economy.

However, because the two-tier royalty system is also deployed alongside these measures, it will still be bigger artists that benefit from the larger royalty pool. Spotify states that redistributing the revenues from the end of the tail will be more impactful for ‘these tens of millions of dollars per year to increase payments to those most dependent on streaming revenue — rather than being spread out in tiny payments that typically don’t even reach an artist’. Spotify also makes the important point that most of the royalties from <1,000 stream tracks do not even make it to the artists because they do not meet the minimum payout levels set by labels and distributors.

Of course, this means that labels and distributors who have a substantial numbers of songs with <1,000 streams will see portions of their income withheld. For smaller labels this could be impactful. All labels shoulder risk knowing that a majority of their artists are unlikely to deliver them a profit. Bigger labels, major labels especially, hedge this bet by only paying artists royalties once they have generated more income than the advances the labels pay them. Smaller labels can rarely afford to pay advances and they also typically pay a higher share of royalties (e.g., 50%) to artists. So, having a payout threshold of, say, $50 per track, is their means of hedging risk. Some of that hedged risk will go out of the window for smaller labels. 

And to be clear, I am referring here to genuine smaller labels, not to synical ones that who trade in 30 second noise clips to gain the system. Those labels will suffer in this system, and rightly so.

A larger label might argue that smaller labels should simply focus on signing tracks with more potential, but the label marketplace is a competitive one. The ‘bigger artists want to go to bigger labels’ dynamic applies to the bottom of the tail too – it just translates to ‘not-so-small artists want to go to not-so-small labels’. Unless a label is investor backed, they all need to start small. There is a risk that these smaller labels do not have a voice in this debate.

But, let’s revisit this objective: ‘increase payments to those most dependent on streaming revenue — rather than being spread out in tiny payments’. 

(It is also important to note that the 1,000 streams threshold is for songs, not artists. So, many artists (and labels) will receive royalties for some, but not all of their songs. So this is not just about artists with <1,000 streams.)

While this is true at the input stage, it does not necessarily translate on the output stage. Assuming that the <1,000 streams revenue was worth around $60 million in 2023 (Spotify says “tens of millions”). Then, taking Spotify’s own Loud and Clear figures, applying the $0.03 per stream royalty, and distributing that on a share-of-streams basis for all other artists, provides an income translating to an extra +/- 1% of annual Spotify royalty income for those artists. So, the system takes money that is insignificant to the bottom of the tail and then divides it up into amounts that are insignificant, in relative terms, to the rest.

To be clear, some artists will get a good payout, peaking at somewhere around $20,000 for the top artists. However, as they already earn over a couple of a million each, that amount is probably not meaningful to them in relative terms.

So, where am I driving at with all this? How about we take the proposed system and instead of dividing into micro payments for everyone, just target it at one small group of emerging artists with potential. Turn it into an artist development fund rather than an inverted redistribution of wealth. That way the money can be put to really good use, investing in the very part of the market where the money came from in the first place. 

In summary, Spotify’s new positioning of two-tier licensing is fair, reasonable and positive in most respects. The associated (but separate) noise and fraud measures are super important and will help bring greater fairness and equity to the system. But distribution of the <1,000 stream royalties remains a sticking point. As it will have such a small impact on the income of other artists, surely funnelling these “tens of millions” into an artist development fund is a win-win that the industry can get behind?

Streaming’s problems will not be fixed by royalties alone

UMG and Deezer’s artist-centric royalty proposal got the amount of attention both parties probably wanted, if not necessarily the type of attention they were after. However, the intent was to kick start an industry debate, and that objective was clearly achieved. Yet, while the discussion has understandably focused on royalties (as, after all, it is a royalty system), these are more symptom than cause. Streaming royalties are not adding up because streaming is not adding up. Fixing royalties is only part of the solution.

In the early days of streaming, DSPs provided platforms for listening to music. Over time they have become places for consuming audio. As streaming mainstreamed, its role as successor to retail became subsumed by its role as music radio’s replacement. Passive playlists, lean-back listening, functional music and ‘noise’ are a series of inevitable second-order consequences, as streaming chases the needs of consumers, following the behavioural data. All in stark contrast to when radio programmers and digital store managers chose what consumers got. In those days, it was a case of the public wants what the public gets, now the public gets what the public wants. The problem is that what the public wants creates a system that neither creators nor rightsholders want. Consumers have, at least in part, chosen this path.

Perhaps, as Steve Jobs was fond of saying, “it’s not the customer’s job to know what they want” or as Henry Ford (may or may not have) said “if I had asked my customers what they wanted they would have said a faster horse”. But whether you believe consumer choice should shape product strategy or not, consumer-led innovation is the defining characteristic of today’s digital world. This means that any innovation that looks to push against prevailing behaviour risks can alienate the very customer base that the system depends upon. So how do we square the proverbial circle?

Solutions must understand the audience’s needs

Many years ago, my former employer, Forrester Research, devised the fantastic POST framework for defining product strategy:

People: First, understand your customers and their needs

Objectives: Next, identify what you want to achieve

Strategy: Then, shape your strategy

Technology: Finally, decide what technology fits the bill

Too often, this framework is done in reverse. Just think of the endless succession of ‘new tech’ start-ups that try to superimpose ill-fitting use cases onto their products. Technology desperately searching for a use case is one of the main reasons new tech, like the metaverse, VR and NFTs, follow the boom-bust-rebuild arc of the hype cycle. The risk with trying to superimpose new royalty structures on today’s streaming world (whether that be user centric, fan centric, artist centric, or whatever else) is that they look to solve supply-side needs (i.e., those of creators and rightsholders) first and demand-side (i.e., consumer) issues either last or not at all. Art may fuel the streaming machine, but consumers drive it (even if that means they benefit from self-driving much of the time).

At its heart, the streaming economy is shaped by diverse and often competing needs. Any successful system with diverse stakeholder needs operates by striking a pragmatic balance of meeting those needs. But a truly good compromise means that neither party is truly happy. This is the challenge that streaming faces today.

A brutal assessment of streaming would be that no one is happy. Every stakeholder, except perhaps, the consumer, has beef with how streaming operates. All of which means that any fixes (at least those that will succeed) will need to deliver some form of benefit to all stakeholders, big and small. And that means tackling the underlying behavioural dynamics of streaming, from which today’s royalty issues come.

Streaming has two main problems

A common refrain is that there is simply too much music. But the issue is dealing with quantity, rather than quantity itself being the problem. No one complains that there are too many search results on Google. The reasons quantity is seen as streaming’s problem are twofold:

1. With so many releases, it is hard to cut through
2. In a zero sum royalty system, more (content) means less (royalties) per stakeholder

Factors like ‘noise’, functional music, and generative AI are not problems in themselves, they are problems because they accentuate both of these issues.

Introducing the algorithm multiplier

Adopting a two-tier royalty system will not solve either problem in itself. The long tail will still be there. Listening will still be fragmented. Royalties are a supply-side issue, not a demand-side one. And it is the demand side that is causing the ‘problem’ by spending time listening to an ever more diverse volume of music. If you want to change behaviour, you need to pull the behaviour levers, not the remuneration levers. One way this could be done is by implementing an algorithm multiplier that applies a higher weight to successful artists. Thus ensuring success breeds success. But (and this part is crucial), this algorithm multiplier should be geared for all tiers of success. So, just as a superstar artist’s hit would get amplified, so would a <1,000-stream artist’s song that is doing exceptionally well when measured against other <1,000-stream artists. How does Google deal with a vast volume of search results? It prioritises the good ones. The algorithm multiplier would surface the best of every tier of artist. Quantity stops being a problem, because quality will be pushed to the surface, regardless of scale. 

The consumer wins (better music), the DSPs win (better user satisfaction), creators and rightsholders win (quality cuts through the clutter and gets a larger share of royalties).

The algorithm multiplier would fix much of today’s problems, but it would not be enough on its own. More needs to be put into the system to give all stakeholders more income and consumers more chances to be fans. MIDiA believes that $2 artist subscription streaming bolt-ons is one such way of achieving this, putting more value (both monetary and experience) into the system. Segmenting artist development and marketing across the platform landscape is another.

Streaming royalties clearly need an overhaul, but they must be done in concert with a reboot of the underlying behavioural architecture. Unless this happens, the artist and fan economies may end up decoupling from the streaming economy. Perhaps that will be a good thing. Perhaps not. But what it will not be is a predictable, low-risk future.

How to make artist centric artist centric

Deezer and UMG announced a major (in both senses of the word) shake up of streaming music royalties. This is arguably the biggest streaming market development in years, as it will set the tone for market-wide change. There is no doubt that streaming royalties require a revamp. The system built for the music business of 20 years ago was always going to struggle to be fit for purpose in today’s business. There are some really positive elements to this proposal, but it can be even better. Indeed there is a risk that as it stands it will break as much as it fixes.

The problems with today’s streaming market are well known, but for the record, a few of the key ones are:

1. Music listening is becoming commodified
2. The volume and velocity of music released is excessive
3. Cynical entities are able to game the royalty system
4. Most artists do not earn enough
5. Artists are building audiences rather than fanbases
6. Artists struggle to cut through the clutter

The full list, of course, is far longer, but the selection shows how pervasive and structural the challenges are. Royalties are an important part of the fix, but nonetheless, just one part. The UMG / Deezer initiative addresses the top three in the list, but not the bottom three. And crucially, it rewards success at the expense of emerging artists.

Among a raft of elements, the UMG / Deezer initiative:

1. Halves the royalty ‘weight’ of artists with less than 1,000 monthly streams and 500 unique monthly listeners, while doubling that of the rest
2. Further ‘double boosts’ music that has been actively searched for by a user

The second item is a very welcome and long overdue move. Streaming has thrown together two old business models (retail and radio) and thrown them into one pot, pretending lean-back and lean-forward consumption are the same. They are not. This move will go a long way to disincentivising the commodification of consumption by rewarding active listening. If you get your listeners to pay attention, to look for you, then you are rewarded with higher royalties. So, top marks for this move.

The first item, though, is an entirely different issue and far less welcome. Why? Because it does a reverse-Robin Hood. It is redistribution of wealth in reverse, taking income from struggling, emerging artists and sharing it among those who have already found success. 

Between 2000 and 2022, artists direct (i.e., artists without record labels) grew streaming revenue by 60% while the majors grew streaming revenue by just 35%. As of 2022, artists direct represented 8% of global streaming revenue. This fastest-growing part of the streaming market accounts for the majority of the long tail of artists with less than 1,000 streams. Crucially, the number of artists in this group grows at the same rate as their revenue, so most are unlikely to ever break the 1,000 streams threshold. 

Which means that the fastest-growing and most dynamic part of the music business could become a permanent funding mechanism for the biggest labels and stars. The way funding programmes usually work in the wider world is that the better advantaged fund the less well advantaged, not the other way round. The idea of a teenage, aspiring bedroom producer having half their royalties taken to pay the likes of Taylor Swift feels like an odd reward for effort and creativity.

The 1,000-stream threshold is not actually a bad idea in itself. In fact, it could actually be used in a dramatically different way that would truly help rebalance the streaming economy.

Artists with less than 1,000 streams represent roughly 80% of all artists. Most generate less than $100 a year of streaming royalties. So, taking away the income from these emerging and long-tail artists may be morally questionable, but it is not going to exactly affect their ability to pay the rent. 

Roughly speaking, the total income from these artists accounts for about 1% of all streaming royalties. Which means that the impact on big artists is going to be pretty small. 

Sidenote: it is difficult to see how >1,000-stream artists will get an over ‘double weight’ without more money being put in the royalty pot or being taken from somewhere else. The “500 monthly listeners” might actually ensure the pool of the <1,000-streams cohort is actually much bigger. Many smaller artists have very engaged fanbases, who may listen to their latest release many times over. In this model, 300 fans listening to a new artist’s song five times per month (thus generating 1,500 streams) would still not get paid the double weight. But an artist who gets a song in random playlist and has 1,000 people listen just once each, would get the double weight. Hopefully this is an unintended flaw rather than design.

Back to reconfiguring the model. If we take 100% (rather than half) of the royalties of <1,000-stream artists and apply it to ONLY the next tier up of artists (those who earn between $100 and $1,000) then the impact is truly significant, representing an increase of almost a third to these artists, rather than the 1% across all >1,000-stream artists. These are artists who are making the step up, beginning to get real traction, and need all the support they can get to kick on to the next level. The extra income would make a big difference to them. Supporting the next generation of artists is something that can truly be called ‘artist centric’.

Record labels are in the business of finding, nurturing, and investing in new talent. It is the single most important role the music business plays. A streaming royalty mechanism that takes from 80% of artists to redistribute to 20% does not feel very “artist centric”. But shift the equation slightly, and push all of the royalties of the <1,000-streams cohort to the next tier up, and then we have a truly artist-centric solution. One that invests in tomorrow’s stars. Who in the music business wouldn’t what to invest in tomorrow’s artists?

Everyone hurts – the problem with ‘fixing’ streaming

Apple’s Q4 2022 revenue fall was further illustration that the global economic environment is affecting everyone. During such times, companies look for ways to avoid the worst of the impacts, partially through ‘efficiencies’ but also through growth, by exploring new income streams and improving deal terms. The music industry is no exception. With global streaming revenues slowing – despite a strong performance from Spotify– there is growing pressure on music rightsholders to identify new growth drivers. This is especially the case for major labels, who have new institutional investors who have become acclimatised to rapid growth. All of which leads to streaming royalties taking centre stage. But the problem is that everyone in the streaming ecosystem has problems with the model. So, can any fix make everyone happy? [TL;DR, no]

To heavily oversimplify, streaming has three main constituents:

• Creators (songwriters, artists, etc.)
• Rightsholders (labels, publishers, distributors, CMOs, etc.)
• Streaming services 

At the start of 2023, all three have issues with streaming:

1. Songwriters continue to push for higher royalties while long and mid-tail artists cannot make streaming economics add up
2. Publishers continue to lobby for higher rates while UMG is now advocating for a new royalty system
3. Spotify just reported a net loss of nearly half a billion dollars for 2022

Then add in all the perennials: too much music being released; no artist longevity; the commodification of music; listening fragmentation; the decline of superstars etc.

We have a streaming market in which none of the stakeholder groups feel entirely content with the current market and all would like a larger share of the revenues to flow to them. Because they all extract value from the same revenue pot, the arithmetic is simple: one stakeholder’s gain is another’s loss.

None of this is an argument for, or against, the relative merits of the case of any of the three main interest groups. But it does mean that any change to the system will leave someone unhappy. This is the impossible equation that must be balanced.

What further complicates matters is that market benefits to different stakeholders can be perceived as negatives to others. For example:

• Streaming helped democratise the means of production and distribution. Long-tail and mid-tail artists benefit, and superstars lose their share
• Streaming helped make music the soundtrack of daily routines. Suppliers of mood music benefit, traditional artists, and labels lose listening share
• Streaming helped level the playing field, making it easier for smaller labels to compete. Larger labels faced stronger competition

The debate around new royalty regimes has been around for some time, but momentum is picking up. When the CEO of the world’s biggest record label weighs in, then you know that change is going to come. But as the above illustrates, what might make a major label happy, has the potential be detrimental to other stakeholders. There is no ‘make everyone happy’ fix.

Here are two pragmatic alternatives:

Lean forward premium 

One of the cleanest fixes would be to create a two-tier royalty system based on the nature of the plays:

1. Lean forward plays (higher royalty): when a consumer plays from their own collection or seeks out a song to play it
2. Lean back plays (lower royalty): when a consumer listens to music in an algorithmic ‘radio’ channel or listens to curated playlists

As with all streaming ‘fixes’, the approach would not be without problems. Mood-based music would certainly find itself generally collecting a smaller share of royalties, but also, many of streaming’s hits (including those from majors) rely on driving larger numbers of streams in curated playlists and ‘stations’ – which in turn help fire up the algorithms and power songs to further success.

Penny per stream

Another approach would be a fixed stream rate, which would effectively mean metered streaming. For example, if every stream generated $0.01, a subscriber would be able to listen until their subscription fee was used up, with the ability to top up to listen further or upgrade to a higher capacity tier. This would certainly help drive increased ARPU (something all parties want) but could deter some subscribers as it would mean an end to the all-you-can-eat (AYCE) proposition. But maybe it is time for that. Music is not a scalable resource in the way that, say, mobile data is. Everyone’s song is someone’s creation. Also, there would need to be a solution for free streams.

Don’t forget the listener, ever

Of course, there is a massive missing detail in all of this, the missing stakeholder in the streaming economy: the listener. Crucially though, for all the problems creators and rightsholders face, consumers are not complaining en masse. They are content with a proposition that not only represents exceptional value for money but that also evolves to meet their tastes and behaviours. 

Streaming’s problems are supply side issues, not demand-side. All industry stakeholders should be careful about pushing solutions that could favour the supply side without proper consideration of the demand side. The history of business is littered with the corpses of companies that did not properly consider the needs of their customers.

Streaming was built for yesterday’s music business

The saying goes that in a good compromise, no one is truly happy. So, there is an argument that streaming is already the balance of compromise. Against this though, streaming was built for an industry that is very different than today, so it is only logical that the model needs honing to catch up, and many of streaming’s second-order consequences cannot be undone. On the demand side, music consumption has become commodified, transformed from a largely artist-centric fan experience (radio excepted) into an audio soundtrack to everyday life. On the supply side, there are simply more people than seats at the table.

Any significant ‘fix’ is going to come at one, or more, stakeholder’s expense. And even then, increased royalties will only go so far. For example, an independent label artist might expect to earn around $2,000 from a million streams (after distribution and label deductions). Members of a four-piece band would thus take home $250 each. Even doubling the standard royalty rate (which could not happen without breaking the entire model) would still only mean $500 each, which is not going to turn streaming into a living wage for most mid-tail artists, let alone the long-tail. So, ‘fixes’ will only go so far. Perhaps it is time to double down on building new things on top of and around streaming, and nurture those that already exist (Bandcamp, etc.). 

Absolutely continue to focus on improving streaming economics but do so alongside building a new industry infrastructure that is built to meet the needs of today’s creators and business rather than those of the noughties. In short, grow the pie rather than simply look at how to re-slice it.

What AWAL’s $100k artists mean for the streaming economy

Kobalt’s AWAL division announced that ‘hundreds of its artists have reached [the] annual streaming revenue threshold [of $100,000]’. Make no mistake, this is major milestone for a record label that has around 1% global market share. It is compelling evidence for how a label built for today’s streaming economy can make that economy work for its artists. So, how does this tally up with all of the growing artist concern in the #brokenrecord debate?

It’s complicated. The short version is that we have a superstar economy in streaming quite unlike the old music business, one in which artists on smaller independent labels have just as much chance of breaking into that exclusive club as those on bigger record labels. Given that AWAL states its cohort of $100k+ artists grew by 40% (assuming they mean annually) while global label streaming revenues grew by 23%, the implication is that AWAL is getting better at doing this than the wider market. And it is the implied growth of the rest of the market where things get really interesting.

(A model with more than 50 lines of calculations was required to build this analysis so I am going to walk through some of the key steps so you can see how we get there. Bear with me, it will be worth it I promise you!)

Finding the third data point

To do this analysis I am going to share one of MIDiA’s secrets with you: finding the third data point. Companies, understandably, like to share the numbers that make them look good and hold back those that do not help their story. Often though, you can get at what that third number is by triangulating the numbers they do report. A really simple example is if a company reports its revenues and subscribers but not its average revenue per user (ARPU), you can get to an idea of what the ARPU is by dividing revenue by subscribers (and if you have a churn number to work with, even better).

In this instance, Spotify gives us the ‘second’ dataset to go with AWAL’s ‘first’ dataset. In early August, Spotify reported that 43,000 artists generated 90% of its streams, up 43% from one year earlier – you’ll note how similar that 43% growth is to AWAL’s 40% growth. Combining Spotify’s data with AWAL’s, we now have what we need to create the picture of the global artist market.

Superstars within superstars

Spotify generated 73 billion hours of streams in 2019, which equates to around 1.3 trillion streams. Interestingly, taking its roughly $7.6 billion of revenue, this implies that its global per-stream royalty rate (masters and publishing, across free and paid) stood at $0.00425 – which is a long way from a penny per stream. This highlights how promotions, multi-user plans, free tiers and emerging markets are driving royalty deflation. But that’s a discussion for another day…

For the purposes of this work let’s assume that the average artist royalty rate (across standard major, indie and distribution deals) is 35%. Spotify’s 90% of streaming label royalties in 2019 was $3.9 billion, which translates to an average artist royalty income of $29,221 for each of those 43,000 artists. That is obviously south of AWAL’s $100k cohort, which illustrates that those AWAL artists are not just superstars but an upper tier of superstars.

$66,796 is good, as long as you don’t have to split it

But how does this look outside of Spotify? Firstly, the top 90% of global streaming label revenues was $10.8 billion in 2019. We then scale up Spotify’s 43,000 top-tier artists to the global market and deduplicate overlaps across services and we end up with a global base of around 56,000 top-tier artists earning an average of $66,796 per year from streaming (audio and video).

$66,796 is a decent amount of annual income but it looks a lot better if you are a solo artist than, say, a four-piece band splitting that revenue into $16,699 slices. Interestingly, AWAL seems to skew towards solo artists (94% of AWAL’s featured artists are solo acts) so the $66,796 goes a lot further for them than an average indie label rock band.

And then there’s the remaining 99% of artists…

But of course, this is how things look for the most successful artists. What about the remainder that have to share the remaining 10% of streaming revenue? That remaining label revenue is $1.2 billion of which $0.7 billion (i.e. 57%) is Artists Direct. That means the entire global base of label-signed artists that are not in the top tier have to share 4% of global streaming revenues. This translates to an average annual streaming income of $425. Artists Direct meanwhile earn an average of $176 (only 59% less than those non-superstar label artists).

The 90/1 rule

The key takeaway then is that streaming is levelling the playing field for success. Consistently breaking into the top bracket is now achievable for artists on major and indie labels alike and, if anything, independents are enjoying progressively more success. But this is a very different thing from all artists doing well. Music has always been a hits business. Streaming is widening the distribution but with less than 1% of artists generating 90% of income, the spoils are far from evenly shared. Music streaming has taken Pareto’s 80/20 principle and turned it into a 90/1 rule.

Streaming’s remuneration model cannot be ‘fixed’

The #brokenrecord debate continues to build momentum and new models such as user-centric are getting increased attention, including at governmental level in the UK. But as Mat Dryhurst correctly observes, there is a risk of the market falling into streaming fatalism; that the obsession with trying to fix a model that might not be fixable distracts us from focusing on trying to build alternative futures.

I have previously explored what those new growth drivers might be, but now I want to explain the unfixable problems with the current streaming system for creators and smaller labels. Streaming’s remuneration model cannot be ‘fixed’, but that is mainly because of its inherent structure. Tweaking the model will bring improvements but not the change artist and songwriters need. Instead of exploring sustaining innovations for streaming, it is time to explore new disruptive market innovations

Product remuneration versus project remuneration

Smaller independent artists and labels are outgrowing the majors and bigger indies on streaming, so why are we having the #brokenrecord debate? Why isn’t it adding up? The answer lies in how artists and songwriters are remunerated. In all other media industries other than music and books, creators are primarily remunerated on a project basis. An actor will be paid an appearance fee for a film or TV show; a games developer will be paid for their time on a project; a sports star paid a salary; a journalist paid for a story. In many of those cases the creator will sometimes have the opportunity to negotiate a share of profit too, an ability to benefit in the upside of success. But, crucially, the media company has assumed all of the risk. Also, of course, the media company owns the copyright.

Artists and songwriters might get an advance, but that is a loan against future earnings, not a project fee. Artists and songwriters, like authors, are remunerated via product performance. They shoulder the risk, and most of the time they do not even own the copyright. Actors and sports stars do not have to worry about slicing up a royalty pot; they have been paid for their creativity whatever the outcome of the project. Any royalty splits are an upside, an ability to benefit from success rather than a dependency for income.

The consumption hierarchy has become compressed

Music used to be split into a neat hierarchy, with radio and social being about passive enjoyment and generating usually small royalties, while albums were about active fandom that generated large income. Streaming fused those two together into one place and created a royalty structure that, in artist income terms, resembles radio more than it does album sales. The problem does not lie with how much streaming services pay (c.70% of income is a hefty share to pay out), but instead:

1. how those royalties are divided up
2. the way they monetise consumption
3. the fact royalty rates are determined by how much streaming services charge

Streaming rates are going down because users are listening to more music and streaming services are charging less per user due to promotions, trials, multiple-user plans, telco bundles, student plans etc. Even before you start thinking about how the royalty pie is sliced, it is getting ever smaller in relation to consumption – and there is no onus on streaming services to protect against rates deflation because they pay as a share of income rather than a fixed per-stream rate (for subscriptions).

Monetising fandom

Music fans care about artists and songwriters, and given the opportunity and the right context many fans will support them. But that context is often artificial and happens outside of the normal consumption experience; for example, a music fan listening to a band on Spotify then going to Bandcamp to buy an album. It requires a conscious decision for the fan to say ‘I want to support this artist’. No such decision is necessary for a sports fan or movie fan because the remuneration system already ensures the talent has been adequately remunerated. On top of this, most music consumers are not passionate fans of most artists, so most will not make that step.

There are two natural paths that follow:

1. Build fandom monetisation into the streaming platforms, e.g. virtual artist fan packs, virtual gifting, premium performances, creator support etc. I have written at length about how Chinese streaming services do well at monetising fandom, but there it is the platform that benefits most, not the artists. Western streaming services have an opportunity to monetise fandom for the creators, not for the platforms.
2. Create new models where consumers pay for artist-centric experiences. These will always be more niche and have the challenge of building new audiences rather than tapping into existing streaming audiences, but the decision does not need to be ‘either/or’.

The third way

There is additionally a less obvious third path, that would reframe the entire basis of artist/label/publisher/songwriter/streaming service relationships: direct licensing for creators. No streaming service is going to want to do this (they already prefer to negotiate with aggregators rather than small labels) and labels and publishers are unlikely to want to cede such power. But a pragmatic compromise could be a new generation of artist and songwriter contracts that provide for the creators to set stipulations for royalty floors to ensure that they do not pay for streaming services cutting their prices via promotions and multi-user plans. This would also require rightsholders to ensure that streaming services set a royalty floor which in turn would compel streaming services to start pushing up the average revenue per user and perhaps even introduce metered access for users.

Options 1 and 3 are not exactly easy to do and they would require seismic industry change with wide-reaching impact. But if the industry wants a significant change in creator remuneration, then it needs to embrace truly disruptive innovation rather than spend its time tweaking a model that simply cannot change in the way many want it to.

Time to stop playing the velocity game

We all know that streaming has transformed consumption and business models alike, but this is not a ‘now-completed’ process. Instead it is one that continues to evolve at pace, and the dynamic of pace is the pivotal variable. Consumer adoption continues to accelerate in terms of both time spent and take up. The streaming services – which are entirely geared to driving and responding to this behaviour – rapidly hone their systems accordingly. Labels, artists, publishers and songwriters are stuck playing catch up, running after the streaming train before it disappears over the horizon. The marketing strategies and royalty systems that worked yesterday struggle to cope today. But this ‘upstream’ side of the music business is inadvertently making it harder for themselves to ever actually catch up. By trying to play by the new rules they are in fact feeding the machine, ceding further control of their own destinies. It is time for a reset.

Streaming’s ‘upstream’ fault lines

There are three major fault lines for the upstream music business:

1. Volume and velocity: releasing more music than ever before to meet the accelerating turnover of content
2. The demotion of the artist: once the centrepiece of music consumption the artist is becoming a production facility for playlists
3. Royalties: royalty payments built for the much more monolithic streaming model of the late 2000s do not reflect the complexities and nuances of streaming consumption in the 2010s 

Each of these are inherent attributes of the current model and favour the ‘downstream’ end of the equation (i.e. streaming services) far more than they do the upstream. Each problem needs fixing.

Volume and velocity

This is the most important and insidious factor, yet it is deceptively innocuous. Labels are releasing an unprecedented volume and velocity of music to try to keep up with streaming – especially the majors. But it is a Sisyphean task, no matter how many times you roll that boulder up the hill, the next one needs rolling up all over again and the hill gets steeper every time. Spotify is adding around 1.4 million tracks a month so, for example, if UMG wanted to release tracks on a market share basis it would have to release 420,000 every month.

Now that the data era has arrived in music, the risk of signing a new artists has been significantly reduced, but at the same time, an artist whose numbers are already trending does not come cheap to sign nor does she come with a guarantee of longevity. Many artists can do enough to have a successful song, but far fewer can make a habit of it. Labels have to decide how willing they are to bet on an artist one song at a time.

It feels impossibly hard not to play the game because everyone else is playing it and the system is geared that way. Feeding the velocity game habit is like feeding a crack cocaine habit. And yet, labels know better than most businesses that by breaking the rules, creative businesses can have more, not less, success.

The demotion of the artist

Western streaming services, unlike many Eastern ones, are built around tracks not artists and consequently consumption is too. Inadvertently, labels are feeding this dynamic because they are so focused on making tracks work that an artist is much less likely to be given the benefit of a long term strategy if her songs do not stream. The problem with chasing streams is that the process for one song might not apply to another. Failing at streams will often be a reason for pulling the plug on an artist, simply because ‘Plan B’ does not have a boiler plate. The more they push tracks the more they help the de-prioritisation of artists.

Fandom should come first, streaming second. A longer-term view is needed, one that puts building the artist’s fanbase first and streaming second. If an artist has a large, engaged fanbase then streams will usually follow. But if an artist gets a lot of streams on a playlist a fanbase does not necessarily follow. Marketing campaigns need to shift emphasis to a longer-term, audience-centric focus. It may be harder to measure the near-term ROI with this approach, but it will deliver better long-term returns.

Royalties

The #brokenrecord debate is not about to go away, especially as it will likely be 2022 before live music is operating at full capacity again and thus delivering artists the income they are currently missing. As I have previously discussed this is a complex problem for which there is no single solution but instead will require coordinated efforts from multiple stakeholders. A reassessment of the entire royalty streaming structure is needed from upstream to downstream.

Downstream, we need to stop thinking that every song is equal. They are not. Listening to 30 minutes of 35-second storm sound ‘songs’ in a mindfulness playlist should not be paying the same royalties as an album listened to its entirety. Also, some form of user-centred licensing solution is needed that rewards fandom, whether that is a user opt in model (‘support favourite artists’) or an actual re-work of the royalty mechanism, or a combination of the two.

Labels also need to work out how they can pay more to artists. Lowering their A&R risk exposure could free up some income. Of course, this is something that many have tried and failed at, but what if labels were to allocate 10% of their marketing budgets to top-of-funnel activity so that they can do even more work than they currently do around identifying talent early. This needs a commercial model that protects their funnel (e.g. first refusal terms for artists) and also needs to play in the creator tools space: the tools creators user to make music is the real ‘top of funnel’ – this is where the first relationships are established.

The holy grail for improving label profits would be for the label to improve the overall success rate for the artists in the portfolio. However, in the history of music, it is safe to say that no label has quite cracked it. Instead they live with it as a reality and a cost of doing business.

Labels do though, have some margin slack to play with. WMG improved its OIBDA from 11.9% in 2018 to 14.0% in 2019 while UMG improved its EBITDA from 16.7% in 2017 to 20.0% in 2019. Clearly, improved profitability is important in its own right and for investors, but the way to see this is a near-term expense to secure long-term profitability. A label without artists is not a label.

Breaking the habit

It takes a brave – some might say foolish – label to stop playing by streaming’s rules of engagement, to risk losing share in those crucial playlists. But label business models are not structured for the economics of single tracks – dance labels excepted. Their P&Ls are built around artists. When streaming behaviour started killing off the album, labels complained but then got used to building campaigns around tracks. However, this is not the destination, it is a stopover on the long-term journey towards a post-artist world. Playing streaming’s velocity game perpetuates an increasingly dysfunctional model. It feeds shortening attention spans, degrades the role of the artist and downgrades music to fodder for playlists. It is time to jump off the merry-go-round.

Artists are Learning How it Feels to be a Songwriter

The ‘broken record’ streaming debate that continues to rage on is a natural consequence of the instantaneous collapse of live music revenue following lockdown. As soon as it was clear that live was going to be gone for some time, MIDiA predicted that the artist backlash against streaming royalties would be a natural, unintended consequence.

With many artists used to live comprising more than half of their income and streaming by contrast a sizeable minority, it was easy for them focus less on whether streaming paid enough and more on how many extra fans it was bringing to their concerts.

In the absence of live, all eyes are on streaming. As I’ve written previously, there isn’t a silver bullet solution to what is a complex, multi-layered problem. But there is a really important issue that artists’ lockdown plight shines a light on: the long-term plight of songwriters. Here’s why.

Streaming did not grow in a vacuum

The streaming economy did not grow in a vacuum. It rose in the context of a thriving wider music industry where artists were earning good money from live, merch and (for some) sponsorship. Nor did streaming ever consider its relationship to live as being neutral. Spotify in fact is vocal in its belief that it  ‘supports and extends the value of live’.

This matters because it encourages artists to think about streaming delivering a wider set of concrete income benefits than the royalty cheque alone. The streaming case is that without it, artists would be playing to smaller crowds and selling less merch. A high tide raises all boats.

Without the halo effect benefits though, artists would have found it much more difficult to adjust to the shift of paradigms from a series of large one-off income events (i.e. selling albums) to a longer-term, more modest monthly income, namely trading up front payments for an annuity. Artists would have found it as difficult as…well…as they are now. This is how it feels not to have live music and merch paying the bills. This is how it feels to be a songwriter.

Songwriters only have the song

Professional songwriters (i.e. not those that are also performing artists) may have many income streams (performance, sync, mechanicals, streaming) but they all depend on the song. The songwriter lives in a song economy. The artist lives in a performance/ recordings/ clothing/ collectibles/ brands economy. Songwriters do not tour or sell t-shirts. As a consequence, they have been paying closer attention to streaming royalties over recent years than artists have. Now that artists are also unable to tour or sell shirts (at least in the same volumes) streaming royalties suddenly gained a new importance to them also.

The good news for artists is that live will recover (though it will take until late 2021 to be fully back in the saddle). The bad news for songwriters is that there is no easy or quick fix and things will get worse before they get better. One of the key imbalances is in streaming. Music publisher revenue is around 2.8 times smaller than label revenues but streaming royalties are four times smaller. As streaming becomes a progressively larger part of the wider music economy, if the current royalty mix remains, songwriters will earn a progressively smaller share of the total.

A generation of whom much is asked

Artists are fighting an important fight now, but when live picks up post-lockdown, songwriters will still be fighting their fight. This is not to in any way diminish the importance of artists getting a fairer share from streaming services and record labels, but it is to say that much of their pain will ease when their other income streams come back online.

Be in no doubt. Songwriters have a long and windy road ahead of them.

Songwriter’s streaming era plight reminds me of Franklin D. Roosevelt’s 1933 quote:

“To some generations much is given. Of other generations much is expected.”

But just as streaming does not exist in isolation, nor do songwriters. They are the foundations of the entire industry. There is a well-used saying that ‘everything starts with the song’. It doesn’t. Everything starts with the songwriter.

Quick reminder: if you are an artist and you haven’t yet taken our artists survey, then there is still time! We are keeping the survey live for a few more days. All individual responses are 100% confidential. All artists get a full copy of the summary survey data so you can benchmark yourself against your peers, including how they are dealing with the impact of COVID-19. The survey questionnaire is here.

What is the value of exposure when exposure is all there is?

There is an existential debate going on at the moment, around whether streaming is paying artists enough. It may feel like a rerun of old debates but it is catalysed by COVID-19 decimating artist income. These are some of the key narratives: here, here and here.

In this piece I lay out the underlying economics of the argument. I also focus wholly on artist income as songwriter income is another topic entirely.

COVID-19 has reset the debate

The latest streaming royalty debate is not an isolated event. It is happening because COVID-19 has decimated live income, leaving many artists worrying about how to make ends meet. Last week, just before this whole debate kicked into gear I wrote:

“Live’s lockdown lag may have the knock-on effect of making artists take a more critical view of their streaming income. When live dominated their income mix, streaming’s context was a meaningful revenue stream that built audiences to drive other forms of income. It was effectively marketing artists got paid for. Now that artists are becoming more dependent on streaming income, the old concerns about whether they are getting paid enough will likely come back to the fore. It is in the interests of both labels and streaming services, that labels use this as an opportunity to revisit their streaming splits with artists. Labels cannot afford to have artists united against the labels’ primary income stream.”

None of this makes the debate any less important, but it explains why it is happening now, and with live revenue potentially set to take years to fully recover, it is a reality that streaming services and labels need to adjust to. It is in the interests of both labels and streaming services that artists feel like they are being treated fairly. But it is crucial that this debate is grounded in a firm understanding of streaming economics and that we do not return to the mudslinging of more than half a decade ago. A debate which, by the way, did not result in any fundamental change to how artist royalties are paid and was eventually followed by labels negotiating smaller revenue shares with Spotify and others.

Where streaming has got us to

Firstly, let’s lay some ground markers:

• Streaming has driven half a decade of recorded music revenue growth, with the market now 42% bigger than it was in 2014
• The wider streaming economy has globalised fandom and engagement
• More people are listening to more music now than before

Streaming has been the change agent that turned around 15 years of decline. But it also completely reframed artist income from recorded music. In the old sales model artists would get a large sum of money in a relatively short period of time. Streaming income is more like an annuity, a longer-term return where the music keeps paying long after release. In the old model artists had smaller but high-spending audiences. With streaming they have larger but lower-value audiences.

For example, a recouped independent artist might expect to earn $4,500 for selling 1,500 copies of an album. That is roughly how much an artist would get from 5,000 people streaming the album 20 times each. The average revenue per user (ARPU) has gone from $3.00 to $0.90 for streaming. The artist has traded ARPU for reach.

This model worked fine when live and merch were booming because more than three times as many monetised fans meant three times more opportunity for selling tickets and t-shirts. This of course is the ‘exposure’ argument streaming services are fond of, which works until it does not. Now that live and merch have collapsed, as the trope goes ‘exposure does not pay the rent’. The previously interconnected, interdependent model has become decoupled.

Put simply, artist streaming economics do not work without live.

The question is: what levers can actually be pulled and what effect can they have? In the above chart I have used Spotify’s 2019 premium revenues to illustrate how changes in royalty shares can impact what artists earn. I have used a total per stream rate of $0.06 as the base case, which could look on the high side for some artists, but the purpose is to show the relative change. Whatever amount the base rate is, it will increase by the same percentages.

The tl;dr of the chart is the most radical of the options (label rate returns to 55%, podcast dilution is removed from the royalty pot, a 25% increase in retail price and therefore royalties) results in a very meaningful uplift of 42% in royalties for artists from today’s current state. But, the three problems here are:

1. Such measures could damage the commercial sustainability of streaming
2. It does not change the underlying annuity model shift that streaming represents
3. We are about to enter a recession. Music subscriptions are at risk, increasing the prices right now could accelerate subscriber churn. Meaning a bigger slice of a smaller cake for artists.

Let’s take the first two points in turn.

1) Spotify lost $184 million in 2019. With this royalty model it would have lost more than $1 billion. Spotify would have to reduce its operating costs by a fifth just to get back to losing $184 million. Critics would argue this represents trimming the fat. It might, but it would also likely lead to Spotify:

1. Cutting back on product development
2. Cutting back on growing its subscriber base
3. Finding new ways to charge labels and artists for additional services

None of these are reasons not to pursue the strategy but they are prices that labels and artists have to be willing to take. Spotify revenue growth will slow. Furthermore, it will skew the market towards Apple, Amazon and Google who can afford to make music loss leading. In the mid term this may benefit artists, but in the longer term (i.e. when Spotify is sufficiently squeezed) these tech majors are likely to follow their MO of ‘reducing inefficiencies in the supply chain’. So be careful what you wish for.

2) Taking an artist straw person, with 20% of her total income coming from streaming, if live and merch only gets to 25% of its previous level, the 41% increase in streaming income would still see her total annual income fall by 40%.

No streaming lever can be pulled hard enough to offset the decline in live revenue.

So, let’s pull together all the pieces:

1. Streaming royalties can be increased meaningfully if prices are increased and rates revisited but it may slow the streaming market
2. Now is probably not the best time to be increasing streaming prices for consumers
3. Even a big increase is not going to offset the fall in live income

There is not a simple, single answer to fixing the current crisis in artist income. A blended, pragmatic solution would be:

1. Increase royalties at a middle option rate (do not increase prices until after the recession)
2. Artists push their fans to buy their music at destinations like Bandcamp
3. Professionalise and commercialise the livestreaming sector, with a strong focus on charging for events in order to create some live income
4. Innovate virtual fandom products to drive new, additional income streams

It is not going to be easy for artists for some time yet. The hard truth is that income levels will not return to full strength until live does, and that is a way off yet. Streaming is more important now than ever so any solution must balance maintaining its momentum and scale with sustaining artist careers.

Songwriters Aren’t Getting Paid Enough and Here’s Why

Music Business Worldwide recently ran a story on how Apple has proposed a standard streaming rate for songwriters, with Google and Spotify apparently resistant. Of course, Apple can afford to run Apple Music at a loss and has a strategic imperative for making it more difficult for Spotify to be profitable, so do not assume that Apple’s intentions here are wholly altruistic. Nonetheless, it shines a light on what is becoming an open wound for streaming: songwriter discontent. In the earlier days of streaming artists were widely sceptical, but over the years have become much more positive towards the distributive medium. The same has not happened for songwriters for one fundamental reason: they still are not paid enough. This is not simply a case of making streaming services pay out more; rather, this is a complex problem with many moving parts.

Songwriters don’t sell t-shirts

Streaming fundamentally changes how creators earn royalties, shifting from larger, front-loaded payments to something more closely resembling an annuity. In theory, creators should earn just as much money, but over a longer period of time. If you are a larger rightsholder then this is often wholly manageable. If you are a smaller songwriter or artist, then the resulting cash flow shortage can hit hard. Many artists, especially newer ones, have made it work because a) streaming typically only represents a minority of their total income, and b) the increased exposure streaming brings usually boosts their other income streams such as live performances and merchandise. Professional songwriters however – i.e. those that are not also performers – do not sell t-shirts. Royalty income is pretty much it. There is a greater need to fix songwriter streaming income than there was for artists.

The four factors shaping songwriter income

There are four key factors impacting how much songwriters earn from streaming, and most of them can be fixed. To be clear, though, just fixing any single one of them will not move the dial in a meaningful-enough way:

1. Streaming service royalties: Songwriter-related royalties are typically around 15% of streaming revenues, which represent around 21% of all royalties paid by streaming services – around 3.6 times less than master recordings-related royalties. This is better than it used to be, when the ratio was 4.8. However, there is clearly still a large gap between the two sets of rights. Labels argue that they are the ones who take the risk on artists, invest in them and market them. Therefore, they should have the lion’s share of income. Publishers, on the other hand, argue that they are increasingly taking risks with songwriters too (paying advances) and working hard to make their music a success, e.g. with sync streams. They also argue that everything is about the song itself. Both arguments have credence, but the fact that streaming services have historically negotiated with labels first helps explain why there isn’t much left of the royalty pot when they get to publishers. There is clearly scope for some increase for songwriters, but if there is not an accompanying reduction in label rates – not exactly a strong possibility – then the net result will be reduced margins for streaming services. Given that Spotify has only just started generating a net profit, the likely outcome would be to weaken Spotify’s position and skew the market towards those companies who do not need to see streaming pay – i.e. the tech majors. If the market becomes wholly dependent on companies that thrive on squeezing suppliers… well, good luck with that.
2. CMOs: Many songwriter royalties are collected by collective management organizations (CMOs). These (normally) not-for-profit organisations administer rights, take their deductions and then either pay to songwriters directly or to publishers who then pay songwriters (after taking their own deductions). It gets more complicated than that, however. If a songwriter is played overseas, the local CMO collects, deducts and then sends the remainder to the CMO where the songwriter is based (however there are a good number of exceptions to this with a number of CMOs not deducting for overseas collections). That CMO takes its deduction and then distributes. It gets more complicated still – some CMOs apply an additional ‘cultural deduction’ on top of their main fee before distributing. So, if a US hip-hop artist gets played in Europe, the local CMO will take its cut, and an administration fee. Then it goes to his local CMO which takes its fee before sending it to the publisher which then takes its own cut (typically just 25%) which however is much better than label shares.
3. The industrialisation of song writing: With more music being released than ever, songs have to immediately grab the listener. To help ensure every part of the song is a hook and to try to de-risk their artists, bigger labels commission songwriter teams and hold song writing camps, where many song writers get together and write the tracks for albums. This means that the royalties for every song are thus split into small shares across multiple songwriters. Drake’s ‘Nice for What’ has 20 songwriters credited. That means the already small royalties are split 20 ways.
4. The unbundling of the album: When music was all about selling physical albums, songwriters used to get paid the same mechanical royalty for every song on the album, regardless of whether it was the hit single or filler. Now that listeners and playlists dissect albums, skipping filler for killer, a weak song simply pays less. Tough luck if you only wrote the filler songs on the album. On the one hand, this is free market competition. If you didn’t write a song well, then don’t expect it to pay well. Some songwriters argue that it should go the other way too, though – if they wrote the song that made the artist a hit, then shouldn’t they be paid a larger share? 

Here’s another way of looking at it. With the above analysis, this is how many streams the songwriter needs to earn income based assuming the songwriter is equally sharing income four ways with three additional songwriters:

It is incumbent on all of the stakeholders in the streaming music business to collectively work towards making earning truly meaningful income from streaming a realistic objective for songwriters. No single tactic will move the dial. Increasing the streaming service pay-out from 15% to 20%, for example, would still see the above-illustrated songwriter only earn 25% of that. All levers need pulling. Until they are, songwriters will feel short-changed and will remain the open wound that prevents streaming from fulfilling its creator potential. Ball in your court, music industry.

Note – since originally publishing this post I have had useful feedback from a number of rights associations and publishers. My assumptions actually translated (unintentionally) into a worst case scenario that was not representative of usual practise. The post has been updated to show a more typical revenue flow. The underlying arguments of the piece remain unchanged.