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?

Why artist subscriptions are the perfect partner to two-tier licensing

With two-tier licensing now a thing, it is time to focus the discussion on how to add new components to the DSP ecosystem that will help long-tail artists continue to thrive in this brave new world. There are many positives that two-tier licensing will bring (helping mid-tier artist remuneration, attaching an appropriate premium to lean-forward listening, etc.) even if the streaming fraud efforts will likely soon be offset by bot farms increasing their minimum streams thresholds. But the potential downturn to long-tail artist income is a very real prospect. Not only could artist subscriptions re-level the playing field, but self-releasing artists (artists direct) also have an opportunity here that label artists do not.

For more years than we care to remember we have made the case for artist subscriptions, most recently in this MIDiA report. The data in the report shows that what fans want to pay for most (and by some margin) is early access to music, exclusive merchandise, and songs. On one hand, this makes artists subscriptions relatively low effort, as there is no need to produce backstage access videos or host live Q&As, among other things. On the other hand, it is problematic for record labels that have to consider factors such as release campaigns driving large stream volumes to trigger the algorithms, and commercial agreements with DSPs that can complicate exclusives. Artists direct, however, have no such constraints. 

MIDiA’s data shows strong willingness among fans to pay, up to $5 an artist. But, if a long-tail artist was to price their subscription at just fifty cents, it would only take five fans to subscribe to generate the same amount of income a thousand streams would. Get that to ten fans (surely eminently achievable for many long-tail artists) and they would be earning double the minimum stream threshold of the two-tier system. It is a mechanism that enables DSP streaming to deliver on the elusive long tail promise and, to boot, everyone wins:

• Artists direct get income that is more meaningful income than in today’s one-tier system
• Bigger artists continue to get a more meaningful share of streaming royalties

The beauty of this approach is that the infrastructure is already in place, it just needs a little tweak. In August, Spotify and Patreon announced a new initiative for podcasters, enabling them to create premium subscriptions for exclusive podcast content. Artist subscriptions thus already exist on Spotify, they are just not called artists subscriptions, yet.

Starting in 2024, Spotify and other DSPs face a delicate balancing act. They must navigate the demands of larger rightsholders – a term that covers not only major labels but also a very large number of indie labels and publishers of all shapes and sizes. At the same time, they are going to have to convince the wider creator community that they are there for them. 

This is particularly pertinent because DSP streaming no longer hold a monopoly over music creators. In 2022, the number of creators releasing outside of the traditional digital supply chain grew twice as fast as those releasing into streaming. This is the second successive year that this has been the case. A forking is taking place. These creators are choosing share their music on platforms like TikTok, YouTube, Soundcloud, BandLab, Discord, Twitch, Instagram, etc. rather than risk getting lost in the DSP ocean. From a creator economy perspective this is no bad thing, in fact, it will probably be a good thing. However, from a DSP perspective, they will want to utilise every resource at their disposal to position themselves as the most attractive platform for artists.