The vast majority of music streaming platforms today pay artists on a pro-rata model. This is a system that pools money generated by the service, and pays out to rights-holders based on the proportion of streams they accumulated, in accordance with their respective shares of a composition. This means all artists are paid out of the same revenue pool based on their proportion of total streams on the service. Therefore under this model, fans end up paying for the most popular artists whether they listen to them or not, leading many creators to feel their communities of supporters are lost in the current landscape. An individual could spend all of their time streaming a handful of artists, yet the revenue from their subscription may not go to those they listen to most. Aside from more equitable payments, others also believe shifting to a user-centric royalty system will increase the number of subscribers to music streaming services due to increased transparency.
The Inequity of Pro-Rata Royalties
The pro-rata model was established when streaming was fairly minimal. Within this model, money collected from users has typically divided into three parts: 1) the Digital Service Provider (DSP, such as Apple Music or Spotify) keeps about approximately 30 percent of the money collected, 2) money owed to the rights holders of the underlying compositions (publishing companies, collecting societies, performing rights organizations), and then 3) rights holders of recordings (record labels, distributors, performing artists, producers) receive a share. Currently, the majority of DSPs use a pro-rata model of revenue distribution. Users’ monthly fees are compiled into a total amount, along with ad revenue for the site. That money is then distributed to rights holders based on their share of streams on the platform. Thus, revenue generated by a given user is distributed to artists that they may not listen to. The pro-rata model benefits rights holders of the most listened-to tracks. However, this system did not always demonstrate as much inequity. Early streaming service users were primarily people between the ages of 18 to 35, whose listening habits did not vary as widely as they do today. However, the demographic of today’s music streaming population is exponentially more diverse across all metrics, such as favorite genres, geographic location, and age. With over 59 percent of the recorded music sales markets attributed to online music services, the increase in streaming and myriad of DSP users is reflected in the overall increased diversity of listening habits. The pro-rata model does not equitably portray the wide array of talent on these platforms, as the revenue generated from listeners with more niche tastes still gets distributed to popular artists with the most streams. The potential effects of switching to a user-centric system can be observed in a study published in the Journal of the Academy of Marketing Science, where researchers at Hamburg University conducted a survey to calculate the potential payout for different genres based on subjects’ listening habits. They found that popular genres such as Hip Hop, Rap, and EDM would lose revenue in a switch, whereas fewer mainstream genres, such as International Rock, Classical, and Metal, have the potential to earn more.
SoundCloud’s User-Centric Royalty Model
Fan-powered royalties (FPR) are an alternative approach to revenue distribution that give users more influence over how their money is distributed. In 2021, SoundCloud, an online audio distribution and music-sharing platform, announced its transition to a fan-powered royalty system as a more equitable and transparent way for emerging, independent artists to earn money on its platform. Ushering in the new model of payouts means an artist’s revenue now comes directly from their fan base on the site. With this move, each listener’s subscription and advertising revenue is only distributed among the artists that they listen to. Soundcloud’s announcement was the first major embrace of FPR in the age of pro-rata models used by main DSPs. Their move shifts the benefit to independent artists with loyal fanbases by directing their revenues based solely on their listeners. In 2022, Warner Music Group (WMG) became the first major label to also endorse SoundCloud’s new payout method via a global licensing deal between the two companies. WMG’s Chief Digital Officer & EVP of Business Development, Oana Ruxandra shared, “as the ecosystem expands, WMG is focused on advancing and experimenting with new economic models to ensure the opportunities for our artists and their communities are maximized.”
Even though SoundCloud and WMG’s partnership signals new opportunities for change in artist remuneration, the opportunities and losses vary depending on the genre. A move from pro-rata to fan-powered royalties is estimated to increase the revenue of classical music artists by 24 percent, whereas rap and hip-hop would respectively see reductions of 21 percent and 19 percent. Yet music industry professionals such as Didier Martin, the CEO of Outhere Music and former Artistic Director of the Alpha Classics label, believe that “rather than launch into years of impact studies and debates, action must be taken now to save the creative diversity of music.” Martin urges streaming platforms to use the increasing prevalence of music consumption via their services as an opportunity to change their method of remuneration. Additionally, Didier suggests implementing a “compensation distortion correction fund” or “musical diversity support fund,” in which streaming platforms would provide additional financial aid for recording genres that have been disadvantaged by the current system.
The Cost for Smaller Streaming Providers
However, migrating away from the current royalty model would come at a cost that may not be feasible for smaller platforms to incur. Smaller services may not have the resources to verify the data of every individual subscriber or buy into user reports offered by data companies. Talks of a user-centric model also call into question potential new methods of fraud to increase income on these sites. DSPs will often suggest users similar artists and songs based on their listening activity. Given the opacity of music recommendation algorithms, there is concern over how these programs will impact rights holders in an FPR model. It is unclear how and why artists’ music may be recommended to certain users as opposed to other users. With an FPR system, fraud may take the form of hacking into sub-accounts to increase streams or manipulating meta-data of tracks to game the algorithm and artificially influence user recommendations. The concerns of fraud demonstrate the need for greater transparency by major platforms should they decide to adopt a user-centric model.
Considerations for New Management Strategies
Rights holders who want to leverage the FPR model might reallocate significant resources for building a niche, superfan audience who will actively stream and recommend compositions from their library. Such methods would involve increasing engagement through various fan-based activities within DSPs. For example, SoundCloud has a wide array of fan economy tools that are centered around online social interaction, such as the ability to comment on songs and communicate directly with the artist. Matched with a fan-driven economy, the FPR model has the potential to boost revenue for artists even more by harnessing the power of superfans to further boost engagement and algorithmic spotlights. Even as the music industry weighs the pro-rata model against fan-powered royalties, there is an opportunity for all music streaming services to offer their users new perks as SoundCloud has.
There are no doubt benefits to adopting a user-centric payment model for streaming. Though artists at the top may take a hit to their earnings, great benefits can be realized for those creating in niche spaces. Such a model can also increase positive sentiments regarding DSP’s, as users could rest assured that the money they spend on streaming is going to the artists they actually use the service to listen to. In combination with fan-driven content and online interactions, artists may have the opportunity to build an online community to drive streaming revenue to new, possibly sustainable heights, something unimaginable under a pro-rata model. The shift would take time and resources in order to calculate payments based on individual user data, but in the end, has great potential to increase longevity for creators who rely on streaming, or already have sizable fan bases, but lose revenue generated by their listeners to the most popular artists.
Edited by Vincent Williams
Photo by Matthew Henry
About the author
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