Grizzly Bear was blowing up my Twitter feed this weekend after asking the question: what’s up with Spotify’s payment model?  It’s not an uncommon question lately, likely due to the fact that no one can seem to pinpoint how exactly the service pays artists.  Grizzly Bear themselves claim to get about $.001 per stream, David Harrell from Digital Audio Insider averages closer to $.004 per stream over the past three years, and this infographic, which circulated widely a while back, indicates that artists on a label are paid $.00029 per stream.  So, what’s the deal?

The confusion is warranted – the interactive streaming payment model that Spotify, Rdio, MOG and Rhapsody use is less transparent than the permanent digital download model that iTunes employs, for example. The payments are variable, and payments are made to labels who distribute to their artists directly, which further obfuscates the process.  That being said, the subscription based interactive streaming model will likely continue to play a growing part in the future of music consumption.  As the most recent 2011 RIAA Year-End Shipment Statistics outline, subscription services were up 18.9% in volume from 2010, and up 13.5% in revenue. Small numbers compared with CD and permanent digital download (MP3) revenue and units shipped, but impressive when you consider that one of the major interactive streaming companies, Spotify, has only been active in the US since July of 2011. As we move towards a world where interactively streaming music will be one of the many growing options that consumers will choose to listen to music, it makes sense to understand how the financial process behind subscription interactive streaming works.

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I’ve known D.A. Wallach for several years, after first interviewing him for my Online Music Marketing with Topspin course.  In addition to being the lead vocalist and songwriter in Chester French, D.A. works with Spotify as their “Artist in Residence.”   Below is a transcript of a conversation I had with D.A. about Spotify’s payment process.

Mike King: I feel like there’s a disconnect between artists and Spotify in regards to the mechanics behind Spotify’s payments.  There’s a lot of discussion about the deals that Spotify has with the major labels, and how the payments to indie artists vs. the payments to major labels is lopsided. Is there any difference between the payments Spotify makes to the majors, and the payments Spotify makes to indie labels or indie artist services like TuneCore or Cd Baby?

D.A. Wallach: We treat payments to indies and major labels the same way.  Let’s take a step back first and talk about some of the basics with the service.  We make money in two ways.  We make money through advertising to free users, who have access to Spotify only on computer.  The service is interrupted by ads, and the functionality is a lot like YouTube.  There is no mobile option for free ad-supported users, either.  Second, we generate revenue from selling subscriptions.  In the U.S., a subscription is $120 a year.  In the U.K. it is ₤120 a year, and in the E.U, it is €120 a year.

We aggregate all of this revenue from these two streams, and distribute back 70% in royalties based on a pro rata share in accordance with the popularity of a piece of music.  For example, if one of your songs has been streamed 1% of the total number of streams in a month, you will get 1% of the 70% of royalties we pay out to rights holders.  We pay this out to whomever owns the music.  If you are going through TuneCore, we’ll pay them directly, and because TuneCore takes no percentage on the revenue, whatever we pay TuneCore on behalf of the artist goes directly to the artist.  If you are signed to a label, we’ll pay the label, who is then responsible for paying the artist based on the contract the label has with the artist.

MK: Can you talk a little bit more about the revenue split between publishers and master rights holders?  How is the 70% of revenue you pay out split between publishing and the master side?

D.A.: With the publishing side, it’s a bit of a complicated formula. The rates are statutory, and have been negotiated with the PROs.  [NOTE: A good starting point to understanding how the interactive streaming services pay publishing royalties is this article from The Future of Music Coalition. Boiled down to basics, interactive streaming services pay a mechanical royalty rate of 10.5% on the revenue they generate, MINUS any amounts for performance royalties. In other words, services like Rhapsody and Spotify are subject to both a mechanical and performance royalty, but the entire compensation for songwriters and publishers from any limited download or interactive streaming site is "capped" at 10.5% of the site's revenue.]  In the U.S., we use Harry Fox as our service provider, and they do the distribution to the publishers.

MK: So there are no differences between what you pay a major label and what you pay an indie label?

D.A.: We have thousands of deals with all sorts of entities including distributors like the Orchard and TuneCore, the majors like UMG, and thousands of other independents.  The basic principle of the deals and the rough numbers are within a small margin in all of these deals. At the end of the day, the indie artist is not at a disadvantage compared to a major label artist, and we feel that all artists are being compensated fairly.

MK: Why do you think that there is so much confusion about how Spotify pays artists, and a general concern from artists about the payments they are seeing?

D.A.: I think there are three answers to this question.  First, we’re not a big company.  We have four million subscribers, and 15 million active users at the moment.  These are satisfying numbers but they are not staggering numbers.  We’ve paid out a good amount in royalties so far, close to $200 million dollars.  I think that people are comparing what we are doing to iTunes, which is not a legitimate comparison.  iTunes is orders of magnitude larger than we are.  People are expecting to see iTunes numbers, but we’re not there yet.  The second answer is that people need to transition from unit-based thinking to consumption-based thinking in terms of royalties.  We feel the metric of success should be based on how many people are listening to your music over a period of years, as opposed to looking at how many units are shipping in one week.  People are used to seeing big numbers from a unit-based model, but that’s really front loading what is happening. Comparing iTunes sales with Spotify payments over a two month period of time is not a great way to look at things.  What we are trying to create is a system in which you earn royalties forever for good music, and the time horizon is simply different than what folks are familiar with now. One can actually think about a download sale as a down payment on all future listening that a fan will do. If you took the effective per play rate that I’ve paid for every time I’ve listened to my Dark Side of The Moon CD, it would be trivial compared to what I’d have generated if I’d done all that listening on Spotify. The third answer is that it’s a confusing model since it is unfamiliar.  There is no fixed play rate, and as we grow, our royalty base constantly expands, driving higher and higher royalty payments. There is also confusion that arises from the fact that we pay royalties (just like iTunes, by the way) to whomever owns the music. In the case of a band on a label, the label generally mediates the accounting of those royalties. My band was on UMG, and when I look at my statement, as one example, it’s confusing. I personally hope that the conversations about Spotify royalties actually lead to efforts at increasing transparency in the entire digital music system. We’re very proud of the hundreds of millions in royalties that we’ve been able to pay out to the creative community, and we want the flows of revenue to be clear to artists.

MK: So to reiterate, as Spotify grows, the pool of revenue will increase, and the royalty rate will increase for rights holders.

D.A.: Yes, the larger Spotify gets, the larger the royalty rates should be. The royalty rates we’ve paid out have been growing at an exponential rate, and we expect this to continue.  If we can get to the scale of Netflix – which has 20 million subscribers – we estimate we’d be paying out to artists what iTunes is paying out on a year to year basis. This is a simple calculation based on the average download consumer spending $60 a year with iTunes, and the average premium subscriber paying $120 a year with Spotify.

MK: Do you think that Spotify is cannibalizing other revenue streams, such a downloads or physical sales?

D.A.: In no market where we exist has there been any data illustrating a downturn in physical or digital sales.  Many labels view us as an extra check, as a purely additive income stream, and I think this is an accurate way to think about what we are doing.  Our main demographic is 18-29 year olds, and in many ways, this is a generation who has never paid anything for music.  They grew up with P2P services, and most of these folks are paying for music for the first time in their lives.  It’s found money for artists and rights holders. On an individual artist level, we’re paying out royalties of $200-300 thousand dollars a month for some of the biggest acts.  The bottom line for us is that we have paid out nearly $200 million in royalties and we feel we are making a real contribution back to the music business. Not all artists are earning big checks, but this reflects a small user base and their relative level of popularity. It is also true that if not a lot of people buy your album on Amazon or iTunes, you won’t be seeing massive payments, either. That being said, we are a newcomer to the market, we’re making huge strides, and it will only get better.

 

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    I found D.A. to be quite accurate that their main demographic (between 18-29) years old are mostly people who’ve either never paid for, or rarely paid for music due to P2P. I’m 22, but I purchase music, and avoid P2P or similar things as much as I can, making me one of the odd ones for my demographic.

    Thing is though, what happens when my generation gets up there in age and the generations that were into buying music (pre P2P) are gone? Obviously ways Artist’s make money from their music will continue to evolve, but when thinking about it, it really puts an expiry date on the current physical medium.

    I’ll also note though that as long as the subscription/streaming based medium continues to grow, it will make streaming one of the main music consumption methods for the new generation of children coming up.

    Interesting little points that will eventually unfold and maybe be answered as the Industry continues to adapt to new models and technology.

    What is Spotify’s business relationship with the record labels?…

    Here’s a good answer from Spotify’s Artist in Residence, D.A. Wallach > We treat payments to indies and major labels the same way. Let’s take a step back first and talk about some of the basics with the service. We make money in two ways. We make mon…

    @Mike You raise a good point. People complain about how services like Spotify are hurting artists, but if it acts as a middle ground between buying the physical media or MP3 and illegally downloading it, then ultimately it is beneficial to the artists – even if it prevents only a few people from illegally acquiring the song(s). It is better to be paid $.0001 per stream than $.0000?

    I’m also in that demographic! I use Spotify instead of torrents. Occasionally I’ll purchase a song from Google Play if I really like it and don’t want to go out of my way to download, covert, and transfer. Spotify is a great way to listen to new music, although they are missing quite a few albums and songs. I hope they are paying their artists well because that’s another reason as to why I have it.

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