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Spotify’s D.A. Wallach Explains How Spotify Pays Artists


Grizzly-bear-tweetGuest post by Mike King (@atomzooey), who wrote and teaches courses at Berkleemusic.com including Online Music Marketing with Topspin. The next term begins 9/24.

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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20 Comments

  1. “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.”
    Explains well the biggest paradigm shift that is so hard for so many people to understand.

  2. “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.” If this is so, how can one make a valid case for placing product on the service? Haven’t artists been vilifying the major labels for 40 years because the royalty payment systems were “less than transparent?” Did you believe because this is the internet these are “good guys,” vs the traditional major label villains? The guys at Spotify like to spend big on their expense account dinners too. David Dufresne calls it a “paradigm shift,” I perceive it to be a bad business model that devalues the copyright, pays artists a substandard wage, and as a profit center will ultimately prove to be unsustainable. Of course there is growth rate – it started at point zero backed by a massive advertising and PR campaign. I wish I had a penny for every time Myspace was called a “paradigm shift.” This is nothing more than a bunch a tech heads trying to get rich off of your creativity and content. Wake up people!!! If a company executive has to spend 10 paragraphs to explain how his payment system works, you have a problem. Who runs this company anyway, Romney and Ryan?

  3. The larger Spotify gets, the larger the royalty rates should be.
    Nope: The size of Spotify does not affect the per stream rate.
    The royalty rates we’ve paid out have been growing at an exponential rate
    Not true either. Over the last year the per stream rate did not grow at all. Check this graph of per stream rates over the last two years.
    http://www.spotidj.com/blog/spotify-payout-q2-2012/

  4. Hetal: That article you linked to says that the majors were able to buy shares of Spotify, not that they receive any greater royalty rate when it comes to streaming. Indeed, this ultimately means that they are profiting more from the service, but what DA says is factually accurate. And to your last point: of course majors aren’t going to share profits fairly with artists; that has been true for ages – but you can’t blame Spotify for that.
    As an indie I hope that what DA says is true, but I for one will remain skeptical until these guys can show some actual, relevant data and a business model, rather than empty anecdotes and future promises.

  5. Spotify is hiding a very basic legal obligation that few artists, songwriters and the general public would know about. The 10.5% is mandated by the US government to be PAID DIRECTLY TO THE SONGWRITER OFF THE TOP BEFORE IT GOES TO THE RECORD COMPANIES OT HARRY FOX OR THE PRS’S!
    Read about it….It’s right there in the copyright laws…..Spotify gets around this, by claiming they cannot “find” the artist and post notice to that effect. Thereby, becausee of the fact that the Record Labels OWN Spotify, the money goes to them first, the PUblishers (Harry Fox), the PRS’….Then, some ridiculously low, insulting and illegal trickled down penny comes back to the composer, artist, etc….A songwriter an actully call SPOTIFY, and upon hearing his work played, he/she may demand to be pay the 10.5% share directly to them..You could not be with a PRO but you will have your money. Having written many hit songs that are streamed every day by Pandora Rhapsody, YOUTUBE< SPOTIFY......I can tell you I have NEVER seen a cent from Spotify. Maybe they cannot find my phone number....

  6. “The larger Spotify gets, the larger the royalty rates should be.”
    I agree with Spotidj on this. There is no relationship between the royalty rates per stream and the size of Spotify. The only things that change what Spotify pays out per stream are the following:
    1. User behavior in terms of streams per user. More streams per user means lower payout per stream, all else equal.
    2. Mix between free and paid accounts. A higher % of accounts that are paid = higher per stream royalties, all else equal.
    3. Price of paid accounts, or price of ads. If Spotify can charge more, then the royalty rates per stream will go up, all else equal.
    Of the three things above, the only one that holds much hope is #2. People will not likely change their music consumption patterns over what they already do on Spotify, and I don’t expect the trend on ad prices or music subscriptions to be headed up anytime soon. So it will really come down to whether or not Spotify can convert more people to paid subscriptions.
    Good luck with that, given what Apple is about to do in this space.
    Final comment: I don’t think that Spotify does itself any favors by trotting out poor souls like this guys Wallach, who clearly doesn’t have a grasp of how the math works vis a vis royalty rates. These claims that volume will change the royalty rates for the better are ignorant at best and disingenuous at worst. This is not a “we’ll make it up in volume” model. I really wish they’d stop making this claim – it makes it nearly impossible to defend them without losing ones integrity in the process.

  7. As the number of users and revenue grows so do the number of streams which reduces the per stream payout. I am a premium subscriber and would prefer if my subscription fee were divided between the artists I listen to on a percentage basis.
    For instance, If I pay $10 per month, and $7 is distributed and I listen to 500 three minute songs or 25 hours a month, which is probably more than I currently use. My per stream payout to my artists would be 1.4 cents per stream, going directly to the artists I choose rather than getting diluted in the revenue pool.
    From Spotify’s perspective, they are still taking the 30% cut so this should not matter to them, there must be other interests influencing this. With the current setup, my $7 gets pooled and goes to support Bieber, Drake and Katy Perry and whoever else tops the charts. That is fine if thats who you listen to but it causes the long tail to subsidize the current major label machine.
    I am a fan of a streaming model that someone proposed online that is something like this: listens for 2 cents per stream, 70% goes to the artist 30% to the website distributor(although I think 30% is a lot for what they do, itunes included), no royalty pool divided by all, just payouts to the artist. Also after 100 streams, the fan owns the music, similar to financing your music purchase you pay a little more over time, $2.00 to be exact, or if you want it now, pay the itunes rate of $.99 to $1.29.
    There are still some questions left from this interview:
    1. How do the streaming services treat partial listens, 10 seconds, 30 seconds a minute, what is a listen? Does this further dilute the streaming rate.
    2. Why do they not link to purchasing the track if they dont believe Spotify cannibalizes track sales, this would only lead to more revenue for Spotify.
    3. Why are the ad rates on free listens less than regular radio, meaning if you want it free, you have to deal with ads. Regular radio has shown that people will tolerate a lot of ads in exchange for free access. The more ads they show, the more revenue they generate, thereby increasing the per stream payout and their own profit. It would also drive subscription rates up.

  8. Well — on top of the shares — considering that Spotify has never revealed what the royalty rate % they’ve negotiated with major labels, I don’t think it’s too far off to assume it’s far higher than the flat rate for most indie labels.

  9. Spotify doesnt always pay per stream, they also pay a percentage of advertising revenues compared to your overall Spotify share. Thus, the bigger they are.. they more the advertising pool will be.

  10. The numbers here seems slightly confusing.
    In November 2011, it was said that Spotify had 2.5 million subscribers, and now it’s being said they have 4 million. Just looking at that time (the last 10 months) and assuming a uniform monthly growth (of 166666 subscribers per month), and assuming the subscription level is the lowest value currency (dollars) – I’m calculating 70% of revenue for that period to be $227.5m.
    If we were to take into account currency, with UK subscribers paying 60% more, and advertising revenue, and of course the previous 3 years’ revenues since the company started, I would expect this number to be substantially higher.
    So how is it that they’ve paid out around $200m in the whole lifetime of the company? Am I missing something here?

  11. I agree Ellen. I have two records on Spotify and I have never seen a dime from them. My songs are played thousands of times a month on internet radio. I get peanuts from Pandora for that (in royalties), but absolutely zilch from Spotify. In my opinion, these kinds of businesses should be shut down. They are making money off of content providers, most of whom are not being paid for their content.

  12. I have two records on Spotify and I have never seen a dime from them. My songs are played thousands of times a month on internet radio. I get peanuts from Pandora for that (in royalties), but absolutely zilch from Spotify. In my opinion, these kinds of businesses should be shut down. They are making money off of content providers, most of whom are not being paid for their content.

  13. Can someone please explain the “revenue pool” and how it works? If unsigned artists get their fair percentage based off streams, how does that lower their “per stream rate” as compared to major label artists?
    Why do I feel like Spotify is lying through their teeth?

  14. “How do the streaming services treat partial listens, 10 seconds, 30 seconds a minute, what is a listen?”
    I’ve noticed that a song doesn’t register on my Last.fm playlist unless I’ve scrobbled at least half the track. That could be based on Last.fm’s own metrics but it seems a likely compromise for Spotify as well: they can’t justify 100% because people often skip the last few seconds of a song if there’s a lengthy fade, but at the same time they can’t reasonably be expected to pay full royalties on every song that a listener skims over for a few seconds either.

  15. I think one thing that seems to go unspoken here is that, while Spotify is absolutely obligated to disclose numbers to either the artists themselves or at least their intermediaries, they have ZERO obligation to disclose those numbers to the mass public. That they choose to do so even in vague, “runaround” type verbiage is more a matter of placating the court of public opinion than it is about satisfying any legal obligation on their part. You don’t expect the Tiger Mart down the street to disclose their margin of profit on a gallon of gas, why would you expect Spotify to identify the dollar amount on that check they cut to Slayer last month?
    Which is not to say that they’re not indeed failing in their duties to the artists, but these are two entirely different “problems” that seem to get falsely conflated.

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