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

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by Mark Mulligan

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?

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John Ferris
I agree with Matthew V that not paying for any stream is stealing. Paying out on 1 sec stream is also fair theoretically, but it will encourage the noise creators even more, who rely upon the algorithms and luck to rort the system. Perhaps if spotify (and I know this is very controversial to suggest) say charged a small fee for every track uploaded (say $5) which was recoupable against whatever the payment system is set at. If payment is set at every second played, a stream then would be worth something like $0.00003 per second, it might just discourage the hackers and gamblers a little. Just a thought.
Luke V
100% agree with Matthew Vaughan below. No one else is entitled to the money my music earns, no matter how small the amounts.
Matthew Vaughan
I'm sick of the gaslighting about how stealing the royalties earned by some artists to give to other artists who didn't even earn them is a good thing. It's STEALING, that's all there is to it, and even worse, stealing from the poor to give to the rich, which is not only fundamentally evil, but also economically inefficient. Nobody should be for it, except the major labels, who hope to a) get paid money they didn't actually earn, and b) drive smaller artists off the platform, so there's less competition. Spotify is gladly obliging both of these odious goals. What makes it even worse is the constant gaslighting about how "small artists wouldn't be paid that money by their aggregators anyway", which is a lie (and not even a logically coherent argument based on any reality), and also the gaslighting about how this also helps "emerging artists" when that's exactly who it hurts. I am shocked that anyone with a conscience thinks this is a good thing, or keeps repeating the sheer bullshit surrounding this being put out by Spotify and their sick enablers. Probably nothing will happen in the US, but I hope European countries sue the shit out of Spotify and put a stop to it (or ban Spotify from operating in their countries), since they actually tend to take intellectual property a lot more seriously than the US, and aren't afraid to use their governmental powers to force private corporations to stop being predatory sleazebags. Even some of the other changes wouldn't be as necessary if Spotify just paid per second played, not per "play", which would also fix a lot of other problems, but since they don't, those other problems continue to exist.
Seth Keller
The < 1,000 streams per track is a fine threshold that shouldn't affect small labels. I consult for a lot of niche artists on small labels. You and your readers have undoubtedly never heard of any of them, and all their tracks have well over 1,000 streams. No artist or label will lose out with this new royalty tier. I agree with the other commenters that it would be difficult to determine what developing artists get that pot of money. I don't think there's a fair way to split it up without picking winners and losers. One other thing Spotify could do is what I believe Deezer is doing and pay more for active streams than passive lean back streams. They could also cut the royalty rates in half for all noise and silence tracks. All of that combined would disenfranchise the scammers and maybe take a lot of fake artists and noise out of the overall streaming pool.
Bob Bellin
This amounts to nothing more than a "rich get richer" strategy. True, most of the money not paid won't amount to much for any individual, but taking from small, unknown artists and giving it to the biggest ones is a bad look. Artists almost universally believe that Spotify sets its own royalty rates, that they are profitable and are being greedy in not voluntarily paying out more to artists. This won't help at all and won't do anything to improve Spotify's dismal financials. Spotify would do well to explain their status and how royalties are calculated and derived to artists so they don't continue to blame their co-victim.
Johan Hirvi
Great points Mark, I agree that the extra income will be "amounts that are insignificant" both for small and big artists with this system. Your idea about only distributing this pot of money to smaller artists sounds much better. It would be great PR for Spotify (and the Major Labels for allowing it). It would be great if it could be focused on a group of artists that are not far away from being able to make a living off their music. Perhaps set by a maximum and minimum monthly streams (revenue) criteria for each territory. I want to see more people become full time recording artists.
Neil Sheehan
We need separate streaming services for different tiers of artists.
David Ravden
interesting idea Mark but how would Spotify identify who should be on the list...I can see a lot of artists with banners reading "why not me" . In practice I think this idea whilst worthy is not doable. Anyone have a view?
Ray Laskowitz
"One small group of emerging artists." Which small group of data shufflers gets to decide that? Will they understand music? Or, that it often takes a couple of tries to fly?