[h/t to Jay Gilbert and Mike Etchart at Your Morning Coffee for tagging this explanation of SoundCloud’s “fan powered” royalties. My feeling about the SoundCloud version of user-centric is that it’s the beginning and not the end of the story. These things have a tendency to evolve over time, and SoundCloud may actually start negotiating instead of the usual “we’ll take it and you’ll leave it” attitude of Big Tech, particularly when it comes to independent artists. Remember when iTunes paid bigger labels at least 70¢ for downloads but indie labels and artists 65¢ for no good reason? That didn’t last. The most important part of this story is that it is happening at all and that suddenly a big music service has seen that being early on this trend is a competitive advantage. That may cause other services to react.
The next step will be when major artists get woke to the fact that if the dominant pro-rata model that user-centric rejects is unfair, they may be the beneficiaries of that unfairness. And then there’s the songwriters, who have a similar model applied to their share of the revenue. (And of course focusing on revenue alone completely ignores the valuation benefit that is easy to calculate for public companies like Spotify that has made CEO Daniel Ek a multibillionaire while paying scraps of scraps to artists.]
This week, SoundCloud announced it’s making a major change to the way artists on the platform get paid in an effort to help smaller acts make more money from their music. If you’re not someone who follows the jargony, complicated world of music streaming closely, the new system, which SoundCloud dubbed “fan-powered royalties,” might seem confusing. Allow us to break it down for you.
When you pay for a subscription to a streaming service like Spotify, Apple Music, or SoundCloud, your money goes into a big pot, along with the money the streamer earns from every other subscriber and from advertising. A chunk of money from that pot goes to the company itself. Then, it divvies up the rest among artists, based on each artist’s share of total streams every month. The bigger slice of overall streams an artist gets, the more money they get from the pot.
Everyone knows that streaming royalties are unsustainable. The question is what to do about it. The current system evolved from the early days of online music services and the advertising-driven madness of the Web 2.0 era. Over time, the interactive streaming revenue share model has been extended from advertising and applied to subscriptions. The terms have been tightened down again and again until it has become what it is today–the hyper-efficient market share distribution of revenue that completely ignores the vast wealth extracted from the public financial markets by companies like Spotify. It comes as a surprise to fans that when they think they are supporting the artists they love, the fan’s subscription revenues are being paid to artists that the fan never listens to. It also comes as a surprise to artists that their streaming royalty check is derived from their fellow artist’s work product. And this doesn’t address the session players and background vocalists.
It is this unsustainable model that has attracted great attention. Many alternatives have been proposed to connect fan listening to fan payments, often under the category of “user-centric” royalty methods. This was a topic at the recent hearings before the UK Parliament’s Digital, Culture, Media and Sport Committee where there was considerable testimony about user-centric in an effort to develop an equitable and fair model–the implication from the Members of Parliament being that if the industry didn’t fix the “market centric” structure, the government might fix it for them.
What was most interesting to me was that Amazon, Apple and Spotify were all essentially testifying that they knew the system was grotesquely unfair and seemed to accept that as a given. While Spotify’s representative put up the usual risible drivel about how poor Spotify cannot make a profit, he pretty much had to acknowledge that Spotify had to pay more (and do make direct payments to both featured and nonfeatured artists in a few countries like Spain). Which means that the pretense that streaming royalties would be adequate if it weren’t for the greedy labels had far less purchase with the Members than it did before. Which is what you would expect from any right thinking person who educated themselves about the situation on the ground.
The tone of SoundCloud’s announcement is definitely one of “look at me.” Although for once a streaming service is not saying look at me I have floors and floors of the most expensive office space on the planet while I pay artists a fraction of a penny, or look at me I’m a billionaire, or look at me I saved the music industry. Instead, and most remarkably, a streaming service is saying look at me, I’ve identified the problem of fans paying for music they don’t listen to and the embarrassingly low royalties for artists (and songwriters for that matter) and I’m doing something about it. As I read SoundCloud’s public messaging campaign, the company is putting it out there for a competitive reason–they want to attract artists because they are making an effort at treating people fairly.
In other words, SoundCloud is positioning user-centric as a competitive advantage to attract artists to opt in to the SoundCloud version of user centric. I think this is a very important development because it identifies the real choice for independent artists–to stream or not to stream. If you are driving your fans to a music service but the service pays you so little there may as well be no royalty at all, the question for you is not how many streaming services you can do free work for in fear of missing out. The question for you is whether any of it is worth it, particularly if you now have a better alternative. This may be a sign that the market is starting to drive the issue.
SoundCloud’s new program is also an indicator of another voice on the horizon–successful artists who get woke to the idea that this model causes them to take money away from the less fortunate artists. The day may easily arrive when an artist like Billie Eilish or Taylor Swift walk away from a service because she doesn’t want to be exploited in the “market centric” royalty model. When artists announce these decisions on the Grammy Awards. Now that would be quite a market force.
And if Daniel Ek doesn’t like windowing, just wait til he gets a load of what the arc of the moral universe has in store for him. It won’t be long.
[Editor Charlie sez: Rather than rearranging the deck chairs, we think there are two separate issues with streaming rates. First and most important services need to exercise pricing power to increase the revenue pie or stop asking artists and songwriters to fund and invest in their growth strategy without getting stock or upside. Second, the method of allocating streaming royalties could change so that you don’t hear fans saying “Sick of my money funding crap.” Chris Castle’s “Ethical Pool” approach in the influential post “Arithmetic on the Internet” is an interesting interim step that allows both artists and fans to opt in to an allocation based on usage not market share. If that’s not fixed, it’s just rearranging the deck chairs and artist need to be careful they’re not being used by services.]
As MBW reported Friday (January 24), a group of managers and lawyers representing some of Germany’s biggest artists have written a joint letter to the leaders of the four largest music rights companies in the market – Universal, Sony, Warner and BMG.
The agenda of the letter, undersigned by representatives of 14 artists, “becomes clear very quickly”, according to the Frankfurter Allgemeine Zeitung newspaper (F.A.Z), which published a more detailed story on the matter today (January 26) on the front page of its business section. Translated, F.A.Z says that the artist reps are demanding “more money from the booming business [created by] music streaming services such as Spotify and Apple Music”.
What’s also clear from the letter, according to F.A.Z: unlike prior artist protests against streaming, the letter does not direct its ire towards digital platforms, but instead “attacks record companies” and is “of the opinion that [the majors] are taking too much of the streaming millions”.
The user-centric system means that if one user pays $9.99 a month for Spotify Premium but only listens to independent cellist Zoë Keating, that user’s $9.99 would be paid exclusively to Keating.
“These companies are taking power away from listeners, because listeners don’t have any say where their money goes,” Keating told Business Insider. “If you only listen to me, I should get all the percentage of the money you spend on music.”
For an artist to sustain a career, they need a variety of income sources and streaming is one of them. How do the services rank from the artist earnings perspective? I gave a year's worth of my data to @businessinsiderhttps://t.co/yJ5vBz2deP