What Spotify's royalty numbers don't tell us
Artist royalties have been an albatross around Spotify's neck since the music streaming service launched in 2006. It's one of those instances where both sides have a right to bitch.
That's because the payments are both too much and too little: 70 percent of Spotify's revenue goes to royalties, yet people like Thom Yorke protest that each stream earns artists mere fractions of pennies. Damon Krukowski of Galaxie 500 wrote that it would take 47,680 Spotify plays to achieve the revenue made off one album.
For years, most of what we knew about Spotify royalties came from artists' back-of-the-napkin calculations. That all changed yesterday. In the interest of transparency, which I applaud, Spotify has published a lengthy explanation of the math behind its payments. It estimates that each stream nets an artist between $0.006 and $0.0084.
If that still sounds absurdly low, keep in mind that it's slightly higher than some of the more well-publicized estimates. Last January, music executives told the New York Times that Spotify pays around $0.006 per stream but that's only when a song is played by one of Spotify's paying customers, who represent 6 million of its 24 million users. Streams from free customers, they wrote, netted "as much as 90 percent less." Spotify's estimates are also far higher than the numbers Grukowski reported, saying that 5,960 plays netted his band only $1.05. (That's only $0.0001 per play).
What explains the discrepancies? First, it's important to note that Spotify's $0.006-$0.0084 is the royalty payment made to "rights holders," meaning that the record label takes a cut before the artists gets paid. Even then, that would mean Galaxie 500's publisher and label took over 99% of the payment, which is unlikely. Renown Pandora hater and Cracker frontman David Lowery wrote that his label keeps about half of each digital royalty payment. Even if Galaxie 500's label had been skimming that much off the top, the band's beef should be with the label, not Spotify.
Instead, the wildly varied reports of Spotify payments lies with the exceedingly complex ways the company calculates its royalties:
First, the "monthly revenue" Spotify makes off each stream has numerous variables, including whether the listener pays for a subscription, how many users are in that listener's country, and how much advertising Spotify sells there. If Galaxie 500's listeners do not pay for the service and reside in a country where Spotify sells little advertising, that has an impact on revenue (although Spotify does not explain precisely how).
Artists are also paid by their "market share." The means the higher the percentage of Spotify's total streams an artist comprises, the higher payout he receives per stream. Macklemore and Rihanna, the most streamed artists of 2013, receive more than Galaxie 500. Interestingly, Spotify calculates this by artist, not by song, so a modest hit by Galaxie 500 would earn a lower per-stream rate than an unpopular Macklemore song.
Next Spotify pays 70 percent to rights holders. Is this enough? Considering that Spotify still isn't profitable despite massive growth, it's hard to ask for more (though it's not outlandish to wonder if free unlimited streaming music simply isn't a sustainable business model).
Finally, the record label takes its cut at a rate negotiated between the artist and their label. That is obviously out of Spotify's control.
To put this in more concrete terms, an artist with a shitty contract and modest stream counts from primarily non-paying users in Liechtenstein is going to have a far lower per-stream payment than a star like Macklemore, who has fans worldwide.
Is this fair to less popular artists? Perhaps not, but by providing incentives to more popular acts, Spotify can better retain them. It can live without Galaxie 500, and even Thom Yorke. It can't without Taylor Swift, Rihanna, and Macklemore.
Spotify's decision to release these numbers is notable because it shows a greater devotion to transparency than we've seen in the past. The company also just launched a new analytics tool for artists and managers to track how many people are listening to their music, so at least there are no surprises when they receive a piddling royalty check in the mail.
With so much potential variability in royalty payments, however, the "$0.006 to $0.0084" metric that observers have been throwing around is virtually meaningless. Even Spotify admits as much in its blog post. Not that this is anything new: Royalty payments in the days of vinyl records and CDs were just as complex. Can't the digital era simplify royalty payments like it's simplified so many other things? iTunes pays a fixed royalty rate, after all.
Because Spotify operates a "freemium" ad-supported service and has chosen to go international aggressively and early, its royalty model is necessarily byzantine. While that may be cold comfort to struggling artists looking to get paid, at least now they know how they're getting screwed, who's doing the screwing, and, perhaps, why.
[Illustration by Brad Jonas]