How Spotify money really works!

 

There’s been a lot of controversy surrounding recent changes to Spotify’s royalty model. Namely, those tracks will no longer generate royalties unless they garner 1000+ streams on a 12-month rolling basis. 

As the industry debates whether these changes are a net positive or negative for musicians, it seems many artists are still confused about some of the basics of Spotify’s payment structure. 

Here’s how Spotify pays

To help you better understand your Spotify earnings, I thought it’d be a good time to review how (and when) Spotify pays artists, songwriters, and other rights holders.

But before we dive into specifics, here’s…

What artists get WRONG about Spotify

Spotify has always been a source of consternation for labels and artists.

The Majors, after missing their chance to launch and outright control a streaming platform of their own, jumped aboard the moving train by acquiring a stake in Spotify. Many classic acts were late to add their catalogs, only to see Spotify in the interim begin to lean into independent playlists and music discovery. Acts like Taylor Swift and Neil Young — at different times for different reasons — have famously removed music from Spotify. 

Yep. Lots of big feelings throughout the years. Sometimes that confusion or outrage was warranted. Sometimes not (IMO).

As an early innovator in playlisting, and as a current tastemaking powerhouse in the industry, the Spotify brand has undergone a mild form of genericization: Spotify has become shorthand for music streaming in general, the same way people say Kleenex when they mean tissue.

Unfortunately for Spotify, that also means when artists get angry about streaming economics at large, they often aim their ire at one brand more than others. To put it simply: If you feel that streaming hasn’t been a net positive for your music or wallet, who are you likely to blame first? Spotify. 

Does Spotify criticism = sour grapes?

Well, no. There are real economic stresses that career musicians face due to low per-stream payouts, and Spotify shouldn’t be immune to criticism. But often when I hear artists complain about Spotify, it can sound like they’re choosing an easy scapegoat:

“I’m not successful. It must be Spotify’s fault.”

In the next section, I’ll list some of the reasons I think this criticism is unwarranted. But first, let me address the real challenges that middle-class musicians face when it comes to streaming economics. 

Big players in the traditional music industry generally profit by leveraging catalogs of high-value IP. This sets them up to benefit from the overall growth of the streaming revenue pie. The same is NOT true for individual artists, which is why many artist advocacy organizations push for more equitable ways of divvying up that pie. 

And adjacent to the money discussion is a somewhat subliminal danger: Being told your music is “worth LESS” starts to make you feel you’re being told your music is “worthless.” 

That’s why — correct or not — Spotify’s newest rule of not paying for tracks that get less than 1000 streams per year feels like salt in the same wound for many artists, despite it being a novel rationale for devaluing long-tail music. 

Are Spotify payments already “fair?”

Because Spotify is an industry leader, it’s poised to receive the most public animosity.

Here’s why many criticisms of Spotify have seemed unfair to me:

• Streaming has been unanimously embraced by consumers
• Streaming was an inevitable development offering convenience and massive music discovery
• Supply/Demand dynamics suggest that as music creation accelerates globally, and as passive listening drives the commodification of music, the “value” of any individual track declines
• Spotify is a rare audio-only company, competing against giants like Apple, Amazon, and Google who have the luxury of treating their music streaming services as loss-leaders when necessary
• Despite that disadvantage, Spotify STILL pays 70% of its revenue to rights holders (labels, artists, publishers, songwriters)
• It has paid that 70% to rights holders despite being an unprofitable company for much of its history
• While far from perfect, Spotify has done more than other platforms to empower independent musicians through music discovery, playlists, on-platform branding, and promo tools

Why does Spotify get disproportionately criticized? 

I mentioned genericization earlier. You also have artists who balk on social at the likes of Daniel Ek earning billions, money that may’ve otherwise been distributed to rights holders. I’ll leave the argument over the pros & cons of Capitalism to smarter folks. The way I see it, for better or worse, executive compensation and investor returns are a feature of the same system that delivered the tech in the first place. (And to reiterate my earlier point, why isn’t the same criticism leveled against the execs of Spotify’s competitors?)

No, instead, I think there’s a simple answer for why Spotify gets disproportionate criticism:

confusion X genericization = extra outrage

Streaming royalty calculations are confusing. That makes it very difficult to debate from a place of shared understanding. So we end up doing a lot of apples-to-oranges comparisons. 

Of course, these byzantine royalty calculations aren’t a problem unique to Spotify, but again, since Spotify has been the perceived industry leader, the opaqueness may seem to be part of Spotify’s payment system by design. 

The myth of the single per-stream royalty rate

Let’s dispel one of the biggest myths around Spotify payments: That there’s a single per-stream royalty rate.

There is NOT a fixed per-stream rate.

Today I’ll break down the complicated accounting behind Spotify payments and explore the differences between Spotify’s existing Streamshare model, user-centric royalty models, and newer artist-centric models that have informed the recent changes at Spotify. 

What generates royalties on Spotify?

Music that gets streamed on Spotify can generate two kinds of royalties:

• Recording royalties: This is money owed to labels and self-releasing artists for the recorded track. It gets paid to artists via your distributor (or label, if applicable).
• Publishing royalties: This is money owed to publishers (and the songwriters they represent) for the usage of the underlying composition. This money is paid to publishers, publishing royalty collection societies, and mechanical royalty agencies like the MLC.

When a song gets played, assuming it meets Spotify’s eligibility criteria, the rightsholders mentioned above get paid, no matter if the track was played by an ad-supported user or a Spotify subscriber. 

Tracks on Spotify are eligible for payment as long as they:

• Receive at least 1000 streams on a 12-month rolling basis
• Meet the minimum play-length threshold of 30 seconds (2 minutes for “functional noise” recordings such as white noise, nature sounds, etc.)
• Are not associated with fraudulent accounts, stream farms botting, copyright infringement, etc.

Not all streams are created equal

Contrary to popular belief, there’s no one-size-fits-all rate for Spotify streams. It’s not like the download days when iTunes would pay about 70 cents for every 99-cent track you sold, no matter if the song sold once or a million times.

Spotify’s “Streamshare” model

The amount you earn per Spotify stream is influenced by a variety of factors, including:

• The subscription tier of the user (including FREE users, family plans, etc.)
• The geographic region of the user

Your Spotify earnings are also determined by other monthly figures that need to be reconciled together, most importantly:

• Monthly subscription revenue
• Monthly advertising revenue
• And the total volume of streams 

This yields something called “streamshare.” In other words, the individual artist or rights holder’s SHARE of total streams that month.

As Spotify explains:

Every month, in each country we operate in, we calculate streamshare by adding up how many times music owned or controlled by a particular rights holder was streamed and dividing it by the total number of streams in that market.

So if an artist received one in every 1,000 streams in Mexico on Spotify, their rightsholder or distributor would receive one of every $1,000 from the Mexican royalty pool. The total royalty pool for each country is based on the subscription and music advertising revenues in that market.

In case this is confusing, I’ll describe it one other way for clarity.

Imagine Spotify sets aside a pot of money, let’s call it the “Total Revenue Pool,” which comes from subscription fees and advertising revenue. Then let’s determine your Market Share. Your slice of the pie depends on how popular your music is compared to all the other tunes getting spins on Spotify. If your song represents 1% of all streams on Spotify (congrats!), you get 1% of the Total Revenue Pool. This leads to Pro Rata Distribution of royalties. The money is distributed proportionally to the artists based on their share of total streams.

So, the more streams your music gets, the more money you earn. But with Spotify’s changes in 2024, it’ll also be true that the less your music gets streamed, you may run the risk of not earning at all, as there will now be a requirement that tracks are streamed at least 1000 times per year to generate royalties.

Hmmmmm. So who do these new changes benefit?

What’s the impact of Spotify’s royalty changes?

Spotify claims its new payment model is designed to:

1. reduce fraud
2. disincentivize gaming the system
3. and generate more revenue for “serious” artists

However, they’ve implemented other changes that should’ve helped to solve the first two problems. This includes penalizing distributors that deliver spam tracks, or songs that violate terms or infringe upon copyrights. Spotify has also increased the monetizable play duration for functional “noise” tracks to 2 minutes. So you can no longer create an album of 31-second tracks of washer-machine sounds and expect to get paid the same as artists that generate lean-in listens for full songs or albums.

But here’s where some questions arise:

• Wouldn’t those two changes automatically address the third goal of generating more revenue for serious musicians? Fewer claimants to the royalty pool should mean that every legitimate artist’s streamshare goes up, right?

• What if an artist has a bunch of tracks that each get 999 streams? Do they deserve zero payment?

• Many artists, as they first gain traction on Spotify, often have a lot of songs that significantly underperform the ones that are taking off. It’s common to find new artists that have one or two songs with play counts in the hundreds of thousands or even millions, but the rest of their tracks show the dreaded <1000 designation. While Spotify claims the new royalty policy will benefit serious musicians by raising the payout rate for valuable tracks, some lesser-known “legitimate” artists aren’t going to benefit because much of their catalog is now demonetized. I guess this last point isn’t a question, just an observation.

• What will the mid and longer-term impacts be for different tiers of artists? (To say nothing of the impacts on distributors). Given that royalty reports often lag by several months depending on the label or distributor, it’ll be an interesting story to follow as more data arrives.

How does Spotify money get paid to artists? 

As Spotify explains:

In many cases, royalty payments happen once a month, but exactly when and how much artists and songwriters get paid depends on their agreements with their record label or distributor – or collection societies and publishers in the case of songwriters. 

Once we pay rightsholders according to their streamshare, they pay artists and songwriters according to their individual agreements. Spotify has no knowledge of the agreements that artists and songwriters sign with their labels, publishers, or collecting societies, so we can’t answer why a rightsholder’s payment comes to a particular amount in a particular month.

Okay, but how much ON AVERAGE does Spotify pay per-stream?

As you can see from the information above, it’s complicated and there is NO fixed per-stream rate. But… Spotify has also been around long enough to calculate some averages.

 Which is why Manatt, Phelps & Phillips — a legal and consulting firm specializing in music industry law —analyzed a bunch of US data “collected from direct source payors” and created this handy royalty calculator for Spotify and Apple Music. 

Plug in some numbers and smile or frown accordingly!

How can artists push for higher royalties?

I mentioned above the many reasons I feel it’s unfair for Spotify to take the brunt of the criticism around streaming economics. However, that doesn’t mean I’m advocating complacency. Nor does it mean I think you should passively accept Spotify’s new royalty changes. 

If you’re mad about the 1000 stream-count minimum, or if you used the royalty calculator above and feel motivated to change streaming royalty models across the industry, here are a few things you can do:

1. If you’re in the USA, find your Senator or representative at senate.gov or house.gov and write to them about your concerns
2. Use support portals such as Spotify for Artists to contact platforms directly
3. Keep up with organizations like Future of Music Coalition, and lend your support when they lobby on behalf of creators

User-Centric Royalty Models:

If you’re wondering if there are alternatives to Spotify’s pro-rata streaming payment model, check out user-centric royalties. Instead of all subscriber and ad revenue getting pooled together and distributed to rightsholders based on overall “stream share,” with a User-Centric system, the payment goes directly to the musicians that an individual subscriber actually streamed each month. 

Imagine a user only listens to YOUR music (quite the superfan)! Under this model, all of their subscription money goes to you. It’s like having your own personal revenue pool. You’d get the bulk of that $10 or $12 monthly fee, minus what the platform keeps for operating costs, profit, etc. How would this impact earnings for different tiers of artists? Here’s a study on the potential benefits and consequences of user-centric royalty models. 

To varying degrees, platforms like Soundcloud and TIDAL have experimented with elements of the user-centric royalty system.

Artist-Centric Models:

Don’t be confused by the name. This model is centered on only SOME artists. Namely, those who are already succeeding at driving significant plays and revenue.

Both Deezer and Spotify are incorporating aspects of the artist-centric model, which argues that artists who are already established deserve to be paid more for lean-in streams, as opposed to artists whose music either gets no traction at all or streams via passive listening on playlists and non-interactive radio.

Labels love this one because THEIR artists (and the catalog the labels manage) will earn MORE for the same activity, as revenue in the pool is rebalanced towards earners. As established artists earn more per stream, the money is taken from the countless individual artists with small earnings. While those earnings may not feel significant on an individual basis — a few dollars here, a few dollars there — it adds up to a huge sum when you consider there are millions of those types of music makers.

What streaming royalty model feels most fair to you?

If you’ve read this far, you know the Spotify payment system isn’t as simple as a flat rate per stream. It’s a dynamic process that involves many factors, such as changing monthly subscription and ad revenue, market share of total streams, and pro-rata distribution of royalties. 

While the streamshare model is the current industry standard, user-centric and artist-centric models could both present interesting challenges and disruptions that offer different economic dynamics for rights holders.

The next few years will not be dull.