We’re Rachel Hurley and Frank Keith IV, co-owners of the Sweetheart Pub. We’re music industry veterans with over 30 years of combined experience in the music business, having worked in licensing, talent buying/booking, label management, tour management, and more. Once a week (usually), we’ll publish a new edition of this newsletter, where we’ll share some philosophy and actionable advice on all facets of the music industry.

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First Some Housekeeping

We know we’re a little late on our newsletter, but there was a lot of info to track down and get verified. Also, due to the feedback of many readers as to our weekly essays being really long, we decided to start a YouTube Channel where you can watch or listen if you prefer. You can support this offering by subscibing ;)

Finally, this will be our last post on Spotify for a while, there were just some loose ends we want to tie up before we moved on.

What we’re thinking about this week…

There Are Ways For Spotify To Pay Artists More, But They Aren’t What You Think

The general anti-Spotify argument goes like this: Spotify doesn’t pay artists fairly.

Therefore, it would seem logical that to solve this problem, you would:

Need to come to a consensus on what a fair rate is.
Figure out the changes that would have to be made for Spotify to pay this rate.

This is a lot easier said than done since Spotify’s payment structure is highly complex. They also pay out a LOT of money. That’s why it is so hard for most people to wrap their heads around the fact that they can’t just raise royalty rates based on their current revenue.

Last week I think I finessed the argument down to the most straightforward way it can be expressed.

As an example, Spotify brings in 8 billion in revenue, and their mission is to pay out 70% (5.6 billion) to artists. If you were to raise the royalty rate by 25% (an amount that would not make a difference to the 85% of musicians who did not make $1000 from their Spotify streams in 2021), that means 95% of revenue is going to the artists. This split would leave the company to function on 5% of its earnings.

This is an impossible feat in itself but also makes profitability even harder. It would also tank the stock value of the company. That value is the ONLY way Spotify has been able to pay royalties to rights holders in the first place since 2020 was the first time they ever recorded a profit. They don't make enough money to pay out the rate they have, but they've been able to borrow funds based on their company’s valuation.

I can hear some folks thinking: Yes! Yes! Yes! Spotify shouldn't be in business if they can not pay artists fairly!

Counterpoint: Spotify is not forcing artists to have their music on their streaming service. If anyone is — it’s the labels. Also, many artists see the value of streaming beyond the money they make from it. Many, if not most, would not have an audience without it. The tools they offer musicians are part of their payment to them. They spend hundreds of millions of dollars promoting music, obtaining and retaining subscribers, and reinvesting in their technology to make it even more valuable to both listeners and artists.

Over the past few weeks, whenever a commenter on my original Spotify piece wanted to argue that Spotify has the money to pay and just doesn’t want to give it to artists, I pointed them to their public financial information and asked them to show me the math. Not one person came back with a “fair” royalty rate or a plan for where the money would come from. They mostly came back and brought up how much Spotify's CEO makes or what they paid Joe Rogan. It doesn’t take an accountant to figure out that compared to the revenue they already pay out and the number of artists they pay, those numbers are insignificant.

All of Spotify’s current financial numbers are public and can be found here. The first piece of the puzzle is to break down their royalty rates. After thousands of comments, DMs, and emails, it became pretty apparent that most artists using Spotify do not understand how Spotify pays them. It's vital information to know if you are in the ‘Spotify takes advantage of artists’ camp. I will attempt to break it down as simply as possible.

First of all, Spotify’s payment model is not a payment per stream but rather a percentage of all revenue. Every time you’ve seen a per-stream rate discussed, it’s just a guess-timation. It’s shorthand for a much more complicated system. Artists don't receive a set streaming rate, but instead, they each earn a different percentage of all revenue, or “market share.”

In the simplest terms possible, rather than a subscriber’s money going to the artists they listen to, a percentage of their money goes to each artist based on their particular deal with Spotify. A portion of all subscriber’s fees is paying Drake every month, whether they listen to him or not.

It is called a pro-rata system rather than a user-centric system. It’s widely considered an outdated payment method based on the listening habits of early adopters, primarily young people. Today, the ages of listeners, their streaming habits, their musical choices, and the vast array of content are much different from those of 10 years ago.

With a pro-rata system, Spotify basically puts all of the revenue generated into one big pot, which is then paid out based on each artist/label's market share of all streams. Add to that the fact that streams from subscribers are paid at a higher royalty rate than streams from non-subscribers, whose streams are paid for with ad revenue, and royalty rates become even more convoluted. Their subscriber model also makes it tricky to break down payment rates because not every subscriber pays the same amount. There are student accounts for as little as $5 a month, family plans, bundle plans, and different rates for subscribers in other countries. Not to mention, many labels have been able to negotiate better rates for themselves and their artists. It may seem unfair, but the big three major labels were the ones who initially invested in Spotify, and now they're taking their cut. Plus, you can negotiate your terms if you have something to barter with, like an entire major label roster/catalog.

There is a general consensus that labels are the ones really making the big bucks from streaming. When they negotiate a higher percentage or market share for their artists, a portion of that money goes directly to them. The rest is split between songwriter and publisher. On average, “for each dollar of revenue Spotify earns, 58.5 cents go to the owner of a song’s sound recording (usually a record label), Spotify keeps 29.38 cents, 6.12 cents go to whoever owns publishing rights (usually the songwriter), and 6 cents goes to mechanical rights (often, but not always, owned by the songwriter), according to Manatt, Phelps & Phillips, a financial consulting firm.”

Sidenote: In 2018, the Copyright Royalty Board, a panel of three judges, raised the payout rate for publisher royalties from 10.5 percent to 15.1 percent — a 44 percent increase. But Spotify, Amazon, Pandora, and Google successfully appealed that decision. The case is still pending.

However, while labels can negotiate higher payouts for the artists they work with, by the time the artists take their cut, the label artist could be getting a lower payout than an independent artist maintaining their own publishing might receive. Major label artists get more money invested in their product, and so they end up owing more people. Remember this when you’re dreaming of that major label deal that pays artists 15% of their streaming income.

While some artists have spoken out about streaming income, the major labels have been pretty quiet. I wonder why.

If you look at Spotify’s 2021 numbers, the average royalties paid per premium subscriber per month is about $3.46, and the average per ad-supported listener is about $.38. According to Glenn McDonald, a data scientist at Spotify, broken down by plan, the average streaming royalty is $.0069/play from premium subscribers, and $.0008/play from ad-supported listeners. So, Spotify is not far from the .01 cent per stream model that seems to be widely held as a reasonable rate if you only count paid subscriptions. However, no one considers that the streaming services that deliver the highest royalty rates can operate in this sector at a loss. Music streaming is an add-on for both Apple and Amazon, not their core business. It’s a bonus feature that keeps people on their platform, and since they also sell music, they have that revenue and their subscriber payments.

A few folks have brought up Tidal as an alternative, but I spent the last week confirming that Tidal does not pay on time. Their payments to artists aren’t very dependable because they are also NOT profitable, so they do not have the capital on hand to pay. They are also borrowing from Peter to pay Paul. I’ve seen many people ask — well, how does Tidal pay a higher rate than Spotify and offer a similar product? The short answer is: they don't. They can say they do, but they don't until the money is in the musicians' bank accounts. Tidal is only estimated to have a 5% market share in the streaming economy. While they haven’t released any paid subscriber numbers in years, the general consensus is that it’s between 1 and 3 million.

In contrast, as of 2022, Spotify says it has 381 million users, with 172 million users paying for the service. That’s an enormous number of users to convert if Tidal ever wants to be a real contender. But the real takeaway is: If Spotify cannot be profitable using its royalty model, how the hell is a company that promises to pay a higher rate going to make the numbers work? Do you really think that many people are willing to pay 20 bucks a month for higher sound quality? I don’t. Another interesting puzzle piece is Jack Dorsey’s Square buying a majority stake in Tidal for 300 million dollars last year. But that’s an entirely different, complicated move that will have to be examined later.

Back to Spotify: Their freemium model is what averages down stream royalties. Without it, Spotify’s royalty rate is a lot more competitive. So do you take away the freemium level? That’s a lot of lost opportunities to convert a listener into a fan. Would that lead to more people subscribing if it was discontinued, or would they go back to pirating music?

Even though Spotify finally posted some profitable numbers last year, its financial statements seem to be clearly warning people not to expect that to continue (see their annual report). I’m no expert in investing, but it looks like buying stock in a company with no clear roadmap to profitability would not be a great investment. So who IS betting on Spotify to turn things around? Weirdly enough, according to a Rolling Stone article from 2020, “more than a third of the streaming firm is actually owned by institutional investors such as Morgan Stanley — with each of these commercial giants holding stakes of more than five percent each.”

So why would these types of investors be interested in Spotify?

This presentation from the SOHN Hearts and Minds Conference, 2021, where TDM Growth Partners doubled down on their prediction that Spotify “is going to be the audio browser of the world,” says a lot. Other factors include the fact that they already have a massive user base. They just have to figure out how to generate more revenue from them. Two ways they are looking to increase revenue:

Rapid product innovation, such as paid podcast subscriptions, sponsored artist recommendations, and live audio events, opens up new opportunities for monetization over the coming years.
Spotify is well-positioned to capture a large portion of global radio advertising spend which will shift towards music and podcasts.

The question is, would these new income streams be enough to get them out of their streaming hole? Would they solve the fair payment argument, or would the streaming service just continue to operate at a loss as in terms of streaming, as they bring in more significant revenue from other products?

Are there any other solutions?

Sure! Here are just a few options:

Cap payouts.
Don’t pay a royalty on songs that have less than a certain amount of streams.
Have a bracketed royalty rate, like taxes. Keep the rate lower on low stream songs, then raise it incrementally as streams increase.

In Conclusion: The money to pay artists more has to come from somewhere.

Spotify does not have that money. There are only two ways to come up with enough money to raise their royalty rate: raise subscriber payments, which we have discussed the downside of, or create a new payment structure for artists.

We also have to accept that not every musician is guaranteed success. There are more opportunities than ever to enter the marketplace and build an audience. Sometimes musicians like to place the blame of their failure on the system. They waste a lot of time shouting into the void/social media, complaining about the unfairness of a business that has … *checks notes* … NEVER been fair. No one is owed a liveable wage as a musician. Becoming a musician is like walking into a casino to make your living. Mostly you’re going to fail, but every once in a while people do hit the jackpot. The better your understanding of the game, the better your odds are at finding success.

— Rachel

Music Rookie Podcast

In our latest episode, we talk with David Macias, President and Founder of Nashville-based Thirty Tigers. We'll discuss the origins of the label, how their business model has changed over the years, how they approach A&R as well as artist development, and discuss independent release plans (label or not) ... and David shares his thoughts on the music streaming economy.

To read more of David's thoughts on Spotify and the streaming economy in general, check out this piece in Rolling Stone, as well as David's full written notes here.

You can listen via your preferred podcast service, as well as via our website.

Recent episodes:

Free Advice

Tips for Pitching Your Music Without a Publicist
How to Register a Copyright Without a Lawyer
A Quick Guide to Setting Effective Daily Goals
Four Must-Know Radio Promotion Terms
How to Get Sync Licensing Deals Using Music Libraries

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There Are Ways For Spotify To Pay Artists…