Spotify royalty shake-up: How streaming giant makes its money

A restructuring of Spotify’s royalty model has raised concerns that smaller artists could be even worse off under the streaming giant’s new compensation strategy.

Spotify this week revealed major changes to its royalty model, designed to ensure that the more than $40bn (£32bn) it gives away each year “goes to the people our platform is designed for.” : emerging and professional artists”.

He told his artists that the ‘drains’ on his royalty fund ‘have reached a tipping point’, revealing new policies to ‘deter artificial streaming… better distribute the small payments that don’t reach artists.’ .and stop those who try. “gaming the system with noise.”

Doing so, he says, will generate about $1 billion in revenue for “emerging and professional artists over the next five years.”

How is Spotify addressing the ‘drains’ of its royalty fund?

Music artists earn most of their income outside of live performances through streaming platforms. Essentially, the more times fans stream your work, the more money they make.

Starting early next year, a Spotify track must have reached at least 1,000 streams in the previous 12 months to be eligible to earn registered royalties.

The group will also charge labels and distributors per track when Spotify finds examples of “blatant” artificial streaming, while increasing the minimum track length of “functional noise recordings” to two minutes.

General secretary of the Musicians’ Union, which represents the interests of 33,000 UK musicians, Naomi Pohl, told This is Money: ‘It is worrying that platforms are changing their model following negotiations with major record labels.

“Although the model purports to be ‘artist-centric’, it will actually divert money from emerging artists to bigger artists and, of course, to the labels themselves.”

Pohl also expressed frustration at the changes being made without any negotiation with artists or their artist representative bodies.

He added: “We have been promised a government-convened working group on remunerating creators through music streaming, so this is the kind of proposal that could and should have been proposed there, rather than being implemented unilaterally. “.

But not everyone agrees that the new royalty model hurts smaller artists…

Distribution platform Stem president Kristin Graziani disagrees that the new minimum streaming threshold will leave early-career artists at a disadvantage.

In a guest essay for a New York-based magazine. Consequenceargued that because 1,000 streams a year equal only $3 in revenue, the impact is minimal.

She added: ‘$3.00 is well below the threshold at which almost all distributors allow artists to transfer profits to their own bank accounts. In other words, this is money that isn’t currently reaching artists in the first place.

‘Right now, artists don’t benefit from the millions of small payments Spotify pays for content that receives a few streams per month. It is the distributors who benefit from the hundreds of thousands of dollars deposited into their interest-bearing bank accounts.’

How does Spotify make money?

Spotify, which is the world’s most popular audio streaming subscription service, makes money primarily through its premium services and ad-supported services.

Its monthly active user base rose 26 percent to 574 million listeners in the third quarter, which it said last month was 2 million above its guidance.

Spotify also posted profits of more than £28 million, the company’s first quarterly profit since 2021.

Subscribers grew 16 per cent year-on-year to 226 million, with total revenue up 11 per cent to around £3 billion, which also beat guidance.

This is despite it raising its prices for the first time in the UK earlier this year.

The company said it would charge £10.99 a month for its premium service, up from £9.99. This followed similar moves by rivals such as Apple Music.

Ben Laidler, global markets strategist at eToro, told This Is Money: ‘Spotify and streaming have almost single-handedly fueled the rebirth of the global recorded music industry after its near-death experience a decade ago.

‘It has become an affordable essential service for music-loving Generation Z, leading recent strong growth of 16% in its paid premium service. This represents about 90 percent of its sales and comes despite an economic slowdown, cost-of-living headwinds and widespread subscription service fatigue.

“Its podcast expansion has been a costly detour, but growth prospects remain strong, with total listeners growing 26 percent, only 40 percent subscribed to the premium service and half of the user base still unavailable. only in the US and the UK.

How much do Spotify and its rivals Apple and Amazon Music pay artists?

Like Spotify, rivals Apple Music and Amazon Music rely heavily on subscriptions to generate profits.

While Spotify is clear that its model does not compensate artists per stream, it is understood that its compensation model works out to be between $0.003 and $0.005 per stream.

This is significantly less than the $0.01 per stream that Apple Music revealed it pays artists in 2020.

However, this value is also an average, and the amount depends on the subscription plan and the country or region.

Amazon Music also reportedly pays more than Spotify. The internet retail giant is rumored to pay artists between $0.004 and $0.007 per stream.