Spotify Announces Royalty Formula And You’re The One Keeping Artist’s Take So Low

Spotify-logo-001Yesterday, Spotify announced Spotify Artists, a website that explains how its royalties are calculated. The company is also launching free analytics for artists and managers to help them track streams, and predict future earnings.

Spotify’s latest announcement aims to curb widespread criticism that the music streaming service is unfair to artists. Perhaps the loudest critic of the service is Radiohead/Atoms For Peace frontman Thom Yorke who, in July, described Spotify as “the last desparate fart of a dying corpse” with the dying corpse of course being the old record label dominated music business model.

In the past, Spotify has sought to quell its critics by noting that they’ve paid over $1 billion dollars in royalties to rights holders since their 2008 launch. But total royalties aren’t an accurate rebuttal to artists complaining that their per-stream royalty payments hover around of a few thousandths of a penny. But now Spotify is taking their critics head on and even admiting their average per-stream royalty rate is a few thousandths of a penny, while shifting blame to consumers and record/publishing companies.

So how exactly does Spotify calculate royalties? It looks something like this:

Spotify Monthly Revenue * (Artist Spotify Streams/Total Spotify Streams) * 70% to master & publishing owners * Artist royalty payment=  Artist Payout.

It’s important to realize that the last part of the equation is based on agreements between the artist and label/publisher.  It’s also critical to remember that the monthly royalty rate is fluid and depends both the success of Spotify and the artist.

With that in mind, Spotify is urging critics to refrain from judging Spotify’s by “per-stream” payout. With their per-stream payout to rightsholders averaging around $0.006 – $0.0084, it’s not surprising that Spotify is shying away from their per-stream rate.  Still, using their current payout rate, the streaming service released actual anonymized figures for July 2013 that showed a “Niche Indie album” received a royalty payment of $3,300 while a “global hit album” netted $425,000.

But here’s where things get interesting. See the key to Spotifies success (more paying subscribers) is also the key to artist success. So what has been framed as a David and Goliath battle between big bad Spotify and the poor little artists is actually a pathetic misunderstanding between members of the same team. And Spotify proves it.

Right now Spotify has around 6-10 million paid subscribers. But if (a big if) Spotify can reach 40 million paid subscribers worldwide, the per month royalty payments using Spotify’s current formula will look like this: $17,000/month for a “Niche Indie Album” and $2.1 million/month for a Global hit. While the definition for “Niche indie Album” is unclear, the larger point isn’t–when Spotify makes money, artists make money.

So then who is to blame for poor musicians who can’t make a living off their low royalty rates?

Well first and foremost it’s you, ya jack ass. Let me give a quick example. I’m by nearly every definition, poor, but I still cough up over $100 every single month for cable and internet. Am I an idiot? probably. Can I choose which channels are included? No. Can I choose when programs are on? eh sometimes with OnDemand not not always. My situation isn’t unique, and in 4th quarter of 2012 over 84,547,000 people in the US were paying for cable.

Fine. We need our cable and internet, but here’s the confusing part; while almost 100 million people are willing pay  $80+ month for TV/internet service with limited flexibility, Spotify finds it difficult to add users at $10/ month. Spotify’s fee includes: access to Spotify on smart phones, tablets and computers, offline access, unlimited plays, and no commercials. And with the exception of some notable hold outs, (Led Zeppelin, The Beatles, Metallica) Spotify has an excellent library. It’s damn close to any music, any time, anywhere for the price of one iTunes CD per month.

Besides the cost, there really isn’t a downside to joining the service, and when compared to other monthly fees we pay, Spotify’s cost is minimal. I know I sound like a Spotify salesman, but that’s really not it– I don’t care which service people use– I just can’t figure out why U.S. consumers are so reluctant to spend money on music. And of course if more people join, Spotify’s per stream royalty rate increases.

Consumers aren’t the only ones to blame for the pitiful artist payouts, and as we’ve seen time and time again, record and publishing companies have their hands securely lodged in artist’s pockets. As I mentioned above, the final part of Spotify’s formula doesn’t involve Spotify at all. When an artist signs a record or a publishing deal, the contract provides terms for streaming income. Of course the rate will vary depending on an artist’s bargaining power, but a safe assumption is that “100% of streaming income to the artist” is not a very common term. Of course it doesn’t have to be that way. Anyone can upload their music to Spotify, and cut out the publishers and record companies from the equation.

With Spotify showing transparency in their royalty calculations they are trying to realign the teams. It’s not longer artists against Spotify, but instead, artists and Spotify working together to create more money for everyone. Of course Spotify is in the business of making money not saving the music industry so they can always change their royalty formula, but based on formula as it stands, royalty payouts increase when two things happen: 1. Spotify adds new subscribers and 2. artists ditch the record company/publisher. The truth is that Spotify needs the support of the artists to change the public’s perception of the service, and while it remains to be seen whether artist will listen, transparency is certainly the first step.


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