Will DSPs Ever Pay Artists Fairly?

Picture the scene: it's the mid-2000’s, and the music industry is reeling from the aftermath of Napster's demise. The price of a CD album is high, meaning that sales are plummeting and piracy is rampant - listeners are increasingly turning to illegal downloads, leaving artists and record labels struggling to find sustainable revenue models. The industry is on the brink of collapse, unable to adapt to the digital age.

Amidst the chaos, two tech nerds from Stockholm emerge with a vision to bridge the gap between artists and listeners. They want to make a streaming service that would provide listeners with instant online access to millions of songs, while still being legal, affordable, and profitable. What do they create? Spotify.

The platform launched in 2008 and quickly became the global powerhouse it is today. Valued at over $60 billion, the streaming service boasts over 500 million users worldwide, with over 200 million of those being paying subscribers. Its success has transformed the music industry, making streaming the dominant form of music distribution, and setting a completely new standard for music consumption; streaming now accounts for over 80% of the music industry's revenue, dwarfing physical and digital sales combined.

There’s only one problem: many of its artists are complaining. Why? They aren’t getting paid enough.

In my article ‘Why I Collect CDs, and Why You Should Too’, I spoke about how before the dawn of streaming, artists would traditionally get paid a set amount each time a record was sold. So, regardless of whether you listened to the track a hundred times over or never even tore open the packaging, a decent artist could still expect to be able to pay their rent. Streaming completely shifted that model, and artists are now paid for their proportion of the total streams on Spotify, leaving many out-of-pocket.

The result of this system is a significant disparity between established artists with strong physical and download sales and newer artists who mainly earn from streaming. This gap is even further exacerbated by the fact that per-stream royalty rates are much lower than the earnings from traditional album sales or downloads.

And so, artists like James Blake are taking to the internet to protest the financial unsustainability of streaming, and to advocate for a fairer system that allows artists to be better compensated for their work.

To find a viable solution to this problem, we need to understand the current pro-rata payment model that Spotify, and many other DSPs (digital service providers), are currently using…

First, where does the money come from? Well, DSPs have two mechanisms from which they generate revenue:

1. Ads - users don’t pay any money to the DSPs, but companies will pay to be able to promote their content to users on the platform.

2. Subscriptions - some of us pay a monthly fee for exclusive perks such as being able to listen to our music uninterrupted, download it, create playlists and more.

Now, how is this money handed to the artists?

Contrary to popular belief, artists aren’t actually paid a set amount of money per stream they generate. Unfortunately, it’s a lot more confusing for people like you and me. In a nutshell, an artist is paid for their proportion of the total Spotify streams at a given time.

Let me explain it like this: last quarter, Spotify had a total revenue of $3.8 billion. They keep around 30% of that for themselves, and the remaining $2.5 billion is pooled into a pot designated for royalties. For clarity, let’s imagine that the $3.8 billion was generated out of 100 billion streams that quarter. Now let’s imagine that someone like Billie Eilish generated 10 billion of those streams from her track ‘Lunch’. She would then have a 10% proportion of the total streams generated on Spotify, and so a 10% cut of the $2.5 billion.

Alternatively, if the total number of Spotify streams was 200 billion, but Billie still had 10 billion of those streams then she would instead get a 5% cut of the $2.5 billion, and so on. The point is that artists get paid for the number of streams they generate against the total number of streams on Spotify. Not just the raw stream count.

If you also found that confusing the first time around, here is a great visual representation of How Artists Get Paid From Streaming.

So, what’s the effect of this?

Well, an artist will generate roughly between $0.003-0.005 per stream, or between $3,000 and $5,000 per million streams. You might think that sounds like a pretty hefty sum. But in reality, only 20,000 artists made over $50,000 from Spotify in 2023, and only 50,000 made over $16,000. Out of the 11 million artists on Spotify, that figure is quite staggering.

To add more fuel to the fire, that cash goes many other places before it reaches the artist’s pocket…

If you’re signed to a record label, the money goes to them before it goes to you. Depending on how good of a deal you got, it’s likely that they’ll take around 75% of that (and far less if you’re not a superstar). If you used a sleek studio to record your song, your record label probably aren’t paying you anything until you clear the advance they gave you for that. Do you have a manager? They’re taking 20% of what you have left from your record label. Are you in a 5-piece band? Well say goodbye to 4/5 what’s left.

Despite how much artists might want to, it’s totally unsustainable for most of them to rely solely on making music. They also have to tour, sell merch, and promote their catalogues, leaving less and less time to actually make good music.

Now of course, Spotify is only one DSP from which artists are getting paid their royalties – they also get paid for streams on YouTube, Apple Music, Deezer etc. But, since Spotify pays out the most royalties, the total salaries won’t be much more than this.

The pro-rata model isn’t merely underpaying artists – it’s also transferring the music itself and the way that we view it. If a mediocre artist isn’t ‘making it’, they might shift their focus onto making catchy hit choruses that will generate millions of streams, rather than a high-quality, coherent album. Less and less are we buying records and listening to them sparingly for years on end. Instead, catchy ‘one-hit-wonders’ live in our heads for a week or two, until a fresher, catchier track is released. We forget about the last one, and the cycle continues.  

Music is becoming a commodity, and we as the consumer are getting used to the fact that we can listen to it whenever we want, however many times we want, and all for such a small price. When in fact, it should be valued for a lot more.

So what solutions are there to the problem? How can we get artists to be paid more fairly for the work that they do?

First of all, Spotify isn’t the Devil - taking a 30% cut is standard practice among many DSPs. Even Apple’s iTunes Store took a 30% cut from download sales during the digital download era, and this wasn't considered particularly controversial (probably because we were paying a lot more for the stuff back then).

People also point a finger at Spotify's swanky offices and high salaries, but the company reinvests heavily in itself. Last year, Spotify had more than €1.8 billion on research and development, and another €2.6 billion on sales and marketing, more than 22 times higher than the 73 million recorded in 2013.

This all suggests that Spotify's revenue-sharing model might not be the core issue…

So what could be done instead of rearranging the current revenue cut?

1. Up the subscription price and grow the premium user base

One solution would be to find a way to substantially increase the total revenue. This way, Spotify could grow the money designated to royalties, and more money would be available for fairer artist compensation. So how could this be done?

According to the stats, premium users represent about 42% of the user base, with free (active) users making up for the other 58%. The problem is that premium users generate 9 times more revenue than active users. To put this into perspective, the stats showed that last quarter, the premium subscribers generated $3.5 billion in revenue. Meanwhile, the remaining 58% generated only $420 million.

So, Spotify should think about ways of encouraging active users to make the shift to premium, and also to budge the price up slightly to get more money coming in from the premium users.

Now, you might be thinking that if they up the price, then many of their valued subscribers would make the shift to other DSPs like Amazon Music or Apple Music for a cheaper fee. Of course, some will make the shift, but a small increase in the subscription fee is unlikely to make many people leave. We can see this from Netflix’s experience. When Netflix raised its prices, most users stayed because they valued the content and experience. Similarly, Spotify’s unique features, like vast libraries, personalised playlists, and exclusive content, can keep users even with a slight price increase.

Spotify’s financial performance and user growth also support the idea of a price increase – despite recently hiking up the price of a monthly subscription by $1 in the US, the company reported a 14% increase in premium subscribers, showing that not only are people are happy and willing to stick with Spotify and pay the higher price, but people are also willing to upgrade to the increased price.

To make the price increase more acceptable and to encourage more active users to make the shift to premium, Spotify can take a few steps: they could introduce different pricing tiers with varying levels of access and benefits. For example, a basic premium plan at a lower price could attract more free users to switch to premium. Additionally, Spotify can add more value to the premium subscription by offering exclusive content, early access to new music, and better sound quality. These improvements would make the higher price seem worth it to users.

Implementing the price increase gradually can also help users get used to the change. Raising prices slowly over time allows users to adjust their budgets and see the increases as more manageable.

Premium subscribers are crucial to the company’s revenue, and a small price increase is unlikely to drive away many users, especially if Spotify continues to offer unique and valuable features. By carefully planning the price increase and enhancing the premium experience, Spotify can boost its income and continue to help pay its artists more.

Spotify Q2 2024: premium vs ad-supported statistics.

2. A User-Centric Model

This all sounds well and good, but it doesn’t solve the problem that only 20,000 artists are making over $50,000 - we still need to bridge the gap between the lower-earning artists and the superstars…

Remember how we spoke about the current pro-rata model where artists are getting paid for their proportion of the total streams? Well, a recent study commissioned by Pro Musik looked into changing that model so that artists can get paid for other, probably fairer, factors than streaming proportion alone. Those factors are:

1. User reach – this represents the monthly listeners of an artist against its monthly streams.

Imagine I come across a really niche artist from County Cork whom I LOVE. They have no other monthly listeners, but because I am such a huge fan, I listen to their song 1,000 times this month. Across the pond, another artist in Dublin has received 1,000 streams from 700 different users.

The guy in Dublin has a much higher user reach because, although both tracks streamed the same number of times, Mr. Dublin reached a greater number of users.

You get the gist? This incentivises artists to expand their audience.

2. User commitment – this represents how much a user's consumption concentrates around a specific artist.

Now, this guy from County Cork received 1,000 streams from me this month, and because I was so busy listening to him, I had no time to listen to any other artists. And so, he now has a 100% user commitment from me.

Last month however, I generated 1,000 streams, and 100 of those were spent listening to the guy in Dublin. Therefore, he had a 10% user commitment from me last month.

The total user commitment is then averaged out. The higher the commitment, the more positive the impact on revenues. Therefore, artists are rewarded if their audience is more committed to listening to them.

This encourages artists to engage with, and to create a deeper connection with their fans.

3. Average User Spend – this represents how much an artist’s listeners pay on average for their music streaming subscription.

Imagine that Taylor Swift has 100 million monthly listeners. Because a large proportion of her listeners might be children who are on a family plan or listening of free, her fan base would therefore be paying less on average to listen to her than I am paying on my premium plan to listen to the guys in Dublin and County Cork.

Put simply, if an artist has listeners who are willing to pay more to listen to their music, then they will be rewarded for this.

All of these different factors are then levelled out, and an artist is paid accordingly. The artist in County Cork has a low user reach, but a high user commitment and a high average user spend. On the other hand, Taylor Swift has a higher user reach and a high user commitment, but a lower average user spend. Got it?

I know this is all extremely confusing and a lot to handle, but here are some slider bars that artists can play with on the report’s website to help understand how this works.

So what’s the effect of the user-centric model?

The study found that across the 18 countries studied for the research, it estimates that as much as 32.6% of the total royalties from music subscriptions could be redistributed. 29.3% of artists would see their royalties increase by 40% or more, including 19% who would double their streaming earnings. This is huge

The now question is: who will this model benefit?

Well, another report funded by SoundCloud estimated in 2022 that 56% of artists will be better off under a similar “Fan-Powered Royalties” model, and it’s those lower down the pyramid.

They found that 64% of artists with between 100 and 1,000 listeners earned more from FPR than they would have from pro-rata, and 65% of artists with between 10,000 and 100,000 listeners. On the other hand, only 38% of artists with more than 100,000 listeners were better off under FPR.

The latter report states that “FPR provides an opportunity for superstars to change their strategy and build deeper fandom. Superstars tend to have more passive fanbases, not because they necessarily want to, but because it is what the pro-rata streaming model incentivises. […] Regardless of an artist’s size, operating under the FPR model frees artists from this reliance on passive fans, instead rewarding them for focusing on building deeper fandom.”

Surely this is a better model than the pro-rata one that’s in place now? Not only will it give a financial leg up to those with a smaller fan base, but it will encourage us as the consumers to engage more socially and culturally with the artists whom we love and listen to.

So why haven’t we made the switch yet?

Well, where some hit the jackpot, others are left empty-handed…Pro Musik’s report also estimates that 38.8% of artist profiles would see their royalties decrease by more than 40%.

MusicAlly suggests that making the switch would risk “taking one set of systemic biases from the pro-rata model – certain artists and genres doing well and others suffering – and simply replacing them with another set.”

“One issue, which was highlighted in a 2021 study by the Centre National de la Musique (CNM) in France, and again in a 2022 study by researchers at Hamburg University and Kuehne Logistic University, was that hip-hop and rap are among the genres that would likely see a decrease in royalties under user-centric models”.

“A new model where young Black hip-hop artists (not just the superstars but emerging and independent musicians) may be ‘losers’ is enough to raise red flags.”

It is crucial to clarify that the discussion is not intended to generalise or make assumptions based on race. Artists of all ethnic backgrounds contribute to every genre of music, including hip-hop. However, there is concern that shifting to a user-centric model could disproportionately affect artists from specific racial or ethnic groups, particularly those within the hip-hop genre, who might experience unintended negative impacts under this new system.

The bottom line…

The issue of fair compensation for artists by DSPs like Spotify remains a contentious and complex matter. While Spotify has revolutionised the music industry by providing a legal, affordable, and profitable way for listeners to access millions of songs, it has also introduced significant challenges for artists, particularly in terms of financial sustainability.

The current pro-rata payment model, where artists are paid based on their proportion of total streams, has led to considerable disparities in earnings. Established artists with large followings can thrive, while emerging and independent artists often struggle to make a living. This model encourages a focus on creating hit singles rather than cohesive albums and shifts music consumption toward a commodity-like experience.

Potential solutions include increasing subscription prices and expanding the premium user base, which could boost the overall revenue pool available for artist royalties. However, this approach alone may not address the fundamental inequities in the current system.

An alternative is the user-centric model, which considers factors such as user reach, user commitment, and average user spend. This model has the potential to more fairly distribute royalties, benefiting artists with dedicated, smaller fan bases and encouraging deeper engagement between artists and listeners. However, transitioning to this model is not without its challenges. It risks creating new biases and potentially disadvantaging certain genres and demographics, such as hip-hop artists.

Ultimately, while there is no perfect solution, moving towards a more equitable compensation system is crucial. Whether through incremental changes to the existing pro-rata model or a complete overhaul to a user-centric approach, the goal should be to ensure that artists are fairly compensated for their creative work. This will require ongoing dialogue and collaboration between DSPs, artists, record labels, and consumers to find a balance that supports the sustainability and diversity of the music industry.