How Spotify pays musicians (2021)

Streaming’s payout model is still too opaque in 2021. It’s more important than ever to have a basic idea of how it works — especially as newer technologies are quickly emerging today.

I’m going to oversimplify some things. My goal is for you to pick this up, read it, and walk away with enough understanding to explain it to someone else in 30 seconds.

I’ve been focused on the music industry for about twenty years and have a lot of opinions about it. I’m leaving those out here. This is intended to be objective and informative.

It starts with two questions:

1) Who is paid?
Rightsholders. This can be a musician/artist, a songwriter (who may not be the artist), a record label, or a number of other entities. Or some combination.

2) How much do they get paid?
Rightsholders are *not* paid a flat rate per play, listen, or stream of a song. They are paid based on streamshare. I’ll elaborate on this more.

Streamshare is pretty simple on the surface: the more streams a song gets — proportionally to all other songs in the same time period — the larger the share of revenue the rightsholder of that music receives.

👉 Here’s an analogy: think of a giant all-you-can-eat food buffet at a restaurant. Each musician has contributed various dishes of food to the buffet. Each song is a different dish of food that’s available, sitting on the buffet table, ready to be consumed.

Every month, a different number of people pay to eat at the buffet, so a different amount of money is made from buffet-access sales each month.

However, some food is very popular. Some isn’t eaten at all. People eat some dishes a lot more than others. Contributors of the popular foods are proportionally paid a larger share of the proceeds from the pool of buffet earnings. This is streamshare.

It’s all you can eat, and what (and how much) you eat determines how much each rightsholder gets paid from the earnings for the right to access the buffet.

The Details: Rightsholders

“How do I become a rightsholder?”
“Why aren’t artists always rightsholders?”

There are a few factors to consider.

Copyrights:

When you think of a song, there are two copyrights. One is the composition (the notes, melodies, lyrics, etc that make up a song). A composition is created — but not necessarily owned — by a songwriter.

The other is the sound recording (the actual recorded version of a composition). A recording is performed — but not necessarily owned — by an artist/musician.

👉 For example: you record yourself playing your favorite cover song on GarageBand. You own the recording copyright of that version, but you don’t own the composition.

Loans for recording music:

Often, artists need money to record music.
Often, a record label gives them that money as a loan.

It’s generally a loan with bad terms for the artist because it’s high risk for a label (9/10 artists never make back the money; essentially defaulting on their loan, and the label loses money on their investment). You may also hear the word “advance.”

✅ Recording copyright

👉 An example: this loan has some similarities to a bank loan (mortgage) to buy a house. If a person has a low credit score, they will have to pay a higher interest rate (a less favorable deal for the homebuyer). This is justified by the bank because the risk of not being paid back is higher (in theory). A higher credit score = a lower interest rate for a loan. Similarly, a popular artist will have better leverage for better recording deal terms because they are seen as a less risky investment.

Then there’s the composition copyright…

…which is also called publishing or songwriter side. The publisher (sometimes a subsidiary of a label) can also become the rightsholder and get royalties here too, especially until it is “recouped” and a loan is paid back. Publishing can get really complicated.

Regardless of the actual numbers here, let’s assume the payouts are pretty low and unfavorable to the creator. The terms and conditions can also be convoluted and very confusing.

For the purpose of understanding basic streaming payouts this is good enough, but just know I’ve particularly oversimplified this aspect. Here’s a good resource if you want to learn more.

✅ Composition copyright

It gets even more complicated (and we’re skipping it):

There are a variety of other copyright collections and payments for rightsholders involved with music. We’re skipping them today. Broadly speaking, let’s just assume a musician who enters a traditional recording and publishing deal will see about 10% of the money both copyrights from their song generates. These aren’t exact terms, and they vary a lot, but this is a fair example conceptually. Here’s Spotify’s rundown of it if you want to learn more.

🤘 You now understand basic intellectual property rights in the music industry.

Put all of this knowledge into bucket #1…we’ll connect it all together in a moment.

Now, in bucket #2, we have Spotify. They bring in billions of $’s a year in revenue from ads and subscription fees. After deducting some taxes, card fees, etc, they claim they pay out ~67% of all revenue money to *rightsholders.*

Wtf is a rightsholder in this context?

A rightsholder is whoever owns & controls the composition and recording copyrights. This might be an artist, label, publisher, or likely, a combo of these parties.

The music biz has done a TERRIBLE job adapting to the digital world here. It’s not really anyone’s fault specifically. It’s kind of like trying to build the most advanced city skyscraper on top of a foundation constructed for a rural log cabin built in the early 1800’s. It works for a while; but the original structure was never intended for its contemporary purpose.

(As an aside, this is one of the reasons why I think there’s so much potential for smart contracts in the blockchain and distributed ledger space).

👉 Example: So, in the case of bucket #1, 67% of revenue goes to the label/pub… and then the artist might get, say, 10%. If Spotify gets $1.00 in revenue, $0.67 goes to the rightsholder (label/pub), then the artist gets $0.067…

One dollar ➡ 67 cents ➡ 6.7 cents.

The artist gets paid almost nothing, but it’s not really Spotify’s fault (simplified).

However, say I’m the artist “Henry” and I write and record my own song and upload it to Spotify. I get my share of that entire 67% (minus some marginal collection fees). If Spotify netted $1.00, $0.67 goes to me as the rightsholder (and artist).

This is why it’s so important for us to work together so artists have alternative options for funding — and so that they have more choices about who the rightsholders of their music are.

There absolutely are situations where working with a label could be the best option for an artist to choose, and it should also be exactly that, a choice.

The Details: Streamshare

There is a second major caveat to streaming payments: streamshare. This is the dreaded “Spotify only pays $0.003 fraction of a penny per play.”

The issue is: they don’t pay per play. Here’s how they calculate it…

👉 Example: Spotify nets $100 revenue in March. ~$67 would be paid to the rightsholders of the music that was streamed. Say “Drake” got 60 listens and “Henry” got 7 listens (and no other songs are listened to). “Drake” would get $60 and “Henry” would get $7.

Next month, maybe Spotify nets $200 revenue because you and a few of your friends bought some new monthly Premium subscriptions. But “Drake” still gets 60 listens and “Henry” gets 7. Now, “Drake” and “Henry” both make twice as much money, even though listenership remained the same.

⚠pay per listen ≠ streamshare⚠

Key takeaways

• The music streaming payments system is still too opaque.
• Artists don’t get paid by streaming services; the rightsholder do.
• Two copyrights for a song: composition and sound recording.
• Streaming doesn’t pay rightsholders per play; they pay per proportional plays to other streamed music. This is called streamshare.
• The common argument is for streaming services to pay artists more. An alternative argument could be that streaming services need to generate more revenue, which means there is more money to split.
• Low artist payments are primarily a mechanism of current recording deal structures and contemporary copyright ownership models.

As you can see, it can get complicated with millions of artists and rightsholders. I’m not for-or-against Spotify, labels, or any nascent technologies, such as Audius or Opulous.

I just want a better ecosystem for artists to grow and thrive. I’m rooting for everyone who is working towards building a better future for musicians and their communities, and my hope is we can get there together.

Have ideas about how we can do that? Please reach out; I would love to hear from you.