I’ve already mentioned how Spotify makes money through their subscription tiers and respectively through advertisements for the free service. But how does that translate into payments for artists, recording labels and right holders?
According to their website, of the revenue collected from the over 6 million paying customers and the many companies who advertise through their platform, close to 70% goes to right holders: artists, labels, publishers and performing rights societies such as ASCAP and BMI. In the US, just thre years from launch, Spotify has paid out more than 500M USD in royalties and they are rapidly increasing along with the popularity of the service.
But how does this work exactly? Spotify has direct agreements with record labels, digital distributors, aggregators and publisher collecting societies to whom they regularly pay royalties. They then pay recording artists according to their respective contractual agreement. Generally speaking, Spotify pays according to the popularity of a specific song or artist. For example, if one artist’s music makes up for 2% of what users are streaming, then the artist will get almost 2% of Spotify’s gross royalties.
For artists, this means that if their music is popular, they have a much better chance of increasing their revenue through Spotify than they have by just selling them through usual distribution channels, be them physical or digital.
How do the economics of this model differ from those of the current single and album sales model? Spotify sells access to music instead of ownership of individual songs or albums. Royalties are generated every time a song or album is streamed (vs. the one time a song or album is purchased), and Spotify users spend twice the amount of money on music through subscription than the average downloader. The economics of streaming are very different than those of digital downloads. A proper comparison requires considering the long-term value of a consumer. In other words, the question they ask is: how much revenue does a streaming subscriber generate compared with a paying downloader.
Spotify Premium subscribers are higher value consumers than “downloaders” because they pay at least £120 annually, whereas average download purchasers spend under £60 / year on music. So for instance, if the 40M paying downloaders in the US became Spotify subscribers, artists would earn twice as much for their music than they currently do.
And this is not only good for already acknowledged artists and their music, but for independent and emerging artists as well. Spotify pays out royalties to emerging artists whenever fans enjoy their music. Here are some artists who agree:
We’ve been big fans of Spotify ever since we got our hands on an early beta version. Spotify was just everything we had ever wished for. Spotify’s got a tight focus and became the main platform for the release of our last studio album, Lorentz & Sakarias. Later on, approximately 90% of our revenue came from Spotify. Prior to Spotify, the music industry had invested in safe bets – popular music, and TV formats such as Idol, but as we, and others with us, reached success on Spotify – the major companies dared to invest in new, more independent-minded music that was aimed towards a younger audience.
– M.Sakarias, artist and producer from the band Lorentz & Sakarias
Independent artists can choose the distributor that best suits them to get their music on Spotify. As with the labels, these distributors govern the specifics of how and when royalties pass-through to artists. Each aggregator makes its own policies clear on its website.
So, whether you’re enjoying their free service or you’re paying one of the subscription fees, you can rest assured that your favourite artists are getting paid for their awesome music and will be rolling out new songs for you.
Until next time, I wish you a delicious day!