In the past ten years, streaming services like Spotify and Apple Music have revitalised the record industry, rescuing it from the decline it faced in the early 2000s due to a drop in physical music sales and the rise of digital piracy. However, as the streaming industry has matured, record companies have become dissatisfied with the way royalties are paid by these services. The most common model, known as pro-rata, treats all streams equally. Typically, streaming services pool together ad and subscription revenue and distribute payments to artists based on their share of total streams.
While this may seem fair, the music industry has discovered that the pro-rata model can be manipulated in favor of smaller and sometimes unethical actors, who divert potential earnings from legitimate artists. Additionally, major music companies face a challenge from the overwhelming amount of music being uploaded to streaming services, which dilutes their global market share. Approximately 120,000 new tracks are now uploaded daily.
According to Music Business Worldwide, Universal Music Group (UMG), the largest music rights holder globally, is in talks with the music streaming service SoundCloud to explore changes in the payment structure for artists based on streams. Bloomberg reports that UMG and SoundCloud aim to conclude these talks by the end of the year. UMG has also enlisted Bain & Co. to advise on the commercial implications of potential changes to the streaming royalty model.
UMG’s discussions with SoundCloud are part of a broader campaign to improve payments made by streaming services to artists and rights holders. Earlier this year, UMG formed partnerships with TIDAL and Deezer to research new streaming models that generate greater commercial value for artists and recognise their creative contributions.
Streaming has become crucial for the music industry, accounting for a significant portion of recorded music revenues worldwide. In 2022, ad-supported and subscription-based streaming accounted for 67% of recorded music revenues globally, while in the US, the largest music market, it represented 84% of revenues.
To advance on this issue, the music industry must develop a concrete “artist-centric” payment model for streaming and gain the agreement of music streaming services. However, this could be challenging as some services are moving towards a “user-centric” or “fan-powered” model of royalty payments. SoundCloud was one of the pioneers of this approach, implementing it for 118,000 artists in 2021.
Under the user-centric model, royalties generated by each individual subscription are allocated exclusively to the artists that the subscriber listens to in a month, rather than being pooled together and distributed based on total streams. A study conducted by Midia Research on the impact of this model found that approximately 56% of artists earned higher streaming revenues compared to the old model, while 44% experienced a decrease in income.
