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We Must Destroy the Spotify Business Model

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Music Streaming Is Rigged Against Independent Artists

/ November 25, 2015

Modern Hut is the solo project of Don Giovanni Records head Joe Steinhardt. He released its debut LP Generic Treasure  in 2013. Check out and buy his song here, and read his essay on the evils of music streaming sites below. – Spark Mag



We Must Destroy the Spotify Business Model

By Joe Steinhardt

There seems to be no end to the amount of articles being written about Spotify and their royalty payments. These pieces all tend to point to how streaming royalties are significantly lower than those from the CD and MP3 era, and then go on to either argue that this is problematic for the industry, or that it is an inevitable paradigm shift that needs to be understood as such and will be appreciated in the long run. In reality, Spotify’s “pro rata” streaming model is far more sinister than either side of the argument suggests.

I operate an independent record label called Don Giovanni Records. “Independent” means it is not owned by one of three giant corporations (Sony, Universal, and Warner) that control 80% of the U.S Music Market and 70% of the World Music Market. We follow in the tradition of labels like Dischord, Touch and Go, Lookout!, and Kill Rock Stars in that we try to treat our artists and fans as fairly as possible, and work with artists who also believe in maintaining their own independence from the major labels.

This often means working with artists who may be influential, but who don’t become the kind of superstars that can only be generated through ties with the big corporations. It also means having to choose business models that make sense for these bands and their niche audiences. For these independent bands, Spotify’s streaming payment model fails miserably.

Spotify doesn’t pay artists or labels a set rate for a stream of song. Rather, they use what is called a pro rata model, perhaps best explained by one of Spotify’s former “Artists in Residence,” D.A. Wallach:

“We treat payments to indies and major labels the same way. Let’s take a step back first and talk about some of the basics with the service. We make money in two ways. We make money through advertising to free users, who have access to Spotify only on computer. The service is interrupted by ads, and the functionality is a lot like YouTube. There is no mobile option for free ad-supported users, either. Second, we generate revenue from selling subscriptions…We aggregate all of this revenue from these two streams, and distribute back 70% in royalties based on a pro rata share in accordance with the popularity of a piece of music. For example, if one of your songs has been streamed 1% of the total number of streams in a month, you will get 1% of the 70% of royalties we pay out to rights holders. We pay this out to whomever owns the music.”

To summarize, “pro rata” means artists get paid not by the amount their songs are played, but by the amount their songs are played relative to every other artist on the streaming music service. This is problematic for a number of reasons (the least of which being that it incentivizes artists to convince their fans to listen to no one else but them on the service).

…artists get paid not by the amount their songs are played, but by the amount their songs are played relative to every other artist on the streaming music service.

If music listening habits were normally distributed across artists, this might be a fair model to pay everyone, as any artist’s percentage of the pot would be roughly equivalent to the amount of times they were played in a given period. However, music listening is far from normally distributed. In fact, it is extremely long tailed (i.e. a very small group of artists receive a disproportionately enormous amount of the listens on streaming services).

When Chris Anderson first wrote about the long tail and the internet’s power to unlock its potential in 2004, he illustrated the web’s potential to empower the niche, the alternative, and the small. With near infinite server space, Amazon and iTunes could suddenly sell everything, to everyone’s benefit; the incremental sales of the long tail would add up to as much as the whole of the superstars at the top, providing an incentive for mainstream retail to carry niche albums that didn’t exist in the limited space of brick and mortar retail.

In the pro rata model of streaming music, however, the head eats its own tail. Independent records’ relatively small numbers are pitted against their Major Label-controlled Top 40 counterparts in a zero sum game.

In the long tail world of yore, a small label could sell under 100 records a month, and over the course of a few years sell thousands of records, allowing the label to recoup at its own pace and continue to take risks on small and often challenging artists. That would be the case in a pay-per-stream world. In our pro rata world, however, there is a substantial difference in the value of 20,000 streams in a month vs. 20,000 streams in two years. This gives the small labels and artists who sell slowly-but-surely no hope of ever competing fairly. This is a business model that only works for pop music.

This is a business model that only works for pop music.

You would think that a business run this way would be cause for alarm, maybe even class action lawsuit from those being unfairly disadvantaged. But those benefiting the most from this unfair payment model are the very people with the power to change it, as Sony, Warner, and Universal all both own a stake in the streaming services and represent the artists profiting most from the pro rata payment distortion.

Ask for a defense of the pro rata model and Spotify’s website provides a totally unsatisfying runaround:

“Again, we personally view “per stream” metrics as a highly flawed indication of our value to artists for several reasons. For one, our growing user population might listen to more music in a given month than the month before (resulting in a lower effective “per stream”), while generating far more aggregate royalties for artists. As with any subscription service, our primary goal is to attract and retain as many paying subscribers as we possibly can, and to pass along greater and greater royalties to the creators of the music in our service. Theoretically, another service could generate higher effective “per stream” payouts simply by having users who listen to far less music. We believe, however, that our service and the lives of artists will both be best if the World’s music fans enjoy more music than ever before in a legal, paid manner.”

We’re supposed to ignore that a pro rata model only works in an imaginary universe with normally distributed music listening, because we’re supposed to be impressed with the size of their user base? Spotify has built incredible software with the power to change the way people listen to music, provide unprecedented access for listeners, and truly democratize the music industry. However, if Spotify wants to be serious about supporting independent, unsigned, and niche artists, they need to change their business model and end the insulting pro rata payment system.