Updated: How Much Do Artists Earn Online? How Do Spotify and Other Revenue Share Services Calculate Royalties?
“I’d rather be raped by The Pirate Bay than shafted by Hasse Breitholtz and Sony Music.”
Swedish artist Magnus Uggla, speaking of Spotify’s major label ownership and low payments
This 2010 graph may no longer be exactly correct on the number of streams at the Spotify end of the equation, but I think it is spot on–so to speak–on the relative numbers. I think that the aggregate Spotify payout rate they use is a little low now, although it may well have been correct in 2010 when there were fewer premium service subscribers to Spotify. The aggregate payout rate will skew higher as more users sign up for the subscription service over time (I’m focused on the total number of subscribers, not where they live, i.e., not the number of countries where the company operates). But what really hasn’t changed is the general message of the graph–independent artists make a lot more money selling CDs and permanent downloads than they ever make on streaming services. This is not news. You can agree or disagree that streaming services do or don’t cannibalize sales of higher margin items, but it seems that you have to be completely convinced that “obscurity is your biggest enemy” and that somehow your being on streaming services solves for that problem sufficiently to make it worth the risk.
And remember that you probably won’t be joining Daniel Ek (the Spotify CEO) on the Rich List anytime soon and that his salary surely must be paid by the venture capitalist investment in his company and not by revenues. Sure there’s some correlation between those two, and no there’s nothing wrong with raising venture money if they send in the clowns once again. But a $180 million rights payment implies a $77 million share for Spotify, and that’s not enough to get you on the Rich List based on cash. Or at least cash from advertising and subscriptions–which makes one wonder if there’s some other source of revenue that’s not being reported. But then Spotify CEO Daniel Ek said that “turnover” (roughly gross ”revenues”) for Spotify in 2011 was $250 million and that in an interview translated in PaidContent, “’It is not unlikely that, already this year [April 2012], we have a turnover of more than SEK 6 billion ($887 million),’ he added.”
The point being–your music is worth a lot more than Spotify (or any other on-demand streaming service) is paying for it. And we have Daniel Ek to thank for that realization, the person that Forbes called the most important man in the music business. Do you think Irving agrees? (Thus proving yet again how little the suits know and how little they care about demonstrating to the world how little they know.)
Remember–when Spotify has its liquidity event–IPO or acquisition–you will not participate in that cash. Daniel Ek, venture investors and Spotify employees (and probably the “artist evangelists”) will participate in the company’s $1 billion valuation–that’s how you get on the Rich List. You will not, even though the entire value of the company is based on the life’s work of artists, songwriters, producers, remixers, engineers and so on. The way working people in the music business participate in these things is through current royalties. If you don’t capture the value then, you never will. (Could this be a reason for the “artists are lazy and want to be guaranteed an income forever” meme we here so often from the odd fellows who want to cut off artist royalties because creators don’t deserve it?)
So maybe the unelected Spotify “artist evangelists” should spend less time counting their stock options and more time coming up with a better way to compensate the artists they supposedly represent.
Is it fair? As super agent Ari Emanuel said famously, “Fair is where we end up.” Right now, I don’t think this model is fair to the artists or the indie labels. But I don’t think we’ve ended up anywhere yet, so the whole system needs to make an adjustment closer to fair. And that won’t happen by itself. Given that these services, and especially Spotify, have insulated themselves from situations where they could be forced to negotiate with independent artists (and also given antitrust concerns) about the only way that I can see these deals getting more fair is if artists raise these concerns in a variety of ways and maybe the message will get through the the Spotify board room.
The Basic Math:
The first thing to realize about subscription services is that with one exception that only applies to major labels, they do not calculate royalties on a per-unit price, or in their case a per-stream price. They pay a share of a defined set of the service’s revenues (e.g., from advertising) that is allocated by how many streams you had that month as a percentage of all the streams.
So if you had 30 tracks on the service and the service had 15,000,000 tracks that were streamed an average of 20 times each (realizing that probably 40% of these tracks are streamed fewer than 5 times, and probably 20% of the tracks are streamed hundreds of thousands of times), your share of the month’s advertising pie would be the net revenues multiplied by 30/300,000,000, divided by 30 to get to a per-stream result. I won’t depress you further by doing the math, but you get the idea that it’s not much. It’s just an example, it could be better and it could be worse. This should explain why major labels are rumored to get a per stream minimum (discussed below) and why you don’t.
That is the biggest difference from iTunes financially speaking. When iTunes tells you you sold $100 of downloads, if you know what your wholesale price is (which you would because you set it) you know how many units you sold and vice versa. When a revenue share service like Spotify tells you you made $100 of streams, the number of streams may vary from month to month depending on the value of the advertising inventory on the service during that month. Advertising, as you will see, is one of Spotify’s principle products–unlike a download. One model focuses primarily on selling advertising, the other on selling music.
Because Spotify accounts on a pro-rata share of advertising revenue for indie artists, you have to make an assumption about what the revenue will be on average. For indie artists, the revenue calculation is something along these lines:
Ad-Supported Service: 50% of the gross advertising revenue less certain deductions multiplied by the label’s (or the artist’s if the artist is the label) prorata share of performances for the accounting period concerned.
Subscription Service (including mobile): the greater of (a) 50% of gross subscription revenue (less the deductions) multiplied by the label’s prorata share of performances for the accounting period concerned and (b) certain negotiated per subscriber minimum payments multiplied by the total number of subscribers and multiplied again by the label’s prorata share of performances (all for the accounting period concerned).
Rumor has it (to coin a phrase) that some labels (four soon to be three guesses) also get a third tier in the greater of formula which is a per-play minimum. If I had to guess, I would guess that minimum is somewhere around $0.01 per play.
If the artist is signed to a label that is accounting to the artist for the Spotify income, then the artist share will probably be somewhere between 10% and 50% of the label’s share depending on the artist’s deal.
Don’t hold me to these numbers being exact, but I think it’s pretty close to what I have described.
So for the ad service alone, if Spotify grosses $100 in a month, it can take certain deductions from that $100 like sales commissions or other fees paid to advertising agents for sales of Spotify’s advertising, sales, use, value added or similar tax on Spotify’s sales of ad inventory, any fees paid to publishers or societies, and probably some other things. Let’s say those deductions equal 50% of gross (typical ad sales commissions at 35% and publishing at 15%, both calculated on 100% of gross so you can just add the percentages), and that the taxes are zero. (35% and 15% are kind of benchmarks for the maximum caps on these costs in rev share deals so in a good month the actual costs may be lower, but I would bet that the Spotify accounting system sets up these costs at the maximums, just like label accounting systems take a returns reserve at the maximums allowed.) I don’t have time to do the subscription service calculations, but you would add credit card fulfillment fees to the off the top costs, which can be significant. The point is that Spotify (like most subscription services) can deduct most of their third party non-overhead costs off the top.
Spotify then keeps 50% of that net number and shares the other 50% with the label, but allocates the label payment based on the label’s share of total performances. (Remember, the independent artist will be the label and rumor also has it that certain labels get more than 50%.) So when you hear Spotify’s artist evangelists say that Spotify pays out “70% to rightsholders” did you think that the revenue share was 70% and not 50%? That would be an easy mistake to make. A very easy mistake.
Let’s say the label has 1% of the total plays on the ad supported service that month (which is the typical Spotify accounting period). Realize that most independent artists will have far, far less than 1% of the total plays on Spotify in a month, but let’s keep it simple.
So it looks like this:
$100 – $50 out of pocket costs = $50
Spotify’s 50% share: $25
Our label’s 1% prorata share of $25: $0.25 (realize that the total payment to all the labels will equal $25)
Artist’s share for the month assuming the artist counts for all of the 1% market share of the label: somewhere between $0.025 and $0.125 depending on the deal. I can’t get to a per-stream payment because I didn’t feel like making assumptions for number of streams. So if you want to make some assumptions go ahead and divide the label and artist share by whatever number of streams you think equals a 1% market share on the entire Spotify free service in a month. It’s a lot. They have 15 million tracks or so. You should read “Why Spotify Doesn’t Make Sense for Musicians: 70,000 Listens Earns Less Than $300” about cellist Zoë Keating’s publishing her Spotify royalty statements in a public Google doc. And as far as I can tell from the article and the statement, that $300 is the label’s share over 6 months because Zoë Keating is both the label and the artist for these streams. A little quick math and you get to $0.0042-ish per stream before aggregator commissions.
Artist share for the month if there are 5 artists on the label: somewhere between $0.005 and $0.025
So these are very low payments whether you did the calculation in 2010 or last night. There is an undercurrent in Spotify’s defense of its payouts that is starting to sound like a criticism of the label split with the artists. But even if the split was the 50/50 that was established in the “Eminem case,” an extraordinarily low payment is even lower when it’s shared. Spotify can be “shocked, shocked” that artist payments are low, but alarm is a little…well, cinematic.
I would guess that the way Spotify gets to the 70% payout to “rights holders” that was reported in Digital Music News is if they include publishers and if some labels get more than a 50% split. (Otherwise why didn’t they say “labels”–”rights holders” is more inclusive.)
Another way to look at this is that for every $100 of gross revenue on the free service a label with a 1% market share makes $0.25. (Or for every $1 million of gross revenue, $2,500).
The subscription service will be somewhat better depending on the negotiated per-subscriber minimums, but also remember that the conversion ratio from the free to the premium service is relatively low so “better” is relative. Remember, Spotify has cleared over 15 million tracks, so in reality, the artist net is probably a lot smaller due to the proration. By the way–there is nothing particularly magical about the Spotify deal compared to other subscription deals or rev share deals. So don’t start looking for something sinister in the calculation. The shenanigans are probably not in the rev share, it will be other places, like on what doesn’t get included in gross for example.
Rumor has it that the way Spotify (and most other subscription services) define advertising revenue is as monies received by Spotify for sales of in-stream advertising, sponsorships and promotions and display advertising, sponsorships, promotions that appear on the Spotify client during playback.
I hear that subscription revenue is defined as revenue from the various subscription “tiers” from subscriber fees, access charges, perstream charges and subscription fees from the subscription service, as well as referral fees, bounties, affiliate fees and the like from sales of products and services offered by means of the subscription service. Does this include Spotify’s “sponsored playlists”? Not clear.
Oh, but of course it must be said that both these calculations exclude hardware that plays Spotify sold through the service. Now call me suspicious, but whenever I see something specifically excluded from one deal, I know that it is so easy to change that “ex” to “in” and it makes me wonder what other deals might say (with you know who, perhaps). Particularly in the absence of MFN treatment.
And then of course if you are going to Spotify through an aggregator, you have to deduct the aggregator’s commission.
Now there’s a business, eh? I understand now why the need so much venture money to cover their burn.
This is not to knock Spotify as a service but the numbers are what they are so it’s important to keep that in perspective. I don’t quite understand what the comparison between the Spotify subscription service and iTunes is meant to prove, and I also don’t see how Spotify could be the second highest income source for record companies. If you take the claim that Spotify has paid $180 million to labels in 2011 on a worldwide basis and you wanted to see if Spotify was the second highest revenue source, one way to do it would be to determine how many CD sales it would take to equal $180 million. If Spotify was second, you would expect CD sales to be less than $180 million. (Which seems totally implausible to me, but let’s go with it for a minute.)
In order to make that calculation, you’d have to make an assumption about the blended wholesale price of CDs if you wanted to get a feel for the unit sales. If you took a fairly high average wholesale price, say $9, that would mean that 2011 CD sales were under 20,000,000 units on a worldwide basis. If you took a fairly low average wholesale price of say $3, that would mean that 2011 CD sales were under 60,000,000 units on a worldwide basis. Adele alone has sold 22 million. So I feel like there’s some missing data there somewhere. But then I didn’t go to Harvard and I’m just not as smart as these city fellers. $180 million is not nothing and it definitely gets you a NARM board seat, but I don’t quite follow how it makes Spotify the number 2 revenue source behind iTunes but ahead of CDs on an industry wide and global basis. And neither does Glenn Peoples.
So what is appalling about Spotify is not that the payouts are small, not even that that they refuse to disclose the kind of detail an artist would need to know in order to determine whether using the service is a good idea–that’s nothing new, for years major label royalty statements have given artists just enough information to almost but not quite know what’s going on.
What’s appalling is that they are getting so rich off the backs of the artists, songwriters, producers, remixers, and indie labels that provide them with their sole product.
As I told the Austin Chronicle in a recent interview:
“To me, it’s a lot like the record clubs,” offers Castle, referring to the mail-order companies of last century, like Columbia House and BMG. “Record clubs were owned by the labels, and once you got put out by the record club, you became part of this giveaway program. The royalty rates for artists and songwriters went way down, and if you worked at one of those labels that had a record club, there was no way they were going to let you hold back those records because the profit was just too great.”
When I worked at A&M, I did everything I could think of to put bombs in the recording contracts that would disincentivize record clubs from putting out our records. 12 month or “reasonable” holdbacks, no reduced rate mechanical licenses, everything I could think of. Did it stop them? Sometimes. But it slowed them down.
And even if the “Information is Beautiful” graph may need to be updated, what definitely hasn’t changed is that it looks like the people who are really making the money out of Spotify’s cash flow are selling the advertising. That’s another point of disclosure that it would be nice to know. Maybe that was announced and I missed it, but I’d love to know which adserving networks Spotify uses–and if it has an ownership interest in any of them. And whether the $1 million each that its US launch partners reportedly paid for the privilege ended up in the pockets of any artists (Chrysler, Coke, the Daily, et al).
We’ve had a number of questions lately about how artists should look at aggregator deals and how to evaluate them. You would, of course, evaluate these deals the same way you would any other deal in the first instance–using break even analysis. This requires a little bit–a very little bit–of high school algebra, but you can do it.
Why Do You Need an “Aggregator”?
Retailers like iTunes have a huge number of contracts that they administer–but they rarely will let you sign up directly as an individual artist. Most of the time, they want you to sign up through an “aggregator”, a tech industry term that refers to a middleman who services the larger account (iTunes for example) with one deal that provides many independent artists. This idea of a threshold volume requirement is not new and certainly existed in the music business for a very long time (hence the “one stop”). It is also costly for artists to try to make separate deals with online retailers or other digital outlets. So aggregators are middlemen who sit in between the retailer and the independent artist, providing a benefit to each like a typical middleman would. In fact, you could easily say that an aggregator creates efficiencies like the quintessential middleman in dry goods or any other business.
It is almost required that an independent artist sign up with an aggregator in order to have your works serviced to many online outlets. Realize that mere servicing does not do one thing toward making the artist less of a needle in a bigger haystack online as hardly any aggregator will include any, or any meaningful, marketing and promotion in their basic distribution charge. I think it’s safe to say that none will, but I try to avoid the categorical.
It is also important to remember that an aggregator makes money by collecting money for as many artists as possible and taking a split of revenue. It is only good business for the aggregator to charge the highest fee the market will bear–and it is also only good business for you to let the aggregator charge you just enough to keep them incentivized to collect your money. Realize that the aggregator’s costs are highest at the beginning of the deal and then every time they have human contact with you. This is why some will charge a “set up fee” that you pay them up front even if they get a percentage of collections after that. It’s also why it’s usually hard to get someone on the phone (just like it is at Google) because unless you are making over a certain amount of money which will vary by aggregator, one customer service call with you can eliminate the aggregator’s profit for the year. So don’t expect much human contact from your aggregator.
It’s also important to remember that your deal is just about money. Your aggregator isn’t advancing you money, they are not paying for your recordings, they do not pay you tour support. It is not a social movement or a cult. You are not authorizing the aggregator to act in your name just by signing up with the company.
An aggregator deal is really just about the money and for you it should be about getting the deal that requires you to pay the lowest “real distribution fee” (meaning the lowest percentage of your revenue whether calculated on a percentage or flat fee basis) and the deal that you can get out of the most easily when someone comes along who is willing to do more for you but requires those same rights be assigned to them.
Some deal points of aggregator deals to be concerned about include getting the ironclad ability to opt-in to any retailer or to opt-out at any time, and also to terminate the aggregator deal on short notice for any or no reason (e.g., 30-60 days), preferably at no cost to you.
Another key issue is to make sure that you are collecting your SoundExchange revenues yourself for both the featured artist share and the copyright owner share. You do not need an aggregator to do this. It is not unusual for an aggregator to try to collect at least the copyright owner’s share of these monies, but they should cave on the point. This assumes, of course, that you have registered for SoundExchange WHICH YOU SHOULD DO!
Aggregators who try to convince unsuspecting independent artists who own their own sound recordings that they need to let your aggregator collect your SoundExchange revenue is unfortunately an old problem. The best way I know of to avoid being in this situation is to register your sound recordings with SoundExchange before you make your aggregator deal. SoundExchange will typically not change the sound recording owner to your aggregator without the permission of the prior registrant–you in this case–so that should keep your aggregator from incorrectly claiming money they are not entitled to. Or shouldn’t (and don’t need to) be collecting.
What is the commission base?
You should focus on which revenue streams the aggregator is charging you commission for–the commission base–and which revenue streams you can carve out of the commission base. They often don’t come right out and say “we are collecting and commissioning webcasting money that you could easily collect yourself particularly since you have to register with SoundExchange as a featured artist anyway and you may as well sign up for both featured artist and sound recording owner at the same time but if you are uninformed we will be happy to take your money.”
Not common to see that paragraph.
You should also be on the alert for any aggregator who has registered themselves as the sound recording copyright owner with SoundExchange. Since the aggregator is never the sound recording owner (or they better not be), the only reason the aggregator would try to list themselves as such would be to collect your money–and commission it.
Negotiate Your Own Deal
In the case of webcasting monies, the language that you will often see in aggregator deals is a reference to “noninteractive” or “nonsubscription” or “statutory”. Those words mean, essentially, royalties collected on your behalf by SoundExchange. As long as those words are preceded by “The aggregator does not collect or commission….” that stuff, then that’s a step in the right direction. But all too frequently the aggregator agreement is either silent on the issue or allows the aggregator to collect monies already collected for you by SoundExchange. If the aggregator’s standard deal allows them to commission webcasting royalties collected by SoundExchange tell them they have to carve that out because you don’t need them to collect those monies as SoundExchange is happy to pay you directly both the artist share and the sound recording share, unlike some of the big retailers. If you are not sure–ask.
We also assume that your aggregator will be willing to negotiate the terms of your distribution agreement as opposed to a one-size-fits-all arrangement which some will and some won’t. Acquisition costs, i.e., the cost of getting your deal done, is another sunk cost of an aggregator, so like any good middleman they will try to reduce these costs with no-negotiation or click through agreements (sometimes called “adhesion”). So unlike a record company that may refuse to negotiate certain aspects of their artist agreement, an aggregator often won’t negotiate at all.
You want the ones who will negotiate with you if you can get them. And even if they won’t, by registering your sound recordings with SoundExchange in your name before you go to the aggregator, that is pretty good protection against “accidental” collecting by your aggregator.
How can you tell if your aggregator is playing this game? Go to the SoundExchange ”PLAYS” database and search for your aggregator’s name in the sound recording owner field. PLAYS is a public facing database that SoundExchange maintains that allows you to search for sound recordings and see who they are registered to in the SoundExchange accounting system. (For more information on SoundExchange you can read my interview with SoundExchange President Mike Huppe on the Huffington Post, part 1 and part 2, also in a podcast available at Arts+Labs Innovation Central.)
Getting Out of the Aggregator Deal
If you are asked to sign a deal with an indie label or with a major label, these labels will require that you give them exclusive distribution rights–including the digital rights you have already granted to the aggregator. That means that you need to have the ability to terminate your aggregator deal and transfer digital distribution to the new label. There have been instances where digital distributors tried to hold up artists from signing to bigger situations because the aggregator tries to hold the artist to the aggregator deal and block the artist getting into a more desirable label. As digital is rapidly becoming the primary sales channel, asking a label to accept a deal with no digital rights is like asking them to sign an artist they can only license for film and TV.
Commission Rates: Percentage vs. Subscription
How the aggregator is compensated is also an issue of concern. In the traditional model, the aggregator took a percentage of sales as their compensation. This meant that the aggregator only made money if the artist made money. Some aggregators charge a flat fee on some basis (such as a per-retailer basis) instead of a percentage, or an annual flat fee. This makes the aggregator deal more like a subscription model where your credit card is banged every year for a magazine subscription.
Each model has its strong and weak points. The percentage model pays the aggregator a percentage of your gross revenue the aggregator collects regardless of whether they are making an effort to stimulate sales (which few of them do in any event regardless of how they are compensated). However, under the percentage model the aggregator only makes money if you make money, so at least the incentives are aligned. The percentage should be low (15% or so is fairly typical) to take into account that the aggregator has lower incremental costs over time of maintaining content in their catalog.
The flat fee model has the artist pay the aggregator a fee for distribution instead of paying the distributor a percentage. While this is attractive from the point of view that the artist knows what their distribution costs will be up front, it also transfers all of the risk of distribution to the artist. In order to determine which is the better model, the artist should compare their most favorable percentage based offer to the flat fee model and see what the breakeven point will be. Try using a formula like this and solve for “X”:
[Flat Fee]/[percentage] = Gross Income
Gross Income/wholesale price = breakeven units
or, for example if the flat fee is $100 and the comparable distribution fee deal is 10% (which would be very low but this is an illustration):
$100/.10 = $1,000 (Gross Income)
$1,000/$0.70 = 1428 units (rounded down)
In the example, a $100 flat distribution fee is equivalent to a 10% distribution fee model if you sell 1,428 units at a wholesale price of $0.70 (a typical wholesale price per track for permanent downloads). That means that if you sell exactly 1,428 units you will be indifferent between the two models. It also means if you sell fewer than 1,428 units, you will be better off under the percentage model. If you sell more than 1,428 units you will be better off under the flat fee model. (You could argue that the units would be 10% higher to get to a net number to the artist, but we are trying to keep it simple. That difference would be another 159 units [(1428/.90)-1428], rounded.)
This example is only for one accounting period and only uses one revenue stream–permanent downloads. It is more likely that you will see blended revenue streams, but we factor out limited downloads and streaming because permanent downloads are the overwhelmingly dominant revenue stream for most artists. That may change over time or be different for you. Also, as you extend the distribution costs and revenues over longer periods of time (with additional flat fee payments per year under the subscription distribution model), your results may vary.
To take another example of the flat fee model, what would the flat fee equate to under the percentage model at 500 units at a wholesale price of $0.70 (a typical wholesale price for permanent downloads)?
[Flat Fee]/[Gross Income] = Distribution Fee as a percentage
$100/[(500) x ($0.70)] = 28.6%
Under these assumptions, a 28.6% distribution fee for an accounting period would be in the astronomical zone for a digital aggregator–who should be getting around 15%. It would even be on the high side for a major label distributor who was also giving signficant (and expensive) marketing, PR, sales and radio promotion support.
But these are just assumptions to illustrate the issues. In any of these examples, you will need to use your own projections on sales, wholesale price and configurations in order to get a projection that is personalized for you.
Chris posted “One for You, Nineteen for Me: Is Kickstarter Money Taxable?” on the Semaphore Music blog. It’s a short explanation of tax issues with taking crowfunding money.
For the next few weeks, we’re going to post sections from the article “20 Questions for New Artists” by Chris Castle and Amy Mitchell which has been posted various places. If you are interested in getting a free copy of the article, write to firstname.lastname@example.org before February 1. This doesn’t constitute legal advice, or any intent to form the attorney-client relationship. (If you miss an installment, try searching this blog for “20 Questions for New Artists”.)
Bank Accounts/Tax Returns/Accountants: A common mistake that bands make is to have all income paid to one band member, which usually results in unnecessarily complex adjustments at tax time.
Check with your bank branch to find out what the bank requires in order to open a bank account in the band’s name (usually at least a “doing business as” or “dba” filing with a government agency of some kind).
The band should find an accountant in your geographical area who is familiar with music issues and band accounting and take a meeting with that accountant (preferably a Certified Public Accountant). The band’s accountant should be able to advise you on questions such as the deductibility of expenses (recording sessions, haircuts, meals and travel, cell phones, etc.); liability issues (not surprisingly, liability issues substantially increase as soon as the band hits the road and starts driving); whether the band should lease or buy that new band van; and how to treat various income streams such as money received from investors, royalty income, merchandise, etc., as well as payment of sales tax, withholding and income tax.
Eventually, the accountant will be responsible for paying each band member their draw or salary, and making sure any roadies or other employees are properly paid under state and federal tax laws.
See Also: Have you Registered with SoundExchange?
Copyright 2009 Chris Castle and Amy Mitchell. All Rights Reserved.