Business Matters: Rdio Unveils Free Listening Option
Business Matters: Rdio Unveils Free Listening Option

Music subscription service Rdio is formulating a plan to directly compensate recording artists for bringing it new subscribers, according to a source within the company and two managers who have discussed the program with Rdio. The plan comes at a time when subscription services are fighting for market share and against negative publicity over royalty payments.

The plan simultaneously addresses Rdio's need for more subscribers. Rdio has not publicly released its subscriber levels, but it is generally believed to trail the far older Rhapsody as well as upstarts Spotify and Muve Music.

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Rdio is hoping incentivized artists will help bring new customers. "They're basically offering a bounty for everybody you bring them," says one manager who has spoken with Rdio about the program. Another manager says the amount discussed with Rdio was $10 per new subscriber.

But the plan could also put Rdio in a favorable light in the artist community. Many artists and managers have expressed concerns about the payouts from streaming services as well as the lack of transparency in the accounting of royalties from these services. Like other on-demand services, Rdio has agreements with record labels and pays labels through their distributors. What eventually gets paid to the artist is a function of the artist's recording contract. A small royalty on a small per-stream payment can be an incredibly small number of a royalty statement.

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By paying the artist directly, Rdio hopes to add transparency and allow more revenue to find its way to artists, says one source. Payments that would not be sent through record labels' accounting systems could be large enough to spur artists to take part in the program. "The goal is to effectively match the economics of what an album sales would be," says the source within Rdio.

Whether or not this program works depends in part on which artists take part. One manger believes smaller artists, not the mid-tier and larger artists with the most fans, will be most interested in the program. "If you're a small band and you pull in 500 or 1,000 people you can actually make, relatively speaking for a tiny band, a lot of money."

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But to work best, Rdio would need top-tier artists to be on board, too - they have the most fans. Cricket Wireless's Muve Music, for example, attributes part of its success to the marketing efforts of well-known artists such as B.o.B and Jason Derulo. Spotify has certainly benefitted from the awareness driven by Facebook CEO and Spotify fan Mark Zuckerberg and celebrity investor Sean Paker. Large followings bring big results.

The amount of royalties paid by subscription services has come under fire in the last few years. Although there is no large-scale evidence that subscription services are eating into music purchases - album and digital track sales remain healthy in the U.S. and many markets around the world - some artists and their managers are worried consumers will opt to stream rather than buy and thus replace larger royalties with a stream of much smaller royalties. A handful of new releases by major artists by the likes of Coldplay and the Black Keys have been well-publicized holdouts from subscription services for their first few months of release.

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Rdio's new initiative is aimed at improving those payouts to artists without changing the fundamentals of its business model. Subscription services pay a majority of their revenue to record labels and music publishers. Few - if any - of these services are profitable and none have the ability to pay rights owners more than their licensing contracts dictate.

But a subscription service could pay artists based on something other than how often their music is played. Precious little revenue would otherwise make it to an artist's pocket. Artists who own their own masters could be paid in the 0.5 cents to 0.1 cent per stream -- payments have varied by region, service and year - less any applicable distribution fees. Artists signed to record labels receive a royalty based on that small per-stream payment - a sliver of a cent, in other words.

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Rdio's scheme could also make it the most pro-artist service of the bunch. The need to support artists is a common, politically correct theme in today's music business. Many services boast they serve artists by connecting them with fans, streaming their music, selling their downloads or merchandise, or reducing piracy. Rdio's plan to put money directly into artists' pockets - without the use of a middleman - could be a marketing plan its competitors will want to duplicate.

The stakes are high. On-demand subscription services pay out the majority of revenue to content owners. Combined with the cost of building, maintaining and marketing the platform, the cost of content demands services to achieve large scale in order to be profitable. There is no small-scale success in this part of the music business.