When Spotify first negotiated its initial licensing deals with labels in the late 2000s, both sides focused more on how much money the service would take in than the best way to divide it. The idea they settled on, which divides artist payouts based on the overall popularity of recordings, regardless of how they map to individuals’ listening habits, was “the simplest system to put together at the time,” recalls Thomas Hesse, a former Sony Music executive who was involved in those conversations. They decided on a price point “and had the big pie that gets distributed,” he says. “It was early days, when we invented the whole model.”
Over the last decade, that model has become successful enough to bring back the music business — and also reshape it in ways that might have been unimaginable at the time. Paying artists and other rights holders a pro rata share of total streaming revenue means that users who spend more time streaming music have a greater influence than those who listen less. This favors hip-hop artists with young audiences, dedicated fans and broad reach. And at least some of their wins come at the expense of acts in other genres, especially those that appeal to older audiences, who generally spend less time streaming music.
What would the business look like if payouts had instead been calculated with a “user-centric” model, which would allocate money by dividing up the revenue generated by each individual, so that a jazz fan who only listens to Blue Note artists would have his $10 monthly fee divided among them? For years, a few big-name European artists and their managers have pushed for such a model, and starting April 1 SoundCloud will pay some independent rights holders this way.
This won’t change much anytime soon: SoundCloud is only applying this accounting to recordings uploaded to the service directly — 100,000 artists, according to SoundCloud — and the company only represents a small fraction of the streaming business. And while it’s hard to imagine the current model changing soon, for a variety of reasons, SoundCloud’s move is reigniting a debate that until now has been confined mostly to continental Europe.
To understand why, let’s say hypothetically that 20% of streaming service subscribers account for 80% of overall streams, although the actual figures have never been made public. That would mean that these heavy listeners — presumably younger and probably more engaged with their favorite acts than most — have an outsize influence in determining overall payouts. And some executives believe that this is one reason, although certainly not the only one, why hip-hop and pop have boomed in recent years — partly at the expense of album-based genres like rock and jazz.
How much of a difference could the user-centric model make? A 2021 study conducted by Deloitte based on Spotify and Deezer data found that user-centric streaming would favor rock and pop at the expense of hip-hop, while a 2014 Norwegian academic paper that used data from WiMP, the precursor to TIDAL in Europe, concluded that a user-centric approach would increase the royalties of local artists by 13%.
A change in payment models would not significantly affect the market share of the major labels, according to these studies, as well as several sources. Both the majors and streaming services prefer to focus on total payouts, and Spotify CEO Daniel Ek has said that the best way to support artists is to grow subscriptions. The major labels seem to have the same focus — especially at a time when the overall business is growing so fast. Such a change might not make it any easier for young artists to make a living solely from recorded music. “It’s not like money will rain for everyone,” says Maximillian Kolb, managing director of BMG in Germany, where the company has supported the user-centric model. “Music still needs to be successful.”
But a change like this would certainly help acts in some genres more than others. “It helps ensure that the rock community benefits” from streaming, says Seether singer Shawn Morgan. It could also revive them, since the current model seems to be incentivizing labels to sign artists with potentially viral hits.
Could more services follow SoundCloud’s lead? Executives from Spotify, Apple Music and Amazon Music said at a Feb. 23 U.K. Parliamentary inquiry into music streaming that they’re open to discussing the user-centric model, and Deezer endorsed the idea in 2019, although the company has not yet debuted a pilot program originally announced for early 2020.
Any change to the current system, however, would require broad agreement among stakeholders — not just the services but also the majors, large indie labels and potentially even star artists — in a business where unanimity is rare. (Labels would presumably come under pressure from artists who could be hurt by the change to a new model.) From a technical perspective, this would be “not a trivial transition,” said Horacio Gutierrez, Spotify’s head of global affairs and chief legal officer, at the Parliamentary inquiry. That could create even more problems, as greater competition is in the interests of rights holders and the Deloitte study said smaller services might struggle to afford the change. The politics could also be problematic, since a shift to the user-centric model would disadvantage hip-hop artists at a time when the music business is facing renewed scrutiny about its history of unfairness to minority artists.
That doesn’t mean the issue will go away, though. “As always,” says Hesse, “these models need to evolve.”
This article originally appeared in the March 13, 2021 issue of Billboard.