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For the Record: Who’s Afraid of User-Centric Royalties?

Streaming is broken. Can a new royalty system like the one SoundCloud is exploring fix it?

In the music business, it is the best of times and the worst of times. Overall, it is the season of light – in 2021, U.S. recorded music revenues increased 23% to $15 billion, the sixth year in a row of growth driven by subscription streaming. For many creators and some entire genres, however, it is the winter of despair: Per-stream payouts are getting lower, publishers and songwriters are constrained by regulations and receive a small share of revenue, and many independent artists are struggling.

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All of these things are true partly because streaming hasn’t just changed the size of the recorded music revenue pie – it has radically changed how it’s sliced. Streaming royalties are distributed on a pro-rata basis, meaning overall revenue is divided based on the total popularity of tracks. That means consumers who spend more hours listening matter more when it comes to revenue – and the artists they like benefit accordingly. That arguably disadvantages other creators and fuels at least some of the problems with streaming: Modestly successful artists aren’t seeing their per-stream royalties add up partly because the biggest hits account for more of the business than ever — and part of the reason they do is because of the way revenue gets divided. 

Over the past few years there has been more talk about the so-called user-centric model, which involves dividing the revenue generated by individual subscribers according to what they listen to. Now SoundCloud, which began using this system last year for some independent artists, has announced a similar deal with Warner Music Group. (SoundCloud refers to this system as “fan-powered royalties,” which sounds cool, but none of these systems are fueled by people who don’t like music.) The immediate effect will be small, since SoundCloud doesn’t have that much market share. But Deezer has already advocated for this model, and its use will fuel the debate about how fair streaming is.

So far, the big streaming services and the two biggest majors have either said or hinted that they’re fine with either system, sometimes because their revenue and payouts won’t change much, and they’d be happy to make a change if artists and other stakeholders agree. But the idea that label revenue and payouts wouldn’t change much obscures how this could shift the fortunes of artists – and saying you’re willing to make a change once everyone in the music business comes to a consensus on an issue is basically saying it’s going to happen on the 1st of Neverary.

It’s hard to tell just how much of a change user-centric royalties would represent. A French study found that royalties for the top 10 artists dropped 17.2%, while increases for others didn’t rise more than 5.2% — which didn’t add up to much. A MiDIA report on SoundCloud’s system found that 56% of the acts who used the system were better off, but those numbers could change if major label acts joined in. It would certainly favor the kinds of acts that labels used to call album artists – more serious, more established, and probably of more interest to an older audience.

So far, most of the arguments about user-centric royalties relate to fairness – how a different system would better reward middle-class artists, or how the current one would be fairer to superstars. But the music business was never set up to be fair, and a change like this in royalty distribution wouldn’t alter that. So it might be more interesting to consider how the user-centric system would change labels’ incentives to sign different kinds of acts.

Right now, the majors focus on acts that they think will be broadly popular among consumers who spend a lot of time listening to music, like Drake and The Weeknd. They’re less interested in acts that might appeal to smaller numbers of dedicated fans, including rock bands. This can make fans emotional, but it’s not a moral issue so much as a possible sign of short-sightedness: Fleetwood Mac wouldn’t be doing so well if a whole lot of people didn’t like that kind of music. And the most compelling argument for a user-centric system could be that it would incentivize the kind of investment in A&R and marketing that tends to pay off over the long term – for labels and acts of all sizes. It’s worth remembering that Fleetwood Mac’s big breakthrough album, the one before Rumours, was the band’s 11th.

It’s possible that user-centric streaming won’t work – that it won’t change royalty flows enough to be worth the cost of setting it up. OK. But the only way to know is to let some services try it, while others stick with the current system. Some superstars won’t like the user-centric system, and it’s completely possible that they’ll try to stop services from using it. (It’s also possible that some big labels will fight it, in order to keep their superstars happy.) But the best thing for the streaming business is competition – among labels and services, but also among business models. Right now, Spotify and Apple Music offer fairly similar products that pay rightsholders in fairly similar ways. That could be the best way to set up the future of the music business – but the business wouldn’t have them in the first place if it wasn’t willing to experiment.

For the Record is a weekly column from deputy editorial director Robert Levine analyzing news and trends in the music industry. Find more here.