Spotify and Penny Per Stream Royalties: Is the Cure Worse for Artists Than the Disease?

Spotify just reported that it paid out $9 billion in artist royalties in 2023 — an impressive number to be sure, but one that still fails to satisfy artists frustrated by long-standing sub-$.01 per stream royalty rates that many in the music industry believe devalues music.

It was Steve Jobs two decades ago who essentially framed music streaming’s fundamental economics when he set the price to download Apple’s songs at $.99 and albums at $9.99, a steep discount from the $13-$19 cost of physical CDs at the time. The price level was meant to give consumers a legitimate alternative to Napster’s outright peer-to-peer (P2P)  theft.

A few years later, Spotify and other digital streaming platforms (DSPs) launched with that same price point for monthly subscriptions to move consumers away from downloads to streaming. Shell-shocked musicians tried to make sense of it all — to find ways to fuel their art and livelihoods with confounding new per-stream royalty rates that were a fraction of one penny.

In an attempt to rewrite that history, earlier this month U.S. Rep. Rashida Tlaib introduced a bill — dubbed the Living Wage for Musicians Act — that essentially doubles those rates from the current $.003-$.005 per stream to $.01/stream.

The bill’s goal is to give more musicians a chance to earn a livelihood in our streaming-first world that plays by economic lines arbitrarily drawn two decades ago. Its timing is particularly salient now, because musicians are getting hit by the second tech-tonic shoe to drop – generative AI. Tracks produced by AI increasingly flood music streamers, overwhelming real-life artist tracks that otherwise would trigger plays and royalties.

As laudable as the proposed bill’s goal is, its $.01 per stream royalty rate would be financed in a way that would hurt pure play streamers like Spotify and Deezer significantly more than Apple Music and Amazon Music — platforms from multi-faceted Big Tech behemoths that boast multiple revenue streams. That reality would, in turn, likely hurt musicians themselves.

Here’s why.

The bill’s proposed incremental royalty payments to artists would be financed in two ways. First, it would  automatically increase music subscription pricing by 50% (up to a certain maximum dollar amount) and direct those incremental amounts into an overall artist fund. And secondly, it would require DSPs to inject 10% of their non-subscription revenues (mostly advertising) into that same artist fund. Together, these new payments function as a consumer subsidy for the benefit of artists.

It’s easy to defend the push for this kind of artist subsidy, given the undeniable value consumers get for unlimited access to 100 million songs for less than two soy lattes at Starbucks. Remember, current streaming royalties have changed little in the past 15 years, and there’s no “magic” to these low streaming payouts.

To compete and to incentivize consumers to adopt new streaming behavior, Spotify and others settled on Jobs’ $9.99 “magic number” for monthly subscriptions. Only recently – beginning last year – has that pricing crept up. Spotify raised its monthly premium subscription by $1 to its current $10.99 — still a shockingly low value.

“Streaming has become an increasingly popular choice for people to enjoy music, but unfortunately while streaming services and record labels continue to make tons of money off of these platforms, the artists who make this music are not seeing shared prosperity,” Tlaib said when she introduced the bill.

But here’s the issue. No matter how much artists and consumers may consider it to be the enemy, Spotify is essentially never profitable despite its massive global reach. The streaming giant has achieved profitability only a handful of times in any quarter since it launched in 2008. The more it makes, the more it seems to lose (there are lots of reasons why). That means that Rep. Tlaib’s proposed “10% shaving” of non-subscription ad revenue will only make matters worse for Spotify and profitability more elusive and distant.

But it gets even worse for Spotify and the other pureplay music DSPs. They would be harmed significantly more than their resilient Big Tech streaming competitors by the inevitable large numbers of defections by subscribers who refuse to pay the new 50% “tax,” even when they understand that those incremental dollars would go directly into the pockets of the musicians whose music they enjoy. Already unforgiving pureplay economics would be battered further by these subscription losses.

Meanwhile, Apple Music, Amazon Music, and YouTube (the biggest Big Tech music streamer of them all) boast massive war chests because of their parent companies and multiple revenue streams. That means they can withstand user defections more easily and with significantly less stress to their bottom lines. Revenues from music services represent drops in their overall monetization buckets after all.

Those behemoths also have the luxury of being able to essentially “eat” some or all of the 50% subscription “tax” because their streamers essentially function as a marketing expense. Their primary purpose is to drive brand engagement so that users buy more of their underlying core products. That’s a fundamentally different raison d’etre than it is for Spotify and the other pureplay DSPs that monetize only one thing – the music itself.

Let’s face it. Apple, Amazon and YouTube have no real skin in the game to increase subscription pricing to ultimately benefit artists. In fact, they are at least arguably incentivized to compete with each other by driving subscription prices down, essentially subsidizing their services which, in turn, devalues music even further. The incentive for Spotify and the other pureplay DSPs, on the other hand, is to drive monthly pricing upward much like Netflix, the leading independent pureplay DSP on the video side, has done over and over again. The only problem is that Spotify and the others can’t for the reasons noted above.

Pressure on Spotify and independents will continue

So while the sentiment behind Congressperson Rashida Tlaib’s proposal is commendable — and the musicians’ cause is just — the bill, at least as it stands, likely wouldn’t be good for anyone in the music industry, including the musicians it’s intended to benefit. Big Tech likely would just get bigger, and Spotify and the other pureplay independents would face increasing economic pressure that places them at even greater financial and competitive risk. And the fewer independent music DSPs that compete with Big Tech, the worse it likely would be for artists. Big Tech would control the music industry’s overall rules of the game even more than it does today.

One possible fix is to give independent pureplay DSPs like Spotify a fighting chance against the Big Tech behemoths. Spotify and other independents  significantly depend on Apple’s App Store and Google’s Play Store for distribution. Apple, of course, notoriously charges a 30% “tax” on most purchases in its App Store. That’s quite a hefty, some would say usurious, transaction fee. Imagine your credit cards charging you 30% for the luxury of enabling purchases.

Spotify has historically avoided Apple’s crushing toll by essentially forcing those new users to subscribe via a separate step outside of the App Store. That inefficient second step, of course, causes friction that likely sheds a significant portion of those who otherwise would have paid at the time of download.

Apple’s 30% windfall tax is under significant regulatory scrutiny right now both in the U.S. and EU, and we already see changes. The EU just passed The Digital Markets Act that finally gives Spotify and other app developers the ability to make in-app purchases without triggering the Apple tax. This potentially places them in a better position to ultimately pay artists more.

But the ultimate tax here that harms musicians is the tax set by Jobs and Apple two decades ago when they diminished the monetary value of music in the minds of consumers. Although Jobs’ $9.99 album download price certainly was a massive improvement over the original Napster’s outright P2P theft, it essentially set the bar for pricing by legitimate music alternatives. And once consumer expectations are set, it’s hard to change them — especially when Big Tech players control the playing field.

Rep. Tlaib’s bill certainly can’t fix that.

Reach out to Peter at peter@creativemedia.biz. For those of you interested in learning more, sign up to his “the brAIn” newsletter, visit his firm Creative Media at creativemedia.biz, and follow him on Threads @pcsathy.

The post Spotify and Penny Per Stream Royalties: Is the Cure Worse for Artists Than the Disease? appeared first on TheWrap.