Insights #021: Understanding Music Streaming Platform Models

In the evolving music streaming landscape, how artists are compensated varies significantly across different Digital Service Providers (DSPs). As the music industry transitions from physical sales to digital streams, understanding different compensation models is crucial for artists and fans alike. Three prevalent royalty distribution models are the artist-centric, user-centric, and pro-rata models, each with a unique approach and implications for artists.

The artist-centric model aims to create a more equitable distribution by channeling revenue to artists who have actively engaged listeners. This model seeks to filter out passive noise, rewarding those artists whose fan bases are genuinely committed and actively listening to their music. However, while this method benefits established artists with dedicated followers, it potentially redirects income from emerging artists to well-known figures. Data from Water & Music indicates that artists with larger followings tend to capture a disproportionate share of streaming revenue, leaving smaller or emerging artists with fewer financial opportunities.?

A noteworthy solution we’ve been following for a while is provided by EVEN, a platform that allows music creators to monetize their work immediately and receive payments directly in their native currency. EVEN has raised around $4.2 million in capital for its Seed round. EVEN's approach is one of the most seemingly sustainable and successful models for artists to date; ensuring that artists can capitalize on their music and get compensated fairly for their work.?

On the contrary, the user-centric model rewards artists based on the number of unique listeners they attract. This structure, notably used by SoundCloud, distributes revenue according to individual users' listening habits. In this model, artists receive a share of the subscription fee directly proportional to the number of times their music is played by each subscriber. This approach benefits artists with a dedicated fan base by ensuring they receive fair compensation relative to their listeners. However, SoundCloud's revenue, estimated at around $300 million in 2023, pales compared to giants like Spotify, which earned $12.7 billion the same year. While the user-centric model ensures fair pay for loyal audiences, it may limit exposure to a broader audience, as the focus remains on maintaining existing fan engagement rather than expanding reach. Consequently, SoundCloud’s financial growth, while steady, hasn’t mirrored the explosive market dominance seen by companies employing the pro-rata model.

The pro-rata model, most commonly used by major DSPs like Spotify and Apple Music significantly favors superstars who garner the most streams. In this system, all subscription revenues are pooled and then distributed based on the total number of streams an artist accumulates. This creates an imbalanced ecosystem where top-tier artists receive a disproportionate share of the revenue, often leaving lesser-known artists with minimal compensation despite having a loyal listener base. For instance, Spotify saw its stock price rise from $150 to $336 since the beginning of 2023, reflecting investor sentiment towards its model’s profitability despite the ongoing criticism of its fairness. Even though Apple Music continues to thrive, it faces scrutiny over revenue distribution. The inherent inequality of the pro-rata model has sparked considerable debate within the industry, prompting calls for more equitable alternatives. However, as the financial successes of these platforms demonstrate, market forces continue to prioritize the reach and scalability of the pro-rata model, leaving companies like SoundCloud in a competitive struggle.

Adding to the complexity of artist compensation in the streaming era is the rise of music catalog acquisitions. Companies like Primary Wave have pioneered purchasing legacy artists’ catalogs and aggressively monetizing them through sync deals, biopics, and brand partnerships. For instance, after acquiring a stake in Whitney Houston's estate, Primary Wave significantly increased the estate’s annual earnings from $1.5 million to almost $8 million by revitalizing her catalog through marketing, branding, and licensing initiatives. This business model capitalizes on the long tail of streaming revenue, enabling rights holders to continue profiting from older works well beyond their initial release.

However, this trend raises concerns about the potential impact on newer artists. Saturation in the market with reworked classics, biopics, and legacy artist promotions could crowd out emerging talent, making it harder for them to gain visibility and build a sustainable career. While established catalogs offer a reliable income stream for investors, the focus on monetizing past hits may divert attention and resources away from developing new music and supporting up-and-coming artists.

The current reality of music streaming platforms presents a paradoxical scenario. While these platforms provide unprecedented access to music, they also prompt a shift in consumer habits. Once consumers paid for a product, they now pay for access, and soon they may even pay for participation — potentially earning more from streaming than the musicians themselves. This presents a dystopian possibility that calls for a comprehensive evaluation and restructuring of royalty distribution models to ensure fair compensation for all artists.

References:?

Published:2023-07-14, B. & M. (n.d.). Starter pack: Music streaming platform models. Water & Music. www.waterandmusic.com/starter-pack-music-streaming-platform-models/.

Bloomberg. (n.d.). The business of selling out is warping the music industry. Bloomberg.com. www.bloomberg.com/features/2024-business-music-licensing/?utm_content=businessweek&utm_medium=social&utm_campaign=socialflow-organic&utm_source=linkedin.

Even - crunchbase company profile & funding. (n.d.). www.crunchbase.com/organization/even-5b71.