I’m picking on the Techcrunch story headlined In Europe, Spotify Royalties Overtake iTunes Earnings By 13%, but Techcrunch isn’t the only one to get this story a little wrong. Here’s what the story says:
Kobalt, a company that helps collect music royalties on behalf of thousands of artists — including “half of this week’s Billboard Top 10″ and musicians like Maroon 5, Lenny Kravitz, Dave Grohl, Max Martin, Bob Dylan, and Macklemore & Ryan Lewis — says that in the last quarter in Europe, revenues from Spotify streams were 13% higher on average than revenues from Apple’s iTunes for its customers.
To understand why this is misleading, you need to understand a little bit about the way musicians get paid. Royalty payments for songs, whether bought or streamed, consist of two parts: publishing royalties, paid to the writer of the song (or the owner of the song rights); and royalties which go to owners of the master recording (usually a record company, although in some cases this may be the artist too).
Kobalt, remember, is a company which collects on behalf of songwriters – effectively, a more modern form of music publisher, where the writer retains ownership of their work. It only collects and distributes that portion of the money owned, not the larger amount which goes to the record label and which then trickles down to the artist.
When a song is bought and permanently download, Apple takes its 30%. Apple then sends a separate royalty (8% of gross revenue in the UK) to a local collection agency, such as PRS in the UK or GEMA in Germany. The society then splits this money two ways, between the “mechanical royalty” and the “performance royalty” (in the UK, the split is 75% mechanical, 25% performance for a download, but 50/50 for a stream). The reason for this split is a bit arcane, and not really relevant to this discussion, but it goes to show how Byzantine the whole business of royalties is.
That leaves about 60p on a 99p download, which goes to the record company (the owner of the copyright of the work). Artists usually receive between 10–20% of this as a royalty from the record company. Say you’re an artist with a good lawyer negotiating for you and this is 20% – you just earned 12p for your song. Whoopie!
If you wrote the song too, you’ll eventually get back another 8% of the gross – say about 6p – for your writing skills. So, you’ll make a total of about 18p for your single song download. Minus, of course, whatever advance you got from your record company when you signed, which probably puts you into debt.
When a song is streamed on Spotify, things are different and if anything even more complex, because although with iTunes you get paid roughly the same amount per download, with Spotify you don’t get paid the same amount per-stream.
To work out how much to pay an artist, Spotify first works out its total monthly revenue. It then works out how popular an artist is, dividing their total streams by the total number of streams for all artists. This gives their “market share” – the percentage of Spotify’s revenue (after it deducts its margin) which they should get paid.
Spotify takes a cut of about 30%, leaving approximately 70% of Spotify’s revenue to be split between the owners of the copyright of the recording (usually a record company) and the writers of the song (usually in the form of their publishing company). The proportion of the split between record company and publisher is set by negotiation between record company, rights collection agency, Spotify and (sometimes) local laws. In the US, for example, the percentage which publishers get is around 21% of whatever the label gets.
How much does our hypothetical artist get from Spotify, then? The answer is “we just don’t know” – and, on a month by month basis, neither will he. The split between record company and publisher isn’t known, and without knowing the percentage of gross revenue which PRS, GEMA, etc have negotiated with Spotify, it’s impossible to make a direct comparison between the money a songwriter earns from a download and from Spotify.
But there’s more. But remember Spotify’s revenue bears only a loose relationship to the total number of streams it plays. If the company upgrades a lot of people to subscribers, revenue increases. Likewise, if the price of advertising per play goes up, so does their revenue (without any increase in songs streamed). If Spotify streams more songs to non-subscribers, its inventory (the number of ad spots it has available to sell) will go up – but that doesn’t mean its revenue goes up, because it may not be able to fill all the ads.
Let’s look at an example. In January, let’s say that Spotify’s revenue was £100m, thanks to a load of subscribers and some great ad selling. And it streamed a total of 100m streams. 70% of that revenue – £70m – goes to the artists, and I, Justin Bieber, account for 10% of all Spotify plays (10m streams), so get £7m. Champagne all round!
In February, the costs per ad played go down a bit and Spotify revenues are only £80m, which means £56m goes to the artists. Plays hold up, though, and I, Justin, still end up with 10m streams. However, this month, 10m streams only gets me £5.6m. WTF? How can I afford my new Mercedes?
In March, things look up for Spotify, and it’s back to £100m revenue. And, even better, the number of streams has grown to a massive 120m. Justin’s still hugely popular, with a steady 10m streams. However, this month that 10m only amounts to 6.6% of total streams, so I’m getting £6.6m. WTF? This is crazy! How can I afford my new penthouse apartment?
For a download, the amount which ends up in the artists’ hands is relatively easy to work out and based on how many copies that artist sells. With Spotify, the percentages are unknown, and the number of streams of your work could easily go up while the amount of cash you get at the end of the month goes down, or vice versa.
There’s no doubt that streaming is growing and downloads are shrinking. But Kobalt’s numbers, based as they are on just the revenues going to song writers, don’t mean that the total amount being paid to artists by Spotify is now greater than iTunes. There’s too many variables and too many unknowns to make that simplistic conclusion.