Spotify in Talks with Record Labels to Change Revenue Allocation
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Spotify is currently in discussions with major record companies, key independent labels, and distributors regarding potential changes to its revenue allocation system for individual tracks and catalogues on the platform. This move follows a similar pilot scheme recently introduced by Deezer. Under Spotify’s proposed plans, tracks would need to reach a certain number of streams each year before any money is allocated to them. The streaming giant is also looking to implement new rules for “functional audio,” which includes content like white noise and birdsong.
Both Spotify and Deezer are making these changes in response to mounting pressure from major record labels to address certain aspects of their business model. The labels are increasingly unhappy that their “premium content” is being monetized at the same rate as what they consider to be “lower value” content. This lower value content includes functional audio, as well as tracks uploaded by “non-professional” musicians who may not prioritize monetization but still want their music available on streaming platforms.
Currently, music streaming services operate on a model where revenue is shared with the music industry based on consumption share. Each month, in each market, the streaming service allocates a portion of its revenue to each track or catalogue. The allocation of revenues is currently based on the percentage of total consumption that a particular track accounts for, with all tracks considered equal and plays counted after 30 seconds.
Calls to change this track allocation system have been ongoing for years, primarily from independent artists and music-makers. However, even major record labels have been pushing for changes since the beginning of this year, leading to serious consideration of alternative systems.
Regarding functional audio, Deezer’s approach involves removing third-party content of that nature entirely from the platform. Instead, the streaming service replaces it with similar content created in-house, which will not receive any revenue allocation. On the other hand, Spotify’s proposals, as reported by MBW and Billboard and confirmed by CMU’s sources, focus on implementing new rules for this type of content, particularly concerning the duration of listening required for payment. Currently, functional audio producers often split tracks into 31-second segments, ensuring that each short track triggers a payment. However, Spotify aims to increase the play time needed for payment, making it more difficult for functional audio producers to generate revenue from multiple short tracks.
In terms of tracks uploaded by “non-professional” musicians, Deezer’s new system grants “double boost” status to tracks by “professional” artists, meaning each play counts as two, resulting in less money flowing to “non-professional” artists. In contrast, Spotify’s solution involves setting an annual threshold for the number of streams a track must pass before any revenue is allocated to it.
The division of music-makers into two tiers, as proposed by these changes, has sparked controversy. Deezer, Spotify, and major labels argue that the definitions and thresholds being put forth will place independent artists and emerging talent in the privileged group, with the lower tier consisting of creators who may not be seeking to monetize their music. However, these new policies will affect everyone in the lower tier and could have a particularly adverse impact on niche genres or artists from non-traditional backgrounds.
Artists in that lower tier may question why they should not be paid the same as everyone else if their music is being played, even just a few hundred times. They may also wonder whether the proposed two-tier payout is a form of price-fixing, where dominant streaming platforms collude with major music companies, potentially pushing countless independent creators out of the marketplace or offering them less favorable terms.
While streaming services and major labels may argue that platforms like user-generated content and social media have already set a precedent that creators must achieve a certain level of traction before they can monetize their output, many within the music industry consider this distinction to be a false parallel.
It remains to be seen how Spotify’s and Deezer’s plans will progress as they attempt to gain industry-wide support. However, what seems evident is that the track allocation systems employed by streaming services will undergo significant changes in the coming year, further complicating matters. Moreover, both Spotify and Deezer are making new commitments to combat streaming fraud, although specific details have yet to be disclosed.