Spotify Artist Revenue and the Swedish Streaming Pie

When Spotify went public on 3 April, 2018 the day of trading closed with shares priced at $150 and the company valued at around $26.5 billion. Yet so often I read about artists complaining that music streaming services are screwing them over royally. The most public of these was Taylor Swift, however her battle with Spotify seems to have ceased and after jumping ship in 2014 she rejoined the platform in mid-2017, I guess she learned to “shake it off” /hilarity ensues. Spotify trade as (NYSE:SPOT) for anyone who wants to dig up current share prices.

I had a dream recently that I was a member of the Red Hot Chili Peppers. I was on bass guitar, i’m not sure what happened to Flea at this concert. Anyways, we took the stage in front of hundreds of thousands of people and I suddenly realised that I couldn’t play guitar and began to panic. I don’t know what having this dream means, but it is a fair representation of my current musical talents. I love talking about money and trying to under how different markets work, whether it be markets that I already play in such as online advertising game via Google Adsense, or in this case the streaming music scene where I am unlikely to ever play. But I guess you should never say never, as life rarely turns out how you expect it to.

First in this article we will make up a backstory about the Spotify Founders to set the mood. We will then flow into the talk of money and finally look at how artists can claim their share of the delectable streaming Swedish pie. There are also sub-headings for each of these sections so it would be easy enough to just skip right to the end and look at a number, however in order to truly to get a fair representation of the story, and hear more of my horrible puns, I strongly encourage you to stick with it and read the entire article.

Founded by vikings

Spotify was founded by Daniel Ek and Martin Lorentzon in Stockholm, Sweden and launched in October of 2008. In only a few short months we will see Spotify hit their 10 year anniversary. I don’t want to look up the bios of the 2 founders and instead wish to imagine that they are tall and strapping Swedes, with long flowing golden locks of hair. When these gods smile their teeth light up the room and women swoon. I can’t say for sure, but they most likely are the descendants of vikings.

Most of the last paragraph is completely irrelevant to the rest of the story. Sometimes I type things just to entertain myself. I know then that I always have at least an audience of one.

Who is in the streaming game?

Spotify are a giant with somewhere in the realm of 3,000 employees across 20 locations. But Spotify aren’t the only player in the music streaming game. Most, if not all, of the names below should be very familiar to pretty much anyone who hasn’t been living in the backwoods for the last decade without Internet access.

5 of the largest music streamers:

1. Spotify – who are believed to have somewhere around 50% of the market share
2. iTunes
3. Pandora
4. Google Music
5. YouTube – YouTube apparently have the lowest payout rates by far out of the big streaming music platforms

Why Spotify financials matter

We’re going to take a look at some earnings figures from Spotify. You may be wondering at this point why in the hell this is in the article when all you want to know about are the artist payouts, and I will answer that for you. You see in some ways I feel as though Spotify is getting a bad rap when it comes to talking about payout figures for artists. It is important to understand how they make their money, and how much, in order to determine what sort of pool they can then potentially pass on to artists.

What is absolutely awesome about Spotify going public is that they have an obligation to release financial data to the public. So the first stop for Profit Pants was to run over to the Spotify website and dig up the latest investor report.

On 2 May, 2018 Spotify released a letter to shareholders where they covered off the following figures for Q1 2018:

• The platform has 170 million monthly active users, this is up 30% year on year
• There are 75 million premium members, this is up 45% year on year
• Total revenue of €1.139 billion (for some reason they wrote this as €1,139 million in the letter, maybe that is a Swedish thing! Of this, the vast majority (€1.037 billion) was the result of premium users. The total revenue is up 26% year on year, and 37% year on year if you take into account the changes in exchange rates over that period
• The “cost of revenue” to make the €1.139 billion was €856 million. I have placed this in bold as a proportion of this figure would include the payout to labels and therefore artists.
• The company operated on a gross margin of 24.9% for Q1 2018
• Spotify operated at a loss of €41 million.

The 170 million Spotify users are in the following locations around the world:

1. Europe (36%)
2. North America (32%)
3. Latin America (21%)
4. The rest of the world (11%)

And when you look at just the premium users then the adjusted figures look like this:

1. Europe (40%)
2. North America (31%)
3. Latin America (20%)
4. The rest of the world (9%)

The churn rate (users dropping from the platform) was reported as dropping to under 5% for Premium accounts. They went on further to indicate that the Family and Student plans had lower churn rates than this, one can only assume that this is because the cost is significantly lower to per user.

Getting your sweet tunes onto Spotify

This isn’t YouTube we are dealing with here. It isn’t possible for any average Joe to sign up for a Spotify artist account and just get right down to uploading his new home-brewed beats.

In order to make it onto Spotify there are two paths that you can head down:

1. You sign with one of the major labels. They will handle the rest for you as they have direct relationships with Spotify. When we are talking about major labels then most likely it is going to be one of the big three:
   • Universal Music Group
   • Sony Music Entertainment
   • Warner Music Group
2. You, or your indie label, signs up with an aggregator service, who then has a relationship with Spotify.
   • For artists these are the approved aggregator companies:
     • AWAL
     • CD Baby
     • Distrokid
     • Emu Bands
     • Record Union
     • Spinnup
     • Tunecore
   • For indie labels you also have the options of:
     • Fuga
     • Ingrooves

I’m only speculating here, and speculation is something that we love to do here on Profit Pants, maybe the company have come out and clarified their reasoning, but here are some of the reasons why I believe Spotify has chosen this model for artists, rather than letting individuals sign up directly:

• Aggregators are the first level of quality control:
  • A higher barrier of entry, by forcing people through an aggregator, will help to drive a higher minimum quality of product. Imagine if every cover of Call Me Maybe that can be found on YouTube was thrown into the Spotify catalogue. Technically only the professionals, or very advanced and motivated hobbyists, will proceed.
  • It is the aggregators responsibility to ensure that low technical quality recordings are not pushed forward. I am sure that Spotify still perform their own checks too, but at least you are adding in an additional quality gate at the aggregator level.

• A simplified payment system:
  • At the end of the payment cycle Spotify only needs to make payments to each of the major labels and to a handful of aggregators. Compare this with making payments to a couple of million individuals.
  • Payment calculations are easier. The total number of streams is determined for each of the dozen or so companies that require payments. It is then up to the labels and aggregators to determine exactly how much individual receives.

• Spotify can focus on their product, instead of artist customer service:
  • The responsibility of dealing with artists is shifted. Imagine if artists were paid directly by Spotify and dealing with a call to a Spotify call center: “Hi, this is Jane Supreme Diva and my songs had 471 plays last month but for some reason the screen is telling me that I only made $1.19 in revenue. Clearly this is an error”. Instead this is a conversation that I imagine would need to be had with their aggregator or label. It would then be the label or aggregators responsibility to contact Spotify.

And then how much money does the artist see?

I know that from the start you have just been asking me the question of how much do artists make on Spotify, so we next jump into the grey area of exactly how payout figures are determined per stream.

I call it is a grey area because I don’t understand it completely, so instead this is just a summary of the way that I best understand it.

1. Spotify has a big bucket of money at the end of the month which is some portion of the €856 million that we talked about up towards the top of this article.
2. Major labels have special deals for advances and agreed minimum payout figures for their artists and take a chunk of the pool. Also at this point it is a nice time to also inform you that according to a leaked Sony contract from a few years ago there are additional benefits that major labels see as part of their catalogue sitting with Spotify, including special deals on ad placements within the platform. This ensures that artists signed with major labels have an unfair advantage over the competition when it comes down to a user trying to work out what they want to listen to on their device. It shouldn’t come as a surprise that within the Spotify ecosystem not everything is equal for all artists, but it is good to know where you stand. As Notorious BIG put it, “And if you don’t know, now you know”.
3. Spotify take a commission. This commission from Spotify was listed as being around 30% in 2015, more recent figures suggest that the figure is possibly still somewhere around there.
4. Magic happens. More money also leaves here for royalty payments (different to per-stream payments) that we will touch on further down in the article.
5. There is a magical pool left that is dedicated to pay-per-stream. When I last checked in the Spotify FAQ section it listed that a song would need to be played for 30 seconds in order to be counted as a play. So with this pool:
   • Determine how many valid streams were played on Spotify during the cycle. Let us imagine it is 10 billion.
   • Divide the “magical money pool” by 10 billion. To keep it very simple we will imagine that the result is “1 cent”.
   • Determine how many streams each artist had to work out what share they receive. So if an artists had 250 streams during the cycle they would be entitled to 250 cents.
   • Pay the aggregators and labels the total money for all of the artists under their control.
   • The aggregators and labels then work out how much money they will pay their artists.
6. The artist is paid “some” money by the aggregator or label, depending on the deal that they have made.

We will jump back to step #5 in the above calculations, where we are talking about that Spotify will pay per stream. In 2015 Spotify claimed that this number was between $0.006 and $0.0084 per stream. That numbering does my head in, but it is roughly between half a cent and three quarters of a cent per stream, so you can look forward to cashing in a few thousand streams for a $20 souvenir silver spoon. Just remember that this is before the label or aggregator takes their cut.

Although the statement from Spotify in 2015 claimed that $0.006 to $0.0084 per stream was the expected payout, the numbers reported by news stories varies significantly, but importantly at all times the figures have been under 1 cent per play. There were multiple articles citing $0.0035 to $0.0045, and nothing really coming near the $0.0084 from 2015. It is also impossible to know, unless the artist has specifically stated so in the article, whether or not the quoted figure is before or after their aggregator or label has taken their Swedish pie slice.

As an example, the aggregator service CD Baby charge a flat fee per album of around $50 and then take an ongoing 9% commission. These numbers are relatively affordable, so if you have a dream to see your music published on Spotify then you can do it for the cost of a dinner, assuming that you have the music recorded already!

For those that are signed with labels the deals will vary too greatly to speculate what sort of number an artist would end up with, as some artists may only receive as little as 10-20%, while others with newer deals and high bargaining power could be at the complete opposite end of the spectrum.

Note: Just to ensure that we have put all the fish onto the table, there are a few other types of royalties that also get paid when music is paid on Spotify. We won’t try and calculate these any further, however my understanding is that these calculate out to be only a small fraction of the per-stream payment amounts, somewhere in the region of 10% of what you can make per-stream:

• Mechanical royalties: If you wrote the music then there is a commission. This royalty needs to be collected separately.
• Performance royalties: Performing rights organisations such as ASCAP and BMI will collect a royalty for you if you are a songwriter and publisher.

Lets run some theoretical examples

I would expect that most people reading this article are trying to determine what sort of ballpark the artists on Spotify are playing in, rather than trying to determine an exact dollar payout figure. Because the reported artists payouts have varied significantly, and I never saw anything higher than the 2015 Spotify high band figure of $0.0084, we will take a range and top out the theoretical highest payout at $0.0084 and go right down to $0.0035, which was the lowest claimed figure that I found.

First for a basic table featuring the low and high range payout figures:

Most of the numbers that I found reported by artists (remembering that the $0.0060 and $0.0084 numbers were reported by Spotify) were sitting under $0.0050, so the lower end of the payout table is most likely more realistic. Remembering that before the artists receive their share there will be a cut to either an aggregator or label, the artist pay cheque is likely to be well below even the low end of the band.

To help put these numbers further into context here are the most streamed songs ever on Spotify according to a Wikipedia article that I came across. I have once again used the same low, medium and high payout figures from the table above.

Some of these numbers look to be extremely impressive. You may be starting to rub your greedy paws together with glee. And well, they are impressive numbers. Keep in mind though that we are talking about the most played songs in the world. Using these figures as any sort of guideline as to what a small indie artist might receive is unrealistic, which would be the same as comparing Vin Diesel’s Fast ‘n’ Furious pay cheque with that of the actor performing in the local Shakespeare production at your local theatre. They are completely different ballgames and are therefore also playing by different rules for the most part. But yes, they are both still actors. Also try to remember that these figures are before the major labels have taken their cut, which we can expect to be very significant cuts in many cases.

What else are the artists missing out on?

It is difficult to calculate the indirect losses experienced by the artists which have come as a result of the music streaming platforms being in existence. A few of the items that come to mind:

• Reduction in album sales – The reduction in album sales is already a well discussed global trend. If I want to listen to an artist then I am opening up Spotify to find them. If they aren’t there then I probably won’t bother looking any further. The tradeoff is of course that there is this magical internet money coming from Spotify, but it is unlikely that the incoming streaming revenue comes even close to offsetting the golden days of album sales.
• Less chart impact – When consumers shift over to Spotify to listen to their favourite artist’s music, instead of purchasing an album, the impact that has on the Billboard chart rankings is altered considerably. A Spotify Premium member must stream an artist 1,250 to 1,500 times to provide the same impact as purchasing one album. The good news is that all artists who participate in streaming platforms, which is more or less all artists, are effectively in the same boat.
• Less “true” fans – This is purely my own theory, I have nothing but anecdotal evidence to back it, but the day that I moved over to Spotify my world of music was unleashed. If I read about an artist or saw on television that they had been shot and killed, as was the case with rapper XXXTentacion, I can have their music playing in my lounge room within seconds as part of my “all you can eat” Spotify plan …and it is completely legal. I can listen to hits from the 60s if I am in the mood, as experimenting with different genres is all too easy and free. In the old world I wouldn’t have bought this new music.
  • In the past: There was a not so distant time when I would have to save my pocket money and go to a physical store and wisely choose an album. I would learn to love the album, read the lyrics in the case insert and settle into an ass-groove in the lounge as the album played end-to-end, take a bathroom break and then repeat the process.
  • But now: For an artist that I love, I will still listen to an album end-to-end, but between listens I am also exposed to the music of dozens of other artists. This makes it even more important for artists to try and retain their existing audiences, whether it be through social media engagement or via the concert touring scene. Hot new artists are popping up all the time trying to steal audience attention and the barrier of entry is so very low. This is another area that plays both ways though, as your smallest local artist can now be in the same catalogue as Drake.

Would I move my music catalogue to Spotify?

At the beginning of the article I was making my way onto the stage as the bass guitarist of the Red Hot Chili Peppers. Imagine that I was a success and still riffing away along with Anthony Kiedis to this day, would I want our catalogue on Spotify?

For the artist who has a heavy reliance on the flowing trends of the pop charts, is heavily “shareable” and has the real possibility of several million streams, joining the platform makes sense. There is a potential untapped pool of magical internet money waiting and if you don’t take your share then it is likely that another artist in your genre will take it instead.

But for the small indie artist who has a loyal local following and relies heavily on album sales to survive, do you risk these sales for the chance of massive exposure? It is a roll of the dice.

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