On SoundCloud’s new deal with Warner Music (or why the debate over Fan-Powered Royalties is more complicated than ‘fairness’). – Music Business Worldwide

MBW Reacts is a series of short comment pieces from the MBW team. They are our ‘quick take’ reactions – through a music biz lens – to major entertainment news stories.

Imagine you’re in an office. (One can no longer assume that to be the case for a typical MBW reader on a Thursday afternoon, of course.)

Now imagine your entire team, inhabiting a whole floor of this hypothetical workspace, all rising to their feet.

Picture 300 people, from cubicle-dwellers to support staff, from interns and contractors to the kings and queens of the corner offices.

They all gather in front of you, this attentive throng, and you find yourself standing on a chair.

“The good news,” you announce, “is that just over half of you are getting a pay rise, right here, right now.”

There is a loud cheer. Some people burst into applause.

“The complicated news,” you continue, “is that to facilitate this pay rise, just under half of you will see your salary reduced.”

Question: Are your workforce happy in this scenario? Is it worth the stress?

Do you even make it out of that office alive?

This, in a nutshell, is the potentially insurmountable barrier facing the widespread music biz adoption of user-centric royalties.

Or, as they’ve been smartly re-branded by SoundCloud, Fan-Powered Royalties.

We’re going to assume at this point that MBW readers are au fait with the difference between FPR and ‘pro rata’ payouts on other streaming services, but, briefly, if you’re not:

• Most streaming services continue to pay out on a ‘pro rata’ basis. This sees them pool all the royalty money generated by subscriptions into ‘one big pot’, and pay this out to artists based on their share of total streams across a given month. Spotify calls this system ‘Streamshare’.
• FPR is different. It sees the royalty amount generated by each individual subscription split exclusively between the artists that the owner of that subscription played that month.

Just over a year ago, SoundCloud made a pioneering move: It transferred around 100,000 independent artists who were being paid on a ‘pro rata’ basis to being paid on an ‘FPR’ basis.

It was able to do so because, fairly uniquely at this point, SoundCloud is both a distributor/services provider to these artists, as well as a royalty-paying music streaming platform.

Last week, research firm Midia released a very interesting report with SoundCloud, investigating the impact this switch to ‘Fan-Powered Royalties’ has had on 118,000 independent artists now being paid via that model on the platform.

The Midia report was largely full of praise for FPR, and its future potential.

For example, Midia provided compelling evidence that an industry-wide switch away from ‘Streamshare’ to FPR would help curb illegitimate streaming activity. (Such activity is currently being driven by bad actors wanting to grab as big a market share of all streams on a service as possible… to get paid as much as possible.)

Leading the Midia report was one very loud number: Of its 118,000 creator-sample on SoundCloud (who were previously paid via ‘Streamshare’ on the service), Midia found that 56% are now financially “better off under FPR than pro-rata”.

The sunny conclusion on that: The majority of artists who moved to FPR from ‘Streamshare’ last year have seen their income improve as a direct result.

The glass-half-empty counter-conclusion: Nearly half (44%) of all artists who did the same have seen their income decrease.

As an individual, this writer would love to see the music industry move to an FPR-payout system. It is, when all is said and done, a fairer and less-gameable way to pay artists than the current structure.

But there are over 250 million tracks on SoundCloud today. And, presumably, the makers of just under half of those tracks stand to fiscally lose out from a switch to FPR.

We have an inkling of the type of artists who almost certainly will lose out, of course: The most popular artists in the world.

Midia’s report makes the case that for these artists – the Drakes, Ed Sheerans, and Rihannas of the world – FPR provides better data about their biggest fans (due to insights about individual subscriptions).

It suggests that, even if Drizzy took a financial hit from FPR streaming royalties, he could easily offset this by better monetizing his ‘super-fans’ using FPR data.

Yet the fact remains: If you, dear reader, were being paid a wage today that you were really happy with, and then you were told you were going to be paid less – but were also going to be given information that meant you could make the lost income up on the weekend – would you be happy?

I am guessing not.

It is because of this bottom-line fact that this writer also believes that the lack of industry (and artist) consensus around FPR will, eventually, see it struggle to win mainstream adoption in the music industry.

All of which makes an announcement from yesterday – that Warner Music Group has agreed to adopt FPR for its artists on SoundCloud – extra intriguing.

Credit is due to the SoundCloud team (particularly, I’m guessing, its President and ex-Warner/ADA higher-up, Eliah Seton) for successfully negotiating such an important test case for the adoption of FPR.

It’s undoubtedly a big win for SoundCloud, and for its pro-FPR argument.

However, that nagging question remains: What happens when just under half of Warner Music Group’s artist base begins to earn less money from an important streaming service?

Especially when the artists who will be earning less from the switch are the superstars on which WMG banks its business – from Cardi B to Ed Sheeran, Dua Lipa, Lizzo, and Megan Thee Stallion?

These questions, in this particular case, might actually be moot: Sources suggest that such Warner artists who don’t financially benefit from a switch to FPR will be protected by a “minimum guarantee” in the WMG/SoundCloud deal. This ensures they will be paid at the same rate they would have been on a ‘Streamshare’ basis.

Yet the fact such a clause (potentially) is required in the first place spotlights the wider problem:

FPR is a fairer, less manipulatable system for artists. It also happens to hit a lot of artists in the pocket (during a macroeconomic inflationary crisis, no less).

(Also making things tricky: A 2021 French study that suggested the artists most likely to be hurt, financially, by a switch to FPR are hip-hop artists, a community with which SoundCloud’s brand and reputation is tightly intertwined.)

Then, there’s the Universal Music Group Problem.

Warner Music Group, on a corporate level, may or may not see a switch to FPR improve its market share in terms of streaming income. It’s hard to say.

What we probably can say for sure is that Universal Music Group would lose out on such a switch if it ever were to go industry-wide.

You only need to look at UMG’s peerless dominance on streaming services last year to get the hint:

• UMG had 4 of the Top 5 global artists on Spotify in 2021 (Taylor Swift, BTS, Drake and Justin Bieber)
• Another of its artists, Olivia Rodrigo, released drivers license – Spotify’s most-streamed song of 2021;
• And Rodrigo’s SOUR was Spotify’s most-streamed album of 2021

Universal Music Group has pledged to deliver a mid-20-percent annual EBITDA to its shareholders (after going public in September 2021) in the next few years.

The idea of UMG voluntarily agreeing to slice a chunk off its global streaming revenue market share, therefore, seems… unlikely.

Especially when you consider the practical pain point: Who, exactly, at UMG is going to make the call to 44% of its artists to tell them they’re getting financially suckered by a new streaming model that Universal didn’t need to permit?

As one senior music biz source told MBW today: “With their success in mainstream hip-hop, I can’t see any way Universal would ever risk a switch to ‘Fan-Powered’ royalties.

“Could you imagine telling Drake or Ye they were about to earn less money from streaming Just Because The Man Says So?!”

He has a point.

So what’s the future for FPR?

What of SoundCloud’s bold position as a talisman for the model – and Warner’s bold decision to experiment as its partner? (Albeit, I repeat, an experiment likely cushioned by a “minimum guarantee” safety net.)

The first question: Could SoundCloud really survive without Universal Music Group’s catalog?

If the service is determined to switch the entire industry over to FPR, it could very possibly lose the UMG catalog on its consumer-facing platform (and possibly the Sony Music catalog too, dependent on the view of ‘FPR’ at the Rob Stringer-led company).

Then again, SoundCloud is truly unique in its space.

It’s increasingly as much an independent A&R and artist-servicing entity these days as it is a Spotify rival.

Perhaps the ultimate key to differentiation in the marketplace for SoundCloud is to actually double down on the former part of its identity, rather than the latter.

And, just for fun: What if Warner Music Group acquired SoundCloud?

One of the major record companies would finally control an established consumer-facing streaming platform.

In turn, that would open up a direct relationship with oodles of customer credit cards – something that the trad ‘middleman’ role of a major label does not permit.

Even under WMG ownership, SoundCloud would presumably continue to be blessed with bazillions of tracks from independent artists, in addition to Warner’s own handsome catalog.

Plus, with SoundCloud’s own indie artist distribution and development operation coming as part of the deal, such an acquisition would:

• (i) Bulk up WMG’s reputation amongst the indie artist community;
• (ii) Improve WMG’s ability to access data about the independent artist community;
• (iii) Improve WMG’s ability to ‘upstream’ the cream of the crop into the Warner label system.

It’s an interesting idea.

I maintain, however, that the “potentially insurmountable barrier” I mentioned earlier will likely, ultimately rule this story.

No music industry company representative – be they from a major label, management firm, or indeed a streaming service – wants to stand on a chair and tell a roomful of artists that they’re going to have to swallow a pay cut… Just Because The Man Says So.Music Business Worldwide