Universal is investigating new royalty payout models for streaming. Which one will it choose? – Music Business Worldwide

MBW Explains is a new series of analytical features in which we explore the context behind major music industry talking points – and suggest what might happen next…

WHAT’s HAPPENED?

On January 11, Sir Lucian Grainge, Chairman and CEO of Universal Music Group (UMG), issued an internal memo decrying today’s dominant streaming payout model on services such as Spotify – a model commonly known as a ‘pro-rata’ system.

Grainge then called for the introduction of an entirely new model of royalty payouts on streaming services.

Grainge lambasted three targets within his memo – all of which, he suggested, were unjustly benefiting from the ‘pro-rata’ model on major streaming platforms:

1. Fraudulent actors who are using ‘stream farms’ and other illicit methods to generate billions of ‘fake streams’ that suck royalties away from legitimate artists;
2. ‘Fake artists’ aka pseudonymous/fictional artist names usually created by production music companies. These ‘fake artists’, as MBW has reported multiple times, appear with suspicious regularity on certain Spotify first-party playlists. Grainge had a poetic euphemism for their creations – “music that lacks a meaningful artistic context”. He further suggested this music was “less expensive for [streaming platforms] to license” than other music, and even indicated that some of it was being “commissioned directly by the [services]”. (Read this MBW summary of two ‘fake artist’-themed Swedish exposés to see what Grainge was getting at);
3. ‘Functional music’. Grainge strongly objected to streaming services pushing customers towards “lower-quality functional content” (often created by ‘fake artists’) which, he said, “in some cases can barely pass for ‘music’”. In particular, Grainge expressed disdain for playlists stuffed with 31-second tracks of ‘functional music’ (i.e. music to relax/sleep/unwind/focus to) whose brevity is deliberately designed to trigger a streaming royalty payment as many times in a row as possible.

So we know Grainge wants rid of the ‘pro-rata’ streaming model currently favored by Spotify et al. But what does he want to replace it with?

Grainge was short on specifics about what his preferred streaming payout model would entail (the possibilities of which we’ll get on to shortly). He was very clear about one thing, though: Over the course of 2023, Universal is determined to figure out the best possible “innovative, artist-centric” alternative to succeed ‘pro-rata’.

“This year, [UMG] will be working on the innovation that is absolutely essential to promote a healthier, more competitive music ecosystem, one in which great music, no matter where it’s from, is easily and clearly accessible for fans to discover and enjoy,” concluded Grainge.

WHAT’S THE BACKGROUND?

Let’s quickly define the ‘pro-rata’ streaming payout model, which continues to be adopted by most Western streaming services.

Under the pro-rata model, a streaming service’s total subscription (and/or advertising) revenue is added up each month. The platforms then take their share (typically around 30%), and the remainder (≈70%) forms a central royalty “pool” to be paid out to rightsholders (record labels, artists, and so on). The money from this central “pool” is then distributed in correlation to each artist or label’s share of the total volume of streams (i.e. all users’ streams combined) on the platform.

One popular alternative to the ‘pro-rata’ streaming royalty model is the so-called ‘user-centric’ (UC) model. Here, the ≈70% royalty-bearing portion of an individual user’s subscription fee is paid out only to artists that specific individual has listened to; there is no central ‘pool’ of royalties.

SoundCloud‘s own spin on the ‘user-centric’ system of payouts – “Fan-Powered Royalties” (FPR) – is already up and running for over 135,000 independent artists who have opted-in to the model on its platform. SoundCloud secured a major partner for ‘Fan-Powered Royalties’ last June when Warner Music Group (WMG) agreed to accept FPR payouts for its artists on the service.

Universal Music Group, however, is on the record as having concerns about the UC model. Speaking to investors last year, UMG’s Chief Digital Officer, Michael Nash, said: “It’s clear from the studies that have recently been done… that a large percentage of artists and important genres of music could be disadvantaged under a user-centric model.”

The “studies” referenced by Nash include a report undertaken by France’s Centre National de Musique (CNM) in 2021, which concluded that a switch to ‘user-centric’ and away from ‘pro rata’ on services like Spotify would lead to a “significant redistribution” of streaming income away from hip-hop artists, and towards artists working in genres like rock and pop.

Grainge nodded towards this in his memo this month when he said that he was against any royalty model “that pits artists of one genre against artists of another or major label artists against indie or DIY artists”.

WHAT HAPPENS NOW?

We know that Sir Lucian Grainge and Universal are unhappy with the corruptible nature of the ‘pro-rata’ model. And we’re pretty sure – backed up by sources close to UMG – that they’re not fully on board with a straightforward ‘user-centric’ alternative.

Instead, they’re going to pick something different (or at least a significant modification of these two established models). But what?

Below, MBW sketches out five concrete examples of different streaming royalty models that could replace – or augment – the current ‘pro-rata’ model.

Note: The below descriptions borrow from IMPALA‘s very helpful “ten-point plan to reform streaming.”

1) The ‘Active Engagement’ Model

In short: This model attaches a premium royalty value to plays where the listener has actively searched for / sought out a track or artist on a streaming service, or where she has saved, “liked”, or pre-ordered a record/album. Algorithmically-served ‘lean back’ plays (with no active action from the listener) would receive a lesser royalty.

Elements of this model would naturally be attractive to UMG. In its examination of various royalty models, the company may also be considering other metrics that indicate how engaged an audience is: For example, if a track gets repeatedly played or, conversely, gets skipped after less than a minute.

Another, more controversial, consideration might be to add premium weighting to music by artists who score highly on an index that’s been referred ‘Meaningful Social Interactions’ (MSIs) – i.e. shares, likes, comments, and other forms of engagement on third-party social platforms such as Instagram, Twitter, and TikTok.

The obvious issue with going too far down that road: The music industry would be handing extra power to Big Tech, and also potentially opening itself up to more online manipulation, not less.

2) The ‘Pro-Rata Temporis’ Model

In short: This model pays out more money for listens of longer tracks than shorter tracks. One suggested methodology here: one set royalty rate for the first 30 seconds to 5 minutes of each song, with further payments triggered at 5-minute intervals within a single track.

Sir Lucian Grainge’s memo explicitly criticized “thousands and thousands of 31-second track uploads of sound files whose sole purpose is to game the system and divert royalties.”

That’s because, under ‘pro-rata’, a play of a 31-second track draws the same royalty amount as a play of a 10-minute track.

The ‘pro-rata temporis’ model, then, is a simple adjustment to the current model to tackle this specific perceived injustice. (Though one wonders whether such a change could create an entirely new version of gaming the system wherein 31-second tracks, such as ambient rain sounds, are replaced by 5-minute-1-second ones.)

Stef Van Vugt, the founder and CEO of Fruits Music – a “lo-fi” record company and playlist operator that has tens of billions of streams – has argued for a basic by-the-second, time-based royalty calculation (i.e. the longer a listened-to song, the more money it gets paid). Van Vugt’s suggestion is especially admirable, given that Fruits Music is one of the best-known culprits of the 31-second streaming song tactic that has drawn the ire of Grainge.

3) The ‘Artist Growth’ Model

In short: Under this model, the more streams (and wealth) an artist accumulates, the less incremental value each further stream generates. The hope of its advocates – including independent label representatives – is that it will support a broader diversity of emerging, and credible, niche talent.

This one is interesting, but frankly seems unlikely to win favor with major record companies – due to their continued (though declining) reliance on superstar artists to drive market share.

However, the ‘artist growth model’ does have some influential supporters: in a submission to a committe of the UK’s Parliament in 2021, AIM (the Association of Independent Music) advocated for the use of a so-called “degressive… approach to the value of streams”.

In a way, the ‘artist growth’ model works similarly to income tax thresholds in the UK and US: The more an artist earns above certain monetary thresholds on a streaming service, the higher rate they are ‘taxed’ on royalties for additional streams, with that ‘tax’ then going back into the central royalty pool to benefit smaller artists on the platform.

4) The ‘User-Choice’ Model

In short: This model facilitates spaces within services for rightsholders to develop incremental revenues through direct relationships with fans.

As Cherie Hu reported in 2018 for MBW, Tencent Music’s tipping feature – for which it is compensated handsomely, taking a ≈70% cut – is a central (and lucrative) part of its music streaming offering to consumers in China.

This tipping model recalls Bandcamp’s name-your-price model, which according to the company’s website has accounted for over $1 billion in total fan payments to artists and labels since its inception.

It should be noted that Spotify did attempt its own version of ‘tipping’ during the pandemic: “Artist Fundraising Pick.” Though the lack of an established micropayment culture for Western music streaming platforms (in contrast with sales platforms like Bandcamp), may have contributed to what seemed a lukewarm fan reception.

5) Something else?

Some sources suggest that Universal Music Group may be keen on the idea of a multi-tiered music subscription offering that borrows from the way that cable TV packages upsell consumers into more expensive sports, movies, or kids’ TV access packages – a practice sometimes dubbed “unbundling”.

For example, a consumer might pay $9.99 per month for access to 95% of music, but have to pay a little more than that to access full albums, or videos, or deep cuts, from their favorite artists.

This could potentially also be segmented into genre. Hip-hop aficionado? Pay $12.99 a month rather than $9.99 per month to access the All-Rap Package. Jazz fiend? You’ll be wanting the Miles’n’Mingus Royale, packed with outtakes and alternate versions for just $14.99 per month. Etcetera etcetera.

Don’t forget that Universal has already shown an appetite for the separation of more ‘premium’ music from ‘regular’ music on streaming services in the past.

In 2017, UMG proudly announced that its artists would, for the first time, be able to ‘window’ their new album releases exclusively on Spotify’s ‘Premium’ tier, for a week or two before that same album landed on SPOT’s ‘freemium’ tier.

An evolution of this ‘windowing’ idea recently arrived via Audiomack’s “Premiere Access” program, through which fans can pay extra to hear albums in advance of their otherwise official release date.

It’s a concept (with links to the ‘user-choice’ model above) with real potential to put more money in rightsholders’ pockets without, as Grainge wants to avoid, pitting one artist versus another.

A FINAL THOUGHT…

Said Grainge in his memo, “In the past, music industry conflict was often focused on ‘the majors versus the indies.’ Today, however, the real divide is between those committed to investing in artists and artist development versus those committed to gaming the system through quantity over quality.”

This ‘quantity over quality’ trend – with over 100,000 tracks now apparently uploaded to digital services daily – may well be detrimental for the experience of the average legit artist, and the experience of the average music fan, on streaming platforms.

But it also isn’t good for major label market share: witness the five-year gradual dilution of this metric on Spotify as depicted below.

If the current ‘pro-rata’ streaming model remains unchanged, this pattern of market share dilution – thanks to that mass of daily music releases – will naturally only continue to squeeze the slice of the total royalty pie being claimed by music’s biggest companies.

That might just be one additional reason why Sir Lucian Grainge is calling for the biggest music streaming payment shake-up of this generation.Music Business Worldwide