Spotify’s recent Joe Rogan controversy has also deepened a rift between the platform and artists over pay.

Spotify just announced it pulled in ~$11B in revenue in 2021. Yet artists — from major stars to indie musicians — feel they aren’t getting their fair share of the pie.

How does Spotify function as a business? Why are artists so poorly compensated on the platform? And will Spotify survive if it continues to alienate them?

The deal that made Spotify a juggernaut
When serial entrepreneur Daniel Ek co-founded Spotify in 2006, people had 3 main options for listening to recorded music:

Paying $10-$15 for a digital or physical album
Paying $1 for a digital song
Illegally downloading albums/songs for free using a file-sharing service like LimeWire
The latter option was becoming more and more popular — and it was putting the recording industry in a bind.

Annual recorded music revenues had fallen from an inflation-adjusted peak of $22.7B in 1999 to $15.1B in 2006. By 2014, that figure had sunk to just $7.3B, per the Recording Industry Association of America.

Today, the platform is a behemoth:

It has 406m users (180m of whom are paid users).
It accounts for 20% of all recorded music revenue, and towers above competitors like Apple, Amazon, and Tidal.

To reach these heights, Spotify had to negotiate with the music industry, which had sued many previous ‘disruptors’ out of existence. But with Spotify, industry leaders made a deal ahead of its 2011 US debut:

The biggest labels, including Warner Music Group, Sony, and Universal Music Group, received a combined 18% ownership stake in Spotify, netting them hundreds of millions of dollars.
Spotify set up a royalty payment structure, sending ~67% of revenues from music back to music rights holders. In 2020, this share of revenues was ~$5.7B.
That royalty structure is further divided between recording rights (held by labels and artists) and publishing rights (held by music publishers and songwriters). Exact details for these agreements vary and are rarely publicly revealed, but Spotify has said major labels get ~50%-52% of total revenues while publishers get ~15%-20%.

How Spotify payouts really work.

How does this payback system function, and why is it so unsatisfactory for artists?

The dollar amounts of royalties are complex and involve things like:

The rights holders’ deal with Spotify
The location of the users streaming the songs
The total revenue Spotify brought in that month
The total number of streams that month

The music blog The Trichordist has shared a midsized independent label’s payout rates for the last several years, finding its average per-stream payout has declined to just $0.00348 as the service has expanded into more countries and extended more subscription discounts and bundles, and as users streamed more and more songs.

Why Spotify won’t increase payouts.

Spotify executive Jim Anderson a question on the minds of many of her peers: Why couldn’t Spotify pay more, perhaps increasing its per-stream payouts to rights holders to 1 cent?

“Do you guys want to talk about entitlement now?” Anderson asked.

And what about podcasting?

In Q2 2021, podcasting revenue was up 627% YoY, and podcasting is the main driver for why Spotify’s Q4 2021 revenue share from ads reached a record 15%. Ek has said that share could rise to 30%-40% in the next 5-10 years.

Spotify takes in every ad dollar for the podcast properties it owns, and podcasters using Anchor and Megaphone can allow Spotify to assist in monetization and take up to 50% of the ad revenue, according to Bryan Barletta, who curates the “Sounds Profitable” podcasting adtech newsletter.

Mick Smith, Consultant M: (619) 227.3118

E: mick.smith@wsiworld.com

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