Michael Huppe is President & CEO of SoundExchange, an adjunct music law professor, published author, frequent contributor and lecturer.
Over the last decade, we’ve seen the size of the music revenue pie grow significantly as the popularity of streaming services has skyrocketed. Today, streaming accounts for 84% of U.S. recorded music revenue. Over 90 million people in the U.S. subscribe to one or more music streaming services for the price of a few cups of coffee a month. And global revenue from music streaming, both paid and ad-supported, is predicted to grow to $90 billion by 2030.
Yet, since the inception of music streaming, a core question remains unanswered: How should these streaming services pay music creators? How do we slice up the revenue pie? It’s a question of fairness with no easy answer.
Pro Rata Model Vs. User-Centric Model
Currently, the primary model for the distribution of digital royalties is the “pro rata model.” Under this approach, all music usage and royalty payments are aggregated across the platform. In other words, listeners’ subscription fees pour into a single pot of money, which is then divided (pro rata) across the billions of streams every month on the service. The percentage that creators are paid is proportional to their number of streams across the overall platform.
As an alternative, some services are starting to experiment with a new “user-centric” or “fan-centric” model whereby a particular person’s subscription dollars are divided up only among the artists to whom they specifically listen. None of your subscription payment goes to artists that you don’t stream. And there are other variations on this individual-focused approach (such as the “ethical pool” or the “creator support” models).
There are pros and cons to all approaches, and what you consider the most fair or appropriate resolution depends on your perspective.
Let’s take the “pro rata” model first. This is how most streaming services operate today. It is a more straightforward system for the services to license and manage, with all streams valued equally. It’s also easier to audit.
But critics of the pro rata model argue that too many artists aren’t getting a fair shake. It’s easy to see how the format favors megastars. According to industry data, the top 1% of creators receive 90% of streams and, therefore, the lion’s share of the revenue. The vast majority receive only modest earnings from streaming, making it harder for working-class musicians to sustain their musical careers. Some also criticize the pro rata model on “fairness” grounds because very little of their specific subscription payment may be going to the artists they actually listen to, especially for fans of niche genres. And of late, there is evidence of some parties gaming the pro rata system by flooding services with short, lower-quality recordings in order to skew the payments.
Because of these drawbacks, there is growing momentum in the industry for switching to the “user-centric” model. French streaming service Deezer has been an early advocate for this model, but SoundCloud was the first actual partial adopter with their “Fan Powered Royalties” model in 2021. In 2022, Warner Music announced a licensing deal with SoundCloud to become the first major label to test its fan-powered approach. This means certain Warner Music artists, as well as some DIY creators who upload their music to the platform, will be part of the “user-centric” experiment.
For some fans and artists, user-centric is more gratifying because the subscription payments go only to artists they stream. For example, if you listen to 70 hours of John Coltrane and 30 hours of Bruce Springsteen in a given month, John Coltrane’s estate receives 70% of your fees, and the Boss receives 30%. This can be a boon for niche creators who may otherwise miss out. Plus, fans can be assured that their money directly supports the creators they care about. It also lessens the chance of gaming the system.
Yet, the “user-centric” approach brings its own challenges.
There is robust debate in the industry around which artists or genres would be the “winners” and “losers” in a switch to a user-centric model. Some experts predict a radical shift in royalty distribution away from the more popular acts, while others expect a much smaller impact when the data ultimately comes in. Some studies suggest that genres like classical, jazz, metal and blues might benefit from a switch, while hip-hop could lose out under this approach.
This is a much more complicated system. Every stream for every user will have a different value every month (depending on how much they listen). That makes for more complicated and costly business systems, which could negatively impact how much services pay in royalties. Also, under a “user-centric” approach, the “per-stream” rate is lower for high-consumption users (because their $15 monthly fee is spread over more music). Ironically, this means that streams from the most dedicated music fans garner a lower royalty rate than a casual listener—which seems illogical (and perhaps a great argument for tiered pricing by usage).
It is too early to interpret the impact of a user-centric approach until we have more data points on this model. Economists, academics, industry stakeholders and artists are still grappling with this question.
As an industry, we are naturally focused on “growing the pie” for our creative community, but it’s equally important to determine the best way to slice up that pie. By understanding how these models ultimately work, the marketplace will eventually decide which is the most appropriate and fair for rewarding the people who create the music we love.
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