Category: Ethical Pool

The Longer Table: The UK Government Working Group for Fair Pay for Creators

SoundCloud Throws Down With Fan Powered Royalties and User-Centric

SoundCloud is the first music service to adopt a version of the ethical pool principles in a user-centric royalty model and I have to applaud the effort. It’s a really good first step. “Fan Powered” royalties tries to connect the dots between what fans actually listen to and what fans actually pay for.

SC Fan Powered

Remember, the point of the ethical pool was to do something right now to remedy the hyper efficient marketshare distributions of the “big pool” or “market-centric” royalty allocation model that is pretty much the rule with digital music services (and to one degree or another with streaming mechanicals, too, although that’s a topic for another day). I acknowledged the transaction cost involved of truly changing the model which would require renegotiating all the big pool catalog licenses. The workaround in ethical pool is to allow those who want out to opt in to a user-centric model that would be separate from the big pool. This is a way to avoid the significant transaction costs of trying to change a system that is working well for some but not all artists on the service.

SoundCloud appears to have done something very similar. This accomplishes another goal of ethical pool which is to not upset the big pool model entirely as it is working for a lot of people and there’s a benefit to the entire industry that flows from that success. By adopting this middle-ground user centric model, SoundCloud is actually able to promote its user centric method as a competitive advantage to attract independent artists to sign up with the service.

When you consider that the real choice of independent artists is to stream or not to stream because the revenues are microscopic but the cannibalization is gigantic, it is competition that is going to get the market forces aligned to produce real organic change. If services understand that offering at least some version of user centric is actually a competitive advantage, we may find that there’s greater uptake than anyone imagined.

It must also be said that fans will feel a lot better about SoundCloud’s model than the market-centric approach. It comes as abrupt news to fans that their royalty is being paid for music they don’t listen to–it’s only a matter of time until someone brings a false advertising claim against the services for failing to educate consumers about that one. And this is really the underlying issue with whatever flavor of user-centric you like: It’s better for the fans. As the erudite Martin Goldschmidt said in MusicAlly:

The bottom line, for me, is that user-centric is obviously a big win for the consumer. Long term, this will be a big win for artists, labels, distributors and DSPs. And we will all make more money.

Or as one fan said to me, I’m tired of my money funding crap. This is an isolated anecdote, but imagine what will happen if a million fans (or even 1,000) had this same reaction. All while the services are literally printing money.

As you can see from this comparison of Spotify share price to the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google), Spotify has far, far outpaced the FAANG stocks in its relative growth rate. You can also see that the COVID pandemic that has decimated the artist community has been rocket fuel for Spotify’s riches and has made Daniel Ek a multi-multi billionaire all why paying out fractions of a penny to artists.

Spot 3-3-21

You can find the SoundCloud user centric royalty terms here. And bear in mind–we’re all better off if artists don’t feel they have to opt out of the entire streaming business in order to make a living.

Arithmetic On the Internet Revisited: The Sustainable Ethical Pool Solution to User Centric Royalties

“Sick of my money funding crap.”
A Fan

“These companies are taking power away from listeners, because listeners don’t have any say where their money goes,” Keating said. “If you only listen to me, I should get all the percentage of the money you spend on music.”
Zoë Keating

“User-centric” is rapidly becoming all the rage in the streaming royalty debate.  To its credit, Deezer is the only streaming service that has announced it is working on trying to implement a user-centric model.  (Others may be, but no public announcements.)

It’s not surprising that a small casual poll by Artist Rights Watch showed that when asked what would help artists the most, the overwhelming choice (83.9%) was buying a CD directly from the artist compared to streaming on Spotify (16.1%) or on YouTube (0%).  More rigorous data is required to reach a conclusion, but the lopsided nature of  the responses suggests that music fans very well may get it.  Not only do they get it, they may be woke enough to try something new.

Streaming is not a way to help independent artists.  And it’s definitely not a way to help songwriters who are still waking up from a century of sleeping on their rights.  Fans are getting the message that the economics of streaming are not sustainable for independent artists (and probably not other artists who are so unrecouped they may not care).  When Daniel Ek makes over $600 million in stock accretion in a single day during a pandemic that has reduced touring revenue to zero, Spotify’s income inequality just seems grotesquely unfair and unethical.  (Ek made more than Saudi Arabia paid for its stake in Live Nation).  This imbalance seems straight out of San Francisco’s Big Four railroad robber barons of the Gilded Age. Both artists and fans feel more than a little dirty contributing to it.

I wrote the first “Ethical Pool” post in 2018, and given the rumors about difficulties Deezer is having with implementation of a user-centric model, I thought it was a good idea to recap the Ethical Pool approach.  I’m not going into the same level of detail as I did in Ethical Pool I, and I’m going to assume that you know certain elements that I won’t get into again here.  If you need more detail, I recommend reading the first piece first.  In this post, we will briefly recap the royalty pool allocation compared to the Ethical Pool, and then focus more on implementation suggestions.

The Perception of Unfairness

Why do we care?  There are a few reasons why streaming royalties are paltry and therefore controversial.  The income inequality is brought into sharp relief with Spotify due to the distribution of shares in Spotify’s public stock sale.  (The problem being Spotify’s typically short-sighted business decision, i.e., failure, to share their good fortune with all creators on the platform, not with the fact that only the majors and big indies got stock.  You can’t take what was never offered.)  However, the problem is not with one particular platform, it’s with all the platforms because they all use some version of the revenue share model of calculating royalties.

At a high level, there are two approaches to paying royalties—up front and back end.  Up front payments are often fixed price per project or fixed price per unit.  Examples of an up-front fixed price royalty would be the statutory mechanical royalty for songwriters or the program license fee for television.  The up front model says, the price for my work is $X, I don’t really care if you make a penny, that’s your problem.  If it doesn’t profit you to pay my up front fee, get another one.  If the up front royalty is small and contemplates numerous copies being sold, there’s often a minimum guarantee or “advance” which does not get paid back, but which is recoupable from the sale of those copies.  A television program may have just a lump sum license fee with some distant profit participation.

The bet is that the user will make money and has the means to finance (or deficit finance) the project to get to the cash flow positive stage.

A backend deal usually has a royalty rate attached instead of a fixed penny rate which is a form of revenue sharing.  The minimum guarantee appears again, and may be recoupable or nonrecoupable or some combination of the two.  Still, the typical backend deal depends on how the licensed work commercially performs in isolation.  In other words, if I license a song to a record company or a television program to a network, I don’t really care how the rest of the songwriters or television producers are compensated (although I will sometimes protect my upside by asking for “Most Favored Nation” treatment on some financial terms which can have its own legal problems).

Unintended Consequences of the Big Pool:  A hyper efficient market share distribution

Streaming backend deals have an additional twist, and it is this twist that creates this hyper efficient marketshare distribution.  Unlike the typical backend deal, streaming backend deals depend on a revenue share.  You could ask why is that different, it’s all a revenue share of some kind.

True.  But this is a very particular kind of revenue share.  Streaming deals establish a pool of service revenue on a monthly basis and that pool is allocated among sound recordings based on plays by the service’s users.

Streaming revenue share is essentially a popularity contest for who gets the most money from the pool at the end of the month.  So rather than having a fixed price that varies based on how you do, how you do depends entirely on how you do relative to everyone else in competition for a fixed pool.

Naturally, the more leverage you have, the less Malthusian your deal will be, and you will have lots of downside protection bells and whistles like per stream minimums, per subscriber minimums, subscriber conversion incentives, and other goodies.  You may have a bigger share of the monthly revenue pie (so the service retains less), but the high level reality comes down to this:  The bigger your market share, the more money you make, and the smaller your market share, the less money you make.  It is essentially a zero sum game.

There is another mathematical reality to this calculation–the per-stream rate tends to decline over time.  Why?  Because if the rate of change in the revenue pie (the “A” value below) does not increase faster than the rate of change in the number of recordings being streamed (the “C” value below), the per stream rate will always decline.  Or more accurately, the nominal per stream rate since it is not actually fixed (outside of the downside protections).  And Spotify is never going to exert pricing power as long as it is in a growth mode, so the “A” value is very unlikely to ever increase enough to counter the increase in the “C” value.

The calculation looks something like this (although the algebra allows different steps to get to the same result):

Ethical Pool

Critics will say there is no per-stream rate in streaming licensing contracts.  That’s true, but there is a nominal per stream rate that can be approximated, which is about the only way to compare services to each other, so it is a relevant calculation.  (See The Trichordist Streaming Price Bible).

streaming price bible

So you can see that if you have a lot of popular recordings that are in genres that get streamed a lot, you will be very happy with the streaming revenue share calculation.  A concrete example might be hip hop compared to contemporary classical.  The ability to fund both an on and off-platform marketing spend that outstrips the competition clearly has a pronounced effect on revenue, also.  Playlist placement may make a difference, but whoever knows how particular tracks get included in playlists, please come forward.  So even within a genre, the better heeled have a better chance of dominating the royalty allocation and the less well-heeled will see their income fluctuate for Kafka-esque reasons beyond their control.

In the calculation illustrated above, that would mean that if your “B” value is larger than anyone else’s B, then you will dominate that month’s allocation.  The more downside protection you have negotiated in your license, then it is likely that your nominal share of the pie will be even bigger if that downside protection is baked into your royalty calculation.  (It’s also possible that one party’s downside protection actually reduces the monthly pie for those who don’t have it, but that’s a timing question that is difficult to know the answer to without a royalty compliance examination and even then may be inconclusive.)

From a user’s perspective, the big pool royalty allocation means that their subscription payment goes into the big pool and is allocated based on how that user and all other users stream during the month nearly regardless of which artists the user actually listens to.  The impact any one user makes on the allocation of revenue to a particular artist varies inversely to the number of active users on the service in a particular month.

Streaming revenue, then, has become a hyper-efficient market share distribution based on factors like who has the bigger catalog being streamed on the service, which at the margins probably means who has the bigger catalog full stop.   This is why the fan says she is “sick of my money funding crap.”  “Crap” obviously is in the eye of the beholder, but what she is really saying is that she’s tired of having nearly all of her subscription payment being paid for recordings she never streamed (and maybe would never stream).

User Centric and the Ethical Pool

User centric royalties would capture the user’s revenue (let’s use subscriptions as an example) and allocate it solely to the same user’s streams.

Let us accept as a given that changing the entire royalty system would require the consent of everyone involved who has a license (which is a lot of copyright owners).  That consent is unlikely to be given the larger the market share of the copyright owner.  Plus a single holdout could stop the whole thing.

Let us also accept as a given that changing the entire royalty system would be very complex and costly.

But–here’s another given.  The lower the per stream rates go, the lower the royalty payments go, and the greater the incentive for independent artists to get out of the streaming game altogether.  (Not to mention getting angry.)  When your royalty payment is minuscule it is easy to just say no.  Your motivation for staying in the service certainly isn’t based on the financials and is more likely to be fear of missing out or other preference curve distortion.

Therefore, rather than asking other copyright owners to opt-in to a user-centric model (which many probably won’t do), artists who are poorly served should consider opting out of the big pool.  (It must be said that U.S. songwriters gave up the right to opt out of audio-only mechanical licenses long ago, and even perpetuated this travesty in the recent Title I of the Music Modernization Act.  Why they did not fight back when they had the services on the ropes through class action litigation is anyone’s guess–but maybe it had something to do with money other than royalty rates.)

If those artists want to stay on the service, then the service could essentially duplicate their big pool accounting ruleset and create a separate pool of revenue–the “Ethical Pool.”  This would require allowing users to still pay their subscription fee, but direct where their money would be allocated for royalty purposes.  (Users would probably have to opt out of the big pool service since their fees would no longer pay for it, but hardcore fans probably wouldn’t mind and might even view it as a feature.)  That could be accomplished by a button in the user’s account settings and artists seeking to participate in the Ethical Pool could have a green check or some other icon indicating that the artist was in the Ethical Pool so would the fan please make that change.

This might take a few months to reach a critical mass of users and artists opting in, but when your royalty starts three or four decimal places to the right anyway, how much worse could it be?  Properly promoted, the changeover could be relatively simple and simplicity for the existing and new users should be the guiding light.

No deal points would change for the “big pool” copyright owners so their consent would not be required for the Ethical Pool.  The only change would be the rough equivalent of artists dropping out of the service and their fans leaving with them.  That risk was part of the original negotiation.  For the dominant players, it is unlikely that they will see any real fall-off in revenue, and if anything their hyper-efficient market share allocation may even increase slightly (because the C value would decrease by the number of streams that transition to in the Ethical Pool).

The Ethical Pool will require an investment by the service to create this parallel infrastructure, but if the big services don’t do it, it’s only a matter of time until insult exceeds injury and artists start leaving.  Or someone launches a service that caters to artists who would be Ethical Pool candidates.

I don’t think this is the end of the story, but it is a workable interim step on the path to sustainability that is more important now than ever.  The Ethical Pool would at least make the money clean and remove that feeling that the fan is actually hurting the artist when streaming.

The arc of the moral universe is long, but it bends towards justice.  However–it doesn’t bend by itself.  At this moment, the arithmetic on the Internet is starting to bend that arc.  The way it bends is up to us.

Save the Date: User Centric: Streaming Gentrification or Fairness at SXSW

I’m pleased to be moderating a panel on user-centric streaming royalties with some of the smartest people in the music business at SXSW on Thursday, March 19 at 3:30.  Helienne Lindvall from Ivors Academy, David Lowery of Cracker and Camper Van Beethoven and Portia Sabin from the Music Business Association will join me in a discussion of this important topic that seems to pick up support daily.

Please put us on your calendar if you’re coming to Austin for the conference!  We really want this one to be collaborative with the audience.  Watch this space for further updates.  If you are new to the topic, a good place to start is the “ethical pool” post from last year.

SXSW User Centric
https://schedule.sxsw.com/2020/events/PP103941

The Return of the Ethical Pool: @marchogan on User Centric Royalties

Marc Hogan has an interesting post on Pitchfork about “user centric” royalties.  (“Is There a Fairer Way for Streaming Services to Pay Artists?”)

He echoes the common arguments about user centric.  These theories are mostly about  comparisons to the current model of the “big pool” and its hyper-efficient market share distribution of streaming service revenues.  Or as Mr. Hogan puts it, a direct democracy vs. electoral college approach.  (Let’s remember what happened when the Greeks tried direct democracy.)

It’s not just that user centric is fair.  Life ain’t fair.  It’s that the big pool model is wildly inaccurate and deceives fans.  The problem with user centric isn’t that it’s too complex, it’s that by comparison the “big pool” method isn’t complex enough.

And let’s also realize that when you pay artists’ at a royalty rate that starts several decimal places to the right, there is no measurable downside in “not playing”–or withdrawing from the service altogether.  So the alternatives are not direct democracy or electoral college, it’s the much simpler choice of in or out.  If you don’t give me a good reason to be in, and if by being in I cannibalize higher margin sales, then maybe I just sit this one out.  (Hundreds of Quebec artists made this point recently.)

Of course, I’m willing to be educated otherwise, but it seems that the really simple thing would be to have a fixed per-play rate.  That’s definitely not true now, which makes this statement a bit bizarre:

Spotify’s chief economist, Will Page, has raised a couple of points in defense of the existing model. Under the current system, every time you stream a song, it has the same value….

If by “value” they mean “same pennies”, that is definitely not true in the big pool model.  Some labels have complex greater-of formulas (not to mention breakage and minimum guarantees) so while the streams may be counted the same (no bonus plays), the per play rates are definitely not identical.  That’s a big reason it takes so long to close Spotify’s label deals.  (There are two ways to juice royalties–play with the units (the plays for streaming) or play with the royalties (the micro pennies for streaming).  Streamers play with the royalties.  So far.)

I don’t underestimate the complexity in running the big pool and the true user centric models side by side under the same roof.  That is what makes it complex.  I have a solution to this challenge I call the ethical pool that is an intermediate step between the two that allows both to co-exist if the fans and the artists elect it to be so.  The problem the ethical pool seeks to solve is best summarized by a fan:  “Sick of my money funding crap”.

Mr. Hogan also makes another interesting point courtesy of ex-Spotify economist Will Page:

The biggest argument against the user-centric model is that it could be too complex. Calculating payouts based on every individual user’s listening is, inevitably, more complicated than just adding up the total and divvying up the pot. The extra administrative cost—say, figuring out what each person’s streams are worth each quarter and then distilling that into a semi-coherent pay statement—could actually leave artists with less money to go around, Page has maintained in a paper co-authored with an executive from music-licensing giant ASCAP. Changing systems wouldn’t be the right decision if it ends up hurting the people it’s supposed to help.

So it appears that Will is making a fundamental error here (presumably on behalf of Spotify).  The question is not whether Spotify will pass through its administrative costs to the artists.   Those costs come out of Spotify’s share.  I simply cannot imagine Apple or Amazon trying to pass along their costs of accurate accountings to the artists.  Google would certainly, but not the real competition for Spotify.

The question is which floor of the World Trade Center is Spotify going to sacrifice to cover these costs?

Spotify Guides Toward “Tipping” Artists on Earnings Call

MTS readers will recall my post on what I called “Ethical Props” (OK, OK, not the best moniker I’ve ever come up with, but you’ll get the idea if you read the “Ethical Pool” post).  The concept is an expansion of the micropayments that TenCent (and lots of other sites in other businesses) permits on its music platform.  The question presented was whether Spotify would adopt a similar structure and how they would treat artists. That’s a serious question, by the way.

It turns out that the issue came up on Spotify’s latest earnings call, and was foreshadowed by Daniel Ek’s interest in Facebook’s Libra currency.  Stuart Dredge at Music Ally reports that the subject did come up:

Spotify IS interested in ways for fans to tip artists

Earlier this month, Spotify’s chief premium business officer Alex Norström hinted that the company was exploring the idea of new ways for artists to make money on its service: “You can add stuff on top like micro-payments, a la carte, prepaid plans for different contexts…”

Ek was asked about direct monetisation such as tipping during the earnings call today. “It’s something that we’re overall interested in. We definitely look at it as part of the scope of the types of marketplace tools that you can expect,” he said. “You should expect us to try a lot of things… it certainly could be very interesting specifically for a lot of artists…”

First…does anyone know what a “chief premium business officer” is?  I’m not familiar with that one, although my best is that they probably office next to the “chief exposure business officer.”

Quick review–Mr. Ek’s buddies at TenCent have made quite a business of “tipping” which explains why Ek is interested:

Simply put, Tencent allows users (all users, subscription or ad-supported service) to make virtual gifts in the form of micropayments directly to artists they love.  (The feature is actually broader than cash and applies to all content creators, but let’s stay with these socially-driven micropayments to artists or songwriters.)

Tencent, of course, makes serious bank on these system-wide micropayments.  As Jim Cramer noted in “Mad Money” last week:
“Tencent Music is a major part of the micropayment ecosystem because they let you give virtual gifts,” Cramer said. “If you want to tip your favorite blogger with a song, you do it through Tencent Music. In the latest quarter we have numbers for, 9.5 million users spent money on virtual gifts, and these purchases accounted for more than 70 percent of Tencent Music’s revenue.”

And that’s real money.  Tencent actually made this into a selling point in their IPO prospectus:  “We are pioneering the way people enjoy online music and music-centric social entertainment services. We have demonstrated that users will pay for personalized, engaging and interactive music experiences. Just as we value our users, we also respect those who create music. This is why we champion copyright protection-because unless content creators are rewarded for their creative work, there won’t be a sustainable music entertainment industry in the long run. Our scale, technology and commitment to copyright protection make us a partner of choice for artists and content owners.”
How Spotify will approach the subject has a lot to do with how they perceive their artist relations problems.  The chances are good that Spotify don’t think they have an artist relations problem.
But they do.  As I often say, if screw ups were Easter eggs, Daniel Ek would be the Easter Bunny, hopping from one to another until he had picked them all up in his basket.  (A nondenominational Easter bunny, of course.)
He could either pass through 100% of the “tip” which would make it “Ethical” as we define it, or he could take a cut like TenCent which wouldn’t.
The dreaded Apple is already in the act to a degree:
[TenCent’s] micropayments reportedly influenced Apple to change its in-app purchase policies, which make a good guideline for putting the “ethical” into an Ethical Prop:
“Apps may enable individual users to give a monetary gift to another individual without using in-app purchase, provided that (a) the gift is a completely optional choice by the giver, and (b) 100% of the funds go to the receiver of the gift. However, a gift that is connected to or associated at any point in time with receiving digital content or services must use in-app purchase.”

(That’s section 3.2.1(vii) in Apple’s App Store Review Guidelines for those reading along at home.)

So watch this space–let’s see what choices they make.

Dance Like Nobody’s Playing: Another call for user-centric royalties

I used to laugh off Spotify’s never ending stream of public messaging disasters–if screwups were Easter eggs, Daniel Ek would be the Easter Bunny hopping from one to another to make sure he scooped them all into his basket.  But the stark double entendre of Spotify’s latest campaign is the end of funny.  Hopefully it’s one more step on the road to user-centric royalties.

As reported in Hypebot, Spotify’s latest attempt to commoditize the value of music got artists and fans up in arms.

6a00d83451b36c69e20240a4bb7b77200b-450wi

This message is obviously offensive (but the underlying business practice is no doubt permitted under Spotify’s major label licenses–which raises a whole other question of how much longer does a publicly traded venture-backed money-losing company with a $25 billion market cap deserve to get special royalty free deals).

So Spotify is insulting, what else is new.  Underneath that message is another subtext, though:  Dance like nobody’s paying because nobody’s playing.  Or said another way, the machines are playing.  As Laura Kobylecky noted in a prescient post on MusicTechPolicy, the Spotify “fake artist” controversy has some ominous ancestry.

The tune had been haunting London for weeks past. It was one of countless similar songs published for the benefit of the proles by a sub-section of the Music Department.”

From1984 by George Orwell

In the dystopian world of George Orwell’s 1984, there is a machine called a “versificator.” The versificator makes what might be called “fake” music—songs that are “composed without any human intervention whatever.” In April of 2016, “A New Rembrandt” was revealed (1). The painting, like the songs of a versificator, was made by machines. In August of 2016, Music Business Worldwide (2) accused Spotify of “creating fake artists.” What is a fake artist? Can music be fake?

The world of 1984 is a grim place. Members of the “Party” have access to resources based on their rank. The rest of society are called “Proles.” The term is short for the “proletarian” and refers to the working class. The Proles make up the majority of society, and so the Party provides them with various sources of entertainment to keep them from getting too restless.

The versificator is one of the entertaining distractions made by the Party. A versificator generates songs that are “composed without any human intervention whatever.” The results range from insipid love songs like “Hopeless Fancy,” to the “savage, barking rhythm” of the “Hate Song”—designed to stir rage against political enemies.   The novel’s protagonist describes one of these songs as “dreadful rubbish.”

But the Proles like it fine. The song “Hopeless Fancy,” takes hold among them and “haunts” London for weeks. In this case, the art of the machine seems adequate for consumption.

So if you dance like nobody’s paying, realize that it’s entirely possible that nobody is paying because nobody’s playing, either.  Spotify can use either the free trial or the fake artist to drive down the royalties the company pays out to flesh-and-blood artists, particularly the ones that lack the leverage to get one of the goodie packed deals with minimum guarantees, greater of formulas, per-subscriber minima and non recoupable technology payments or breakage.  And then there’s the stock.

What would fix this is switching to user-centric royalties or what MTS readers will recall as the “ethical pool”.  No freebies, every artist is paid for every stream and fans are not deceived into believing that their monthly subscription goes to the artists they listen to rather than the ones they don’t ever stream.  If people could manage to look beyond this quarter’s results, the future is waiting.

How about “Dance like creators are paid fairly”?  Now there’s a message–it has a nice beat and you can dance to it.

 

@musically: Spotify CEO says Libra currency could help listeners ‘pay artists directly’ — Artist Rights Watch

Earlier this week, Facebook announced a new blockchain-powered currency called Libra, and a digital wallet for it called Calibra. Spotify was among the companies backing the plans by becoming a founder member of the independent Libra Association.

Now Spotify CEO Daniel Ek has been talking about his hopes for Libra, including the suggestion that it could one day facilitate direct payments to musicians from fans.

“I think like cryptocurrencies and blockchain are obviously two of the biggest buzzwords you can have today. And for me, I don’t think technology in itself is that interesting· What I do think is interesting is what we can do with that technology,” said Ek, in an interview for Spotify’s own Culture: Now Streaming podcast.

“What everyone who’s a part of Libra is trying to accomplish is: it’s interesting that we have all these different currencies, all of these different ways of doing things. But the reality is, there’s several billion people around the world that don’t even have access to a bank account,” he continued….(Whatever you think of Libra, the fact that Spotify is, right up to CEO level, even thinking about direct payments from fans to artists is a significant talking point for anyone mulling how the streaming service will evolve in the coming years.)

Read the post on MusicAlly

The Elusive Obelus: Streaming’s Problem With Denominators

“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”

Ernest Hemingway, The Sun Also Rises.

No matter how much people would like to deflect it, the unvarnished per stream rate is an ever diminishing income stream.  Given the number of calculations involved for both sound recording and song, it is likely that the total end-to-end cost of rendering the accountings for the streams costs more than the royalty earned on that stream by any one royalty participant.  Solving this problem is the difference between a short-term stock-fueled sugar high and a long-term return of shareholder value for all concerned.  So now what?

If you’re someone who receives or calculates streaming royalties, you’re already familiar with the  problem of the ever-decreasing per-stream rate.  The Trichordist’s definitive “Streaming Price Bible” for 2018 confirms this trend yet again, but simple math explains the problem of the revenue share allocation.

Remember that the way streaming royalties are calculated in voluntary agreements (aka “direct deals”) revolves around a simple formula (Formula A):

(Payable Revenue ÷ Total Service Streams) x Your Streams = Per Stream Rate

Which may also be expressed as Formula B:

Payable Revenue x (Your Streams ÷ Total Service Streams) = Your share of revenue

(Formula A and B are also known as “the big pool” in the user-centric or Ethical Pool models.)

Here’s the trick–it’s in the correlation of the rate of increase over time of the numerator and the denominator.  If you focus on any single calculation you won’t see the problem.  You have to calculate the rate of change over time.  Simply put, if the numerator in either Formula A or Formula B increases at a lower rate than the denominator, then the quotient, or the result of the division, will always decline as long as those conditions are met.  That’s why the Streaming Price Bible shows a declining per-stream rate–a contrarian fact among the hoorah from streaming boosters that sticks in the craw.

Services make these accounting calculations monthly for the most part, and they are calculated a bit differently depending on the service.  This is why the Streaming Price Bible has different rates for different services, rates that vary depending on the terms of the contract and also the amount of “Payable Revenue” that the service attributes to the particular sound recordings.

The quotient will also vary depending on the copyright owner’s deal.  If you add downside protection elements such as contractual per stream or per subscriber minimums, then you can cushion the decline.

This is also true of non-recoupable payments (such as direct payments that are deemed to be recoupable but not returnable, or “breakage”).  Nonrecoupable payments are just another form of nominal royalty payable to the copyright owner, and increase the overall payout.  And of course, the biggest nonrecoupable payment is stock which sometimes pays off as we saw with Spotify.  These payments may or may not be shared with the artist.  (See the WIN Fair Digital Deals Pledge.)

So each of the elements of both Formula A and Formula B are a function of other calculations. We’re not going to dive into those other elements too deeply in this post–but we will note that there are some different elements to the formulas depending on the bargaining power of the rights owner, in this case the owner of sound recordings.

So how is it that the per-stream rate declines over time in the Streaming Price Bible?

Putting the Demon in the Denominator

Back to Formula B, you’ll note that the function “Your Streams ÷ Total Service Streams” looks a lot like a market share allocation.  In fact, if the relevant market is limited to the service calculating the revenue share allocation, it is a market share allocation of service revenue by another name.  When you consider that the customary method of calculating streaming royalties across all services is a similar version of Formula B, it may as well be an allocation of the total market on a market share basis.

Note that this is very different from setting a wholesale price for your goods that implies a retail price.  A wholesale price is a function of what you think a consumer would or should pay.  When a service agrees to a minimum per stream or per subscriber rate, they are essentially accepting a price term that behaves like a wholesale price.

For most artists and indie labels, the price is set by your market share of the subscription fees or ad rates that the service thinks the market will bear based on the service’s business goals—not based on your pricing decision.

Why is this important?  A cynic might say it’s because Internet companies are in the free lunch crowd–they would give everything away for free since their inflated salaries and sky-high rents are paid by venture capitalists who don’t understand a thing about breaking artists and investing in talent.  You know, the kind of people who would give Daniel Ek a million dollar bonus when he hadn’t met his performance targets, stiffed songwriters for years and gotten the company embroiled in multimillion dollar lawsuits.  But had met the only performance target that mattered which was to put some cosmetics on that porker and push it out the door into a public stock offering.  (SPOT F-1 at p. 133: “In February 2018, our board of directors determined to pay Mr. Ek the full $1,000,000 bonus based on the Company’s 2017 performance though certain performance goals were not achieved…”)

But long-term, it’s important because one way that royalties will rise is if the service can only acquire its only product at a higher price.  Or not.  The other way that royalties will rise is if services are required to pay a per-stream rate that is higher than the revenue share rate.  How that increase is passed to the consumer is up to them.  Maybe a move from World Trade Center to Poughkeepsie would help.

The Streaming Price Bible is based on revenue for an indie label that did not have the massive hits we see on Spotify.  In this sense, it is the unvarnished reality of streaming without the negotiated downside protection goodies, unrecoupable or nonreturnable payments, and of course shares of stock.  While some may say the Bible lacks hits, that’s kind of the point–hits mask a thousand sins.  Ask any label accountant.

Will Consumption Eat Your Free Lunch?

Let’s say again: The simple explanation for the longitudinal decline of streaming royalties measured by the Streaming Price Bible is that the rate of change across accounting periods in the “Payable Revenue” must be greater than the rate of change in the total number of streams in order for the per-stream rate to increase–otherwise the per-stream rate will always decrease.  Another way to think of it is that revenue has to increase faster than consumption, or consumption will eat your lunch.

What if you left the formula the same and just increased the revenue being allocated?  Services will probably resist that move.  After all, when artists complain about their per-stream rate, the services often answer that the problem is not with them, it is with the artist’s labels because the services pay hundreds of millions to the labels.

We don’t really have much meaningful control over what goes in the monthly payable revenue number (i.e., the mathematical “dividend” or numerator).  What kinds of revenue should be included?  Here are a few:

–all advertising revenue from all sources
–e-commerce transactions
–bounties or referral fees, including  recoupable or non-refundable guarantees
–sponsorships
–subscription income
–traffic or tariff charges paid by telcos
–revenue from the sale of data

Services will typically deduct “small off the tops” which would include
–VAT or sales tax
–ad commissions paid to unaffiliated third parties (usually subject to a cap)

Indie labels and independent artists may not have the leverage to negotiate some of these revenue elements such as revenue from the sale of data for starters.  Other elements of the revenue calculation for indie labels and artists will also likely not include the downside protections, subscriber target top up fees and the like.

And of course the biggest difference is that indie labels (at least not in the Merlin group who may) typically do not get nonreturnable advances,  nonrecoupable payments, or stock.

Is That All There Is?

Why should we care about all this?  There is a story that is told of negotiations to settle a lawsuit against a well-known pirate site.  One of the venture capitalists backing the pirates told one of the label negotiators that he could make them all richer through an IPO than any settlement they’d ever be able to negotiate.

The label executive asked, lets’ say we did that, but then what happens?  You say we should adapt, but you’re still destroying the industry ecosystem so that there’s nothing left to adapt to.  The most we could make from an IPO would cover our turnover for a year at best.  And we would be dependent on your success, not our artists’ success.

Then what?

 

 

 

 

 

Ethical Props–How Streamers Can Empower Fans on the Path to Sustainability 

[This post first appeared in the MusicTechPolicy Monthly Newsletter, if you’d like future issues, subscribe to email updates for MusicTech.Solutions]

After the one-time pop of Spotify’s public stock offering cash-out, the new reality is going to be increasingly obvious–we’re stuck for at least a generation with trading high margin physical for low-to-no margin streaming royalties.  That stock-fueled sugar high created a near-total dependence on big minimum guarantees and non recoupable payments from streamers–if you could get those payments.  But the bad thing about non-recurring income is that it’s non-recurring. Spotify’s stock price is already testing lower lows near the $110 level, $7 above it’s 52 week low, but $80 below its 52 week high.

Now what?  I’ve heard a lot of discussion about my “Ethical Pool” approach to streaming royalties, but any “user-centric” model isn’t going to fix the low-to-no margin streaming royalty problem by itself.  The streaming hole is dug too deep.   
Strange as it may seem, streamer Tencent from the People’s Republic of China may have started a helpful social trend, and Apple is translating that trend into a business practice. Both companies present a teachable moment and an opportunity for the Ethical Pool’s mutual opt-in by fans and the artists they love in the form of micropayments I will call “Ethical Props”.

There’s three obvious things we know about streaming if we know nothing else:  Everyone who works for Spotify got even richer in their stock market cashout while the overwhelming majority of artists and songwriters on the service languish;  per-stream royalties are pitiful which matters if you don’t get minimum guarantees;  plus streamers lose money because they spend too much on overhead, especially salaries and rent.

There’s a less obvious problem we know but that doesn’t come up very often–streamers don’t empower fans to reward the artists they love, much less the songwriters who write the music it all starts with.  Imagine if fans could actually give money directly to their artists (and sign up for direct communications outside of the service).

But–thanks to inspiration from Tencent’s “virtual gift” feature, artists may have renewed negotiation leverage in actually getting streamers to empower fans to make direct contributions to the artists they love in the form of small “Ethical Prop” payments.  Of course, in order to be entitled to be “ethical” handle, the streaming services–including Tencent–will have to make some changes in their current business practice.

Which should be welcomed by all concerned.  As Sony Music as well as Taylor Swift and Universal Music Group recently demonstrated, ethical business is good business.  Both labels have agreed to pass through to artists a share of each label’s Spotify stock windfall on a non-recoupment basis–we’ll come back to that nonrecoupment part.

Simply put, Tencent allows users (all users, subscription or ad-supported service) to make virtual gifts in the form of micropayments directly to artists they love.  (The feature is actually broader than cash and applies to all content creators, but let’s stay with these socially-driven micropayments to artists or songwriters.)

Tencent, of course, makes serious bank on these system-wide micropayments.  As Jim Cramer noted in “Mad Money” last week:
“Tencent Music is a major part of the micropayment ecosystem because they let you give virtual gifts,” Cramer said. “If you want to tip your favorite blogger with a song, you do it through Tencent Music. In the latest quarter we have numbers for, 9.5 million users spent money on virtual gifts, and these purchases accounted for more than 70 percent of Tencent Music’s revenue.”
And that’s real money.  Tencent actually made this into a selling point in their IPO prospectus:
We are pioneering the way people enjoy online music and music-centric social entertainment services. We have demonstrated that users will pay for personalized, engaging and interactive music experiences. Just as we value our users, we also respect those who create music. This is why we champion copyright protection-because unless content creators are rewarded for their creative work, there won’t be a sustainable music entertainment industry in the long run. Our scale, technology and commitment to copyright protection make us a partner of choice for artists and content owners.
That sounds like these guys read the blog!

But–how to make “music-centric social entertainment services” into the Ethical Props? First, the streamer needs to take a smaller cut and they need to do some “Artist Services” work for their share.  If you want to get paid for artist services, then serve the artist for your payment (to get all antimetabole about it).

Spotify and Apple need to create the infrastructure that invests fans with the power to directly support the artists they love.  This empowerment will become increasingly important as more and more fans get woke with the main driver of the Ethical Pool–fans discovering that the very large lion’s share of the subscription fee they pay goes to music they don’t listen to performed by artists they’d never listen to. This ought to apply to both ad-supported and subscription services.

In addition to the Ethical Prop button, services need to empower fans to connect directly with the artists they love through an email list if the artist has one.  
In the background, the service may facilitate transactions like a “Fulfilled by Amazon” service that generates a 1099K (like Kickstarter) or an Apple in-app purchase.  In fact, the Chinese micropayments reportedly influenced Apple to change its in-app purchase policies, which make a good guideline for putting the “ethical” into an Ethical Prop:
Apps may enable individual users to give a monetary gift to another individual without using in-app purchase, provided that (a) the gift is a completely optional choice by the giver, and (b) 100% of the funds go to the receiver of the gift. However, a gift that is connected to or associated at any point in time with receiving digital content or services must use in-app purchase.

(That’s section 3.2.1(vii) in Apple’s App Store Review Guidelines for those reading along at home.)

Following Apple’s lead, Ethical Props should be given at the option of the fan and 100% of the funds should go to the artist directly (but not in lieu of a royalty).  Because the payment is optional for the fan, micropayments ought not to be taken into account in any rate setting hearing or negotiation.

And here’s where the “nonecoupable” issue returns–these monies should be paid directly each artist who opts-in to the feature.  Sony and Universal learned to leave some on the table–we’ll see how far that goes.  But certainly independent creators should get the benefit of 100% of any Ethical Prop.

On the songwriter side–now that lyrics are so prevalent and even Spotify is adding songwriter credits, it should be pretty simple for the discerning fan to give an Ethical Prop to a credited songwriter if the songwriter opts in to the Ethical Props.

So like the Ethical Pool, the Ethical Prop is bilateral–both fan and artist have to opt into the transaction.  If the streamer wants to provide a service to handle any required income or sales tax reporting (although it’s likely that none of these transactions will be significant enough to trigger a 1099), then that might justify a cut.  Maybe.


Ethical Props present a win-win opportunity for services and all artists that want to break the headlock of hyper-efficient market share distributions on streaming services.  As we all know and Tencent acknowledges, sustainability requires more than a per-stream royalty that starts 2, 3 or even 4 decimal places to the right.

As the Spotify sugar high starts to crash, Ethical Props may provide an important counterpart to the Ethical Pool.