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.

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

Arithmetic on the Internet: The Ethical Pool Solution to Streaming Royalty Allocation

“Sick of my money funding crap.”
A Fan’s Tweet

Subscription services are one of the few secular trends in the current economy that is not yet reactive to trade wars or interest rates.  Subscription services are found in many areas of the economy, but music drives some of the big ones like Spotify, Amazon and especially the razor-and-razorblades plays like Apple.  But per-stream royalties do not come close to making up for the CD and download royalties they cannibalize.   Not only do subscription retail rates need to increase, but it’s also time for a major change in the way artist’s streaming royalties are calculated from what is essentially a market share approach to one that is more fair.   (Listen to the Break the Business podcast discussion about the Ethical Pool that I had with Ryan Kairalla.)

Artists’ dismal streaming royalties on music subscription services are largely based on a simple calculation:  A per-stream payment derived from a share of the service’s revenue prorated by number of streams.  Artists get a portion of a service’s monthly revenue (at least the revenue the service discloses) based on a ratio of your plays to all the plays.  Your plays will always be a lot smaller than the total plays.  (This is essentially what Sharky Laguana referred to as the “Big Pool.”)

Sounds simple, but mixed with the near-payola of Spotify’s playlist culture and Pandora’s “steering” deals, it’s really not.  Negotiating leverage allows big stakeholders to tweak the basic calculation with floors, advances (aka breakage), nonrecoupable payments that help cover accounting costs, and other twists and turns to avoid a pure revenue share.

It also must be said that stock analysts and venture investors always—always—blame “high” royalties for loss-making in music services.  This misapprehension ignores high overhead such as Spotify’s 10 floors of 4 World Trade Center or high bonus payments such as Daniel Ek’s $1,000,000 bonus paid for failing to accomplish half of his incentive goals stated in the Spotify SEC documents (p. 133 “Executive Compensation Program Requirements”).

Of course all these machinations happen behind the scenes.  Fans are not aware that their subscription pays for music they don’t listen to and artists they never heard of or don’t care for.   Plus, it’s virtually impossible for any label or publisher to tell an artist or songwriter what their per-stream rate is or is going to be.

Fans Don’t Like It:  A New Wave of Cord Cutters?

So neither fans nor artists are happy with the current revenue share model. Given that the success of the subscription business model is keeping subscribers subscribing, the last thing the fledgling services need are cord cutters.

Many artists will tell you that the playlist culture and revenue share model are destructive.  Dedicated fans often don’t like it  either (after they understand it) because it gives the lie to supporting your favorite artist by streaming their music.  Artists don’t like it because unless you have a massive pop or hip hop hit, all you can aspire to is a royalty rate that starts in the third decimal place from the right if not the fourth.  This is compounded for songwriters.   (See Universal Music Publishing’s Jody Gerson on streaming royalties for songwriters.)

Simply put, if a fan pays their subscription and listens to 20 artists in a month, that fan likely believes that their subscription is shared by those 20 artists and not by 200,000 artists, 99.99% of whom that fan never listened to and probably never will, similar to Sharky’s “Subscriber Pool.”  (You can take a survey here.)

This is why some artists like Sharky Laguana (and their managers) have begun arguing for replacing the status quo with “user-centric” royalties that more directly correlate fan listening to artist payments.  I have a version of this idea I call the “Ethical Pool.”  

How Did We Get Here?

How in the world did we get to the status quo?  The revenue share concept started in the earliest days of commercial music platforms.  These services didn’t want to pay the customary “penny rate” (as is typical for compilation records, for example), because a fixed penny rate might result in the service owing more than they made–particularly if they wanted to give the music away for free to compete with massive advertising supported pirate sites.

Paying more than you make doesn’t fit very well with a pitch for a Web 2.0, advertising driven model:  All you can eat of all the world’s music for free or very little, or “Own Nothing, Have Everything,” for example.  It also works poorly if you think that artists should be grateful to make any money at all rather than be pirated.

Revenue share deals for big stakeholders have some bells and whistles that leverage can get you, like per-subscriber minimums, conversion goals, top up fees, limits on free trials, cutbacks on “off the top” revenue reductions, and the percentage of revenue in the pool (50%—60%-ish).  Even so,  the basic royalty calculation in a revenue share model is essentially this equation calculated on a monthly basis:

(Net Revenue * [Your Streams/All Streams])

Or ([Net Revenue/All Streams] * Your Streams)

In other words all the money is shared by all the artists.

Sounds fair, right?

Wrong.  First, all artists may be equal, but on streaming services, some are more equal than others.  Regardless of the downside protection like per-subscriber or per-stream minima, the revenue share model has an inherent bias for the most popular getting the most money out of the “Big Pool.”  (This is true without taking into account the unmatched.)

And of course it must be said that the more of those artists are signed to any one label, the bigger that label’s take is of the Big Pool.  So the bigger the label, the more they like streaming.

Conversely, the smaller the label the lower the take.  This is destructive for small labels or independent artists.  That’s why you see some artists complaining bitterly about a royalty rate that doesn’t have a positive integer until you get three or four decimal places to the right.  Why drive fans away from higher margin CDs, vinyl or permanent downloads to a revenue share disaster on streaming?  

Yet it increasingly seems that we are all stuck with the nonsensical streaming revenue share model.

Do Fans Think It’s Wrong?

There’s nothing particularly nefarious about this—them’s the rules and rev share deals have been in place for many years, mostly because the idea got started when the main business of the recorded music business was selling high margin goods like CDs or even downloads.  Low margin streaming didn’t matter much until the last couple years.

It was only a question of time until that high margin business died due to the industry’s willingness to accept fluctuating micropennies as compensation for the low-to-no margin streaming business.  (I say “no margin business” because the costs of accounting for streaming royalties may well exceed the margin—or even the payable royalty—on a per-stream basis when all transaction costs are considered as Professor Coase might observe.) 

So understand—the revenue share model is essentially a market share distribution.  Which is fine, except that in many cases, and I would argue a growing number of cases, when the fans find about about it, the fans don’t like it.  They pay their monthly subscription fee and they think their money goes to the artists they actually listen to during the month.  Which is not untrue, but it is not paid in the ratio that the fan might believe.  Fans could easily get confused about this and the Spotifys of this world are not rushing to correct that confusion.  

Here’s the other fact about that rev share equation: over time, the quotient is almost certain to produce an ever-declining per-stream royalty.  Why? 

Simple.  

If the month-over-month rate of change in revenue (the numerator) is less than the month-over-month rate of change in the total number of streams or sound recordings streamed on the service (the denominator), the per-stream rate will decline over those months.  This is because there will be more recordings in later months sharing a pot of money that hasn’t increased as rapidly as the number of streams.

As the number of recordings released will always increase over time for a service that licenses the total output of all major and indie labels (and independent artists), it is likely that the total number of recordings streamed will increase at a rate that exceeds the rate of change of the net revenue to be allocated.  If there are more recordings, it is also likely that there will be more streams.

So streaming royalties in the Big Pool model will likely (and some might say necessarily will) decline over time.  That’s demonstrated by declining royalties documented in The Trichordist’s “Streaming Price Bible” among other evidence.

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Thus the fan’s dissatisfaction with the use of their money is already rising and is likely to continue to rise further over time.

User-Centric Royalties and the Ethical Pool

How to fix this?  One idea would be to give fans what they want.  A first step would be to let fans tell the platform that they want their subscription fee to go to the artists that the fan listens to and no one else.  This is sometimes called “user-centric” royalties, but I call this the “Ethical Pool”. 

When the fan signs up for a service, let the fan check a box that says “Ethical Pool.”  That would inform the service that the fan wants their subscription fee to go solely to the artists they listen to.  This is a key point—allowing the fan to make the choice addresses how to comply with contracts that require “Big Pool” accountings or count Ethical Pool plays for allocation of the Big Pool.   Remember–the Ethical Pool exists along side the Big Pool, not to the exclusion of the Big Pool.  If the fan did not opt in to the Ethical Pool, the default would be the Big Pool.  Don’t miss this point, lots of people do.

Artists also would be able to opt into this method by checking a corresponding box indicating that they only want their recordings made available to fans electing the Ethical Pool.  The artist gets to make that decision.   Of course, the artist would then have to give up any claim to a share of the “Big Pool.”

Existing subscribers could be informed in track metadata that an artist they wanted to listen to had elected the Ethical Pool.  A fan who is already a subscriber could have to switch to the Ethical Pool method in order to listen to the track.  That election could be postponed for a few free listens which is much less of an issue for artists who are making less than a half cent per stream.

The basic revenue share calculation still gets made in the background, but the only streams that are included in the calculation are those that the fan actually listened to.  If the fan doesn’t check the box, then their subscription payment goes into the market share distribution as is the current practice, but their musical selection is limited to “Other than Ethical Pool” artists.

That’s really all there is to it.  The Ethical Pool lives side by side with the current Big Pool market share model.  If an Ethical Pool artist is signed, the label’s royalty payments would be made in the normal course.  The main difference is that when a subscriber checks the box for the Ethical Pool, that subscriber’s monthly fee would not go into the market share calculation and would only be paid to the artists who had also checked the box on their end.

One other thing—the subscription service could also offer a “pay what you feel” element that would allow a fan to pay more than the service subscription price as, for example, an in-app purchase, or—clasping pearls—allow artists to put a Patreon-type link to their tracks that would allow fans to communicate directly with the artist since the artist drove the fan to the service in the first place.  I’ve suggested this idea to senior executives at Apple and Spotify but got no interest in trying.

The Ethical Pool is real truth in advertising to fans and at least a hope of artists reaping the benefit of the fans they drive to a service.  There are potentially some significant legal hurdles in separating the royalty payouts, but there are ways around them.

I think the Ethical Pool is an idea worth trying.

UPDATE:  I want to emphasize a couple points that seem to keep coming up in discussions about Ethical Pool.

Ethical Pool exists as an option to the Big Pool. If a fan doesn’t select the Ethical Pool, the default is the Big Pool. The Ethical Pool is a different pot of money that the Big Pool and is divided among fewer artists.  Both exist at the same time.

If artists who are not rewarded by the Big Pool can offer their music at a higher margin somewhere other than the big platforms, they may just skip the Ethical Pool altogether and simply drive fans to the higher margin sites in more of a direct to fan relationship.

The two essential points of the Ethical Pool are (1) the Big Pool is a hyperefficient concentration of revenue to a small number of artists that trends toward a market share allocation and will always fail to reward niche and developing artists, and (2) that if the artist wants to be on the big platform, they may have a better shot at getting a higher royalty with the Ethical Pool than the Big Pool.