Spotify’s “Dance Like Nobody’s Paying” ad campaign has earned backlash from musicians and songwriters, who point out that streaming pays horribly. So I got a question from a music-lover about what streaming service fans should use, to best serve the artists we support.

I knew going in that the answer wasn’t as simple as “just switch to streaming service X” — especially since plenty of musicians I follow urge their fans to stream specifically on Spotify (and YouTube, which pays even worse than Spotify). The ultimate answer is that the industry as a whole needs to be revamped.

What follows here is a fan primer on the issue, so you can make informed choices. It’s important to note that, if you’re especially committed to supporting a specific musician, and that musician is saying outright “stream me here!”, it’s not wrong to comply. Your favorite musician has weighed the risks and rewards, to the best of their ability — and we’re going to talk about those potential rewards, too.

This is going to be long, so it has sections. If you hit a wall, skip to the last section for concrete actions.

• What is the payment kerfluffle about?
• How do royalties work?
• Why do streaming services pay different rates?
• Why is Spotify saying it can’t afford to increase payments to artists?
• Why do some indie artists ask me to stream their music?
• What can help me make ethical choices in this situation?

What is the payment kerfluffle about?

It’s about lots of things, all of them calculated in fractions of a cent.

Right now, the cornerstone issue is that the Copyright Royalty Board ruled that the statutory rate for mechanical royalties on interactive streams must increase gradually from about 10.5% of total revenue (as of 2017) to 15.1% of total revenue in 2022 [DIY Musician]. This is a good thing for musicians.

Spotify, Google, Pandora, and Amazon — but not Apple, which has its own royalty revamp proposal — promptly appealed the ruling, claiming they can’t afford to pay songwriters a few fractions of a cent more [The Vulture]. This strategy appears on page three of The Idiot’s Guide to Being a Supervillain — well, okay, that book doesn’t exist, but if you want to look evil, being the big corporation with million-dollar executive salaries that “can’t afford” to pay content creators is how you do it.

Spotify’s marketing team then got the bright idea that emphasizing “nobody’s paying” was an appealing ad campaign. From the consumer’s point of view, they’re not wrong — I started Spotify Premium on a heavily discounted trial, back in 2015. My $10/month regular rate gets me unlimited music for the price of 12 albums a year. This is appealing! The ad campaign, though, is also a slap in the face to musicians, because the nobody’s paying model of business is, in practice, very close to nobody gets paid. (Except labels. Labels always get paid. $19 million per day. [Mashable])

That’s the 30,000-foot perspective. The next section drops context and detail on your head. This may hurt.

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How do royalties work?

Everyone agrees that the current royalty system is a headache-inducing morass of confusion. (Though the Music Modernization Act should help with that.) It got that way partly because as the music industry changed, bits got tacked on here and there — and partly because, if it takes a full-time accountant to understand what the heck is going on, the advantage is to those who can afford the best accountants (l-a-b-e-l-s).

The small tree you see to the right depicts the various sources of royalties to an artist from being streamed on Pandora. (You have to click through to the original source to see a big-enough-to-read version — I just want you to feel the confusion.) All of these are measured in tiny amounts per stream. So while an indie, very DIY artist can personally collect more types of royalties than a major-label artist, it’ll still be at the “find a penny, pick it up, all the day you’ll have good luck” level per stream. (Remember: what I’m referring to as “payout to the artist” is usually split among multiple songwriters.)

The Trichordist does an annual estimate of payments to artists per stream. As you can see in the 2019 data below, even the highest-paying streaming services barely clear one cent per stream — and rates are dropping as streaming becomes more popular [Trichordist]. These 10 streaming services account for more than 97% of market share. To help visualize fractions of a cent, I’ve added in the right-hand column how many streams it takes to generate $1 in artist payments.

If you gasped at the more than 3,500 streams needed to generate $1 on YouTube, you are not alone. Let’s say you’re streaming your favorite’s latest video 3x every 8 hours (the rule of thumb for not triggering anti-fraud measures on streaming services), which is 9x daily. It will take you 397 days — over a year — to generate $1 for that artist. In this case, strength in numbers is not over-rated. Streaming is most helpful to artists when really huge numbers of fans do it.

Once upon a time, my justification for why streaming rates aren’t abusive was that bean-counters in the music industry agree one stream is not equal to one song download. It used to be that 150 streams was the equivalent of one song purchase, then Billboard got complex with weighting paid versus ad-supported streams. Fortunately, The Trichordist mathed that math and can give us a sense of how many streams it takes to pay artists as much as one song download.

Compensating for one lost sale on Amazon Unlimited is easy-peasy for a dedicated fan: you can start on New Music Friday and be done before the next New Music Friday. On Spotify, it’ll take you about three weeks. On YouTube… see you next year!

This seems do-able (except for YouTube, yikes!) — but there are two human factors that get in the way. First, buying a download is one decision, and unless you’re feeling especially broke, it’s a fairly easy decision: $1.29 at the outside, yeehaw! Playing the same song 3x every eight hours for three weeks is over 60 decisions (one per set of three plays), spread over different parts of the day.

Second, you know the thing where you kind of go nuts with putting a song you’re really into on repeat about 37 times because you’re bonding with it intensely? Thirty-four of those repeats probably don’t count — and depending how the streaming service’s fraud detection is set, it’s possible that now none of your repeats count. Ouch! So a “good fan” would have to resist the urge to keep listening when passion is at its peak, but make a point of listening regularly whether they’re in the mood or not.

I’ve met super-duper-uber-fans who have the self-discipline to listen that way. I can’t do it myself with any consistency, and I’m betting the typical fan — including ones who used to happily buy downloads when downloads were the big thing — doesn’t even think of doing it that way.

So should we all switch to Amazon Unlimited or Napster, for the better payouts? Well, we need to dig a little deeper. As is often the case with digging, we’re going to hit some worms, some rocks, and possibly a few eldritch horrors.

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Why do streaming services pay different rates?

Three factors affect the actual rate paid, and only one of these factors has anything to do with good will toward musicians.

• Total revenue, which is shaped by how many paid and how many ad-supported listeners the service attracts, as well as what it charges for subscriptions and ads.
• Total streams, which is shaped by how many listeners there are and how engaged they are.
• Contracts that apportion shares (including the label’s cut), control licenses, and generally deal with all the royalty types beyond the mechanical royalties that are always a percentage of streaming revenue.

If the proportion of paid/ad-supported subscribers changes, or if subscribers generally start streaming a lot more or a lot less, then the typical payment-per-stream will change. And, in fact, it has — when The Trichordist mentions how rates per stream dropping for all services, this is exactly because listeners are tending to stream more. The same subscription and ad revenue is now divided among more streams.

My logical first thought, as a responsible listener, is to shift to streaming services that are all-paid (no “free” tier supported by advertising, which generates surprisingly little revenue), such as Amazon Unlimited and Apple Music. (My first thought in handing yet more power to Amazon is to wince, though.) But wait — Apple Music isn’t a top payer on a per-stream basis. How can this be?

Listeners who are willing to pay tend to be way more passionate about music. If we use Spotify’s data as a guideline, “free” users average about 26 content-hours per month, while Premium subscription users listen three times as much. The 96 million Premium users account for 45% of monthly average users (head count, not stream count) but about 75% of streams and 90% of revenue [20-F]. So it turns out that both Apple Music and Spotify are primarily funded by subscriptions, not ads, and that both are slicing the rich juicy subscriber pie super-thin because paid subscribers stream like crazy. Thus, Apple’s rate-per-stream is only a little better than Spotify’s. (If you like Apple Music better for generally not aggressively being assholes, though, that’s still a valid reason to switch.)

It’s possible Amazon Unlimited might prove itself an exception — getting casual listeners to pay, so that more dollars are spread over fewer streams — simply because customers welcome Amazon into every aspect of their lives. I’m skeptical that the world economy really needs to become more dependent on Amazon, though.

It’s also very possible that Amazon Unlimited will be another one of those Amazon projects that quietly vanishes after a while. The streaming industry is reaching the stage where market share gets really concentrated in a few hands — notably, Spotify, YouTube, and Apple Music. The Trichordist is here for us again, to compare market share of streams with market share of revenues. (Spoiler: being ad-supported generates surprisingly little money per stream.)

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Why is Spotify saying it can’t afford to increase payments to artists?

Because its business model is focused on eating the world, not on building a business that’s sustainable at a moderate size, in a competitive market.

Other streaming services are not necessarily run dramatically differently. Spotify is the focus here because:

• Spotify and YouTube dominate the streaming market, as the last table showed.
• Spotify is a publicly traded, stand-alone company, so we can see detailed financial statements that show how the sausage is made.
• Management is surprisingly willing to come across as friggin’ obnoxious.

Spotify pays out about 75% of its total revenue in royalties, deals with labels, and other unspecified costs of obtaining and distributing the music [20-F]. When mechanical royalties reach 15.1%, in the absence of any other changes, Spotify would be paying out 80% of total revenue. I’m a little skeptical that nothing else will change: the increase in gross margin from 2016 to 2018 indicates that some costs of revenue are flat amounts, not percentages of revenue.

But let’s figure Spotify is going to have a gross profit margin of about 20%. About one-fifth of its revenue will have to cover operating expenses — research and development, sales and marketing, and general salaries and overhead — plus non-operating expenses that include taxes and interest on debt.

That’s not tragic. That’s not even unusual.

I took a glance at companies in the Russell 3000 index (so, every public company in the U.S. that a basic vanilla investor would even think of looking seriously at) and discovered that about 12.5% of the companies had a gross profit margin greater than zero and less than 21%. More than 90% of those companies were profitable, as measured by net income, by cash from operations, or (in most cases) by both.

What are they doing differently than Spotify?

One possibility is that other companies are not quite so generous with salaries, since Spotify’s average salary of $168,747 [Digital Music News] is a poke in the eye to musicians earning pennies. That’s a smelly red herring, though, as Spotify also has an important problem with its operations.

Spotify is struggling for economies of scale. Ordinarily, when a company is growing by leaps and bounds, its expenses for R&D, sales and marketing, and general staffing and overhead will also grow, but more slowly than revenue. We should see the percentage of revenue for these operating expenses heading downward — but instead, that’s pretty flat. Not perfectly flat — but not a clear downward trend.

Instead of getting more bang for the buck from R&D as it grows, Spotify “has to” (chooses to?) keep ramping up R&D as fast as it increases revenue. Expenses for sales and overhead (the latter being where salaries are)… just kind of bounce around, and the total spend on operations stays in the 25-30% range.

Note the really important thing — operations continue to over-spend. Even when we’re sweet and generous about putting back non-cash depreciation and amortization, Spotify loses money on its operations. It has almost 50% of global streaming revenue share and can’t turn a full-year operating profit.

Spotify did manage to eke out an operating profit in its final quarter of 2018, based on improving gross margin (a higher proportion of paid subscribers helps) and slowing head-count growth… then warned gross margin is going to deteriorate in 2019, so look for more losses [Reuters]. Lossy loss loss.

Spotify wants to ease its financial problems by starving musicians and songwriters because its other options would lead to slower growth, and you have to grow fast if you want to eat the world. These options are to control its operating costs or to get more revenue out of each user (so that the 20% gross margin is a bigger heap of money). There are three ways to get more revenue per user.

• Charge more for ads. Higher rates require a less fragmented market. So Spotify can attract more free listeners, hope for competitors to go out of business, and/or hope for people seeking entertainment to become more interested in streaming and less interested in, say, television.
• Convert more free listeners to paid listeners. That’s what the offensive “free trial” ad is all about.
• Charge more to paying listeners. Right now, streaming prices are artificially low, to encourage music-lovers to shift from buying to streaming.

Wait, $120 a year is low? Oh yes. Remember, Spotify’s average “content hours per monthly average Premium user” is 78. Figuring an average of 3.5 minutes/song, that’s about 1,337 songs per month or almost 16,000 songs per year for each Premium user.

A Spotify subscription costs the same as 12 downloaded albums or 120 downloaded songs. If that average Premium user listened to only 120 downloaded songs, they’d have to listen to each one 133 times, or more than once every 3 days.

While some superfans are still listening to their favorite artist’s debut album daily, five or ten years later — it’s a good guess that the typical Premium user is listening to a lot more than the same 120 songs over and over. Streaming is a bonanza for music lovers — all the music in the world, at the price of a very mild music-buying habit.

Spotify used that “bonanza” to “disrupt the market”– which is usually a euphemism for “wipe out traditional markets, while promising ‘freedom’ to the creators and producers getting milked to make tech gurus wealthy.”

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Why do some artists ask me to stream their music?

The “freedom” offered by the streaming boom is a change in gatekeepers — which legitimately offers opportunities to indie/DIY musicians.

If the video goes viral or if the song gets on a major playlist, the artist has a chance of “breaking out” into substantially wider exposure. Get really lucky, and the artist can get a boost that, once upon a time, would have required a major-label push. If that boost translates into loyal fans who stick around, the artist has a larger base for touring and for selling high-margin premium merch to.

So the artists who urge you to stream on Spotify or to share their music video from YouTube are accepting that they earn very little at one point in the process, in hope of making a lot more at other points.

It’s really tough to pull this off, but in an essentially broken music industry, it’s a bright spot of hope. So I am 100% in favor of supporting musicians when they choose to ask for this.

So why not make the push on a higher-paying streaming service? As we saw earlier, Spotify and YouTube dominate market share. Apple Music has about 60 million subscribers, Spotify has about 217 million total users, YouTube has over a billion users — while (possibly) profitable and better-paying Napster/Rhapsody has maybe 5 million users [Digital Music News].

Let’s say your favorite artist has a new single that they’re determined to get to 1 million streams (which is fantastic for an indie, but nowhere near record-setting). If we count on 1 million users to play the song once each, we have to reach 20% of Napster’s user base, which is awfully optimistic, given wide differences in music taste. The payout is the best of the four, though.

Let’s look at it from a different angle. Let’s say your fave’s song manages to reach 1% of each service’s user base (which is still optimistic, but it’s an easy number to work with) who love it enough to stream it 10 times. How many streams does the song get?

Holy cow. On Spotify, that would be stardom-level numbers — the kind of achievement that makes an artist the break-out star of the year. On Napster… it’s half a million streams and a bit more $5,000. That’s not insignificant, but it’s not the “21.7 million streams and Ed Sheeran will invite me for tea” level of Spotify.

Capturing even 1% of a streaming service’s base is far from easy — but on Spotify and YouTube, if you can do it, the rewards are enormous. If you can even hit 1/2 of one percent as casual engagement, you’ve got decent numbers. Plus, as a result of greater market share, Spotify and YouTube have more cred in justifying radio play, tour size, and other things that move a career along.

This is how a company eats the world. Setting prices artificially low (or free) shifted consumer habits, so that the industry looks to Spotify and YouTube for indications of an artist’s appeal. If musicians want to “break out,” they have to play ball.

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What can help me make ethical choices in this situation?

If you want to pause here for a stiff drink, or to curl up in a ball and whimper, or possibly to flop like a jellyfish while listening to the latest Ed Sheeran album… it’s justified.

The music business is a cruel and shallow money trench, a long plastic hallway where thieves and pimps run free, and good men die like dogs. There’s also a negative side.

Hunter S. Thompson

Let’s consider five possibilities, starting with the easiest path and working up to the more difficult actions. The leaders for radical reform — which is genuinely needed — will say the first four items aren’t enough, but if you do action five, they can guide you in taking it further.

1 First, what do your favorites want? Not every artist is aiming to “break out.” There are some whose strategy is to sell physical CDs to a dedicated group of fans, usually while touring constantly. These are the artists who most need you to buy CDs rather than stream. (And any artist who releases CDs and/or downloads is up for you buying them, so buy where you can.)

Conversely, if your favorite is all “whoo, Spotify!” and “yeehaw, YouTube!”, that’s presumably an informed choice. I’m reasonably comfortable with sticking with Spotify because it’s useful to some of the musicians around me. I’ve also supported friends in deciding to jump ship for Apple Music because their favorite got disgusted with Spotify.

Yet others may care more about Reverbnation (largely a platform for regional indies). It’s free for fans, and streams there create charts that the artists use as evidence for getting the regional gigs they want. It doesn’t have a huge market share, but it fills a useful niche.

2 Second, consider whether you want to use a smaller, better-paying service just to postpone the day when Spotify eats the world. It’s an option. You’re not going to make your faves rich this way, and you won’t be able to help drive Spotify streams — but you’d be doing a tiny bit to slow consolidation of the streaming industry into the hands of three or four companies.

3 Third, if you’re going to stream heavily on one of the industry leaders, go the extra mile to make it valuable to the faves who are trying to “break out.” This includes a whole bunch of little tricks that supposedly give some advantage in being chosen for significant playlists (though there are also lots of rumors that it’s really all influence and payola).

• If the artist offers an option to pre-save a song on Spotify, do it.
• Like/love/fave songs and (on Spotify) add them to your library. (This should generally improve the appeal of what songs are recommended to you, too.)
• Put songs you love on a playlist. For some reason, that alone gives a boost. It also gives you a convenient way to play songs repeatedly.
• If you’re into a song, play it 3x every 8 hours, as consistently as you can. This maximizes the streams you’re giving it. Don’t put it on constant repeat.
• Share some of your favorite songs on social media, in hope that your tweeps or facebeeps (did I make that up?) will be inspired to click. This works better if you tag specific music lovers who might like the song (which I don’t always bother with, but you can do better than me, right?).

Faced with a massive industry where millions of people are listening to big stars and labels are paying big bucks for promo, I feel very, very small when I suggest steps like these. Effective fan action is not a matter of half a dozen people working their asses off — it has to be mass action, by the thousands.

4 Fourth, weigh the merits of paying for a subscription. While paying is handing money over to the tech gurus to get rich on (those salaries, Spotify, seriously?), it’s also making sure there’s more money for dividing among artists as royalties.

That leads to another whimper-inducing issue, though — your subscription costs do not go directly to paying the artists you listen to. Subscription fees and ad revenue go into a general pool that are divided among all of the songs played. So here you are, giving your 9 plays a day to beloved Connecticut indie artists… while, say, 50,000 music-lovers are playing Ed Sheeran, Billie Eilish, and Drake. Your money is mostly going to support Ed Sheeran, Billie Eilish, and Drake, not your faves.

5 So finally, support user-centric royalty initiatives. The Trichordist is one of the banner-bearers for a change in how royalty pools are defined. What they’re explaining in this article is essentially a plan to assign your subscription fees to the artists you listen to. So you pay your $10 a month, and in August you listen to your favorite indies — and your money goes into the pool to pay them and only them. If the 50,000 listeners playing Ed Sheeran are all in the ad-supported tier, he’ll just have to get by with a smaller payout. (He’ll survive. His numbers are so huge that losing your contribution isn’t even a rounding error.)

User-centric royalty pools would be a big improvement for indie musicians and their fans. But doing something about this as a fan is a lot tougher than switching streaming services! I would start by putting yourself in the loop by following Artists Rights Watch and The Trichordist — if there’s a petition to sign or an action that fans can take, one of those two is going to tell you (and you may find you enjoy their writers and the exchange of ideas).

As I wrap this up, I’m feeling nostalgia for the time when I got my music at a little record store on Dixwell or Whitney or Broadway, because little record stores were where you got music. I played an album until I knew every note because buying an album was a big deal. Technology has shifted the whole experience of music-listening — it’s given listeners more access to variety at a far lower cost, and it’s important that in pursuit of happy listening, we don’t make the industry unsustainable for the people who make the music.

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