Music Streaming Services and Payments

June 20, 2012

1.      Music streaming income

A music streaming service (MSS) will typically require its users to register as a subscriber in order to use the service, and then will charge subscribers a monthly or similar subscription fee, albeit this fee may only apply where the user wants the premium (ad-free) version of the service. There is much discussion in the media about the conversion of non-paying subscribers to paying subscribers: Spotify, for example, claim that approximately 30% of its users are paying subscribers. These receipts are referred to as subscription income.

The label will require the MSS to pay a royalty on subscription income. The first step in this calculation is determining the share of all subscription income that is attributable to the label. That share will be calculated either by reference to the label’s market share generally, or by reference to the share of the service which is attributable to its content.

The royalty payable by the MSS to the label in relation to subscription income varies and depends upon the precise contractual terms agreed in any particular case. Typically the MSS will pay to the label around 50-60% of a pro rata share of any subscription income.

The label’s share of any subscription income will be further augmented by the imposition upon the MSS by the label of a series of minimum charges, usually a minimum fee per subscriber and sometimes even a minimum fee per stream. Minimum fees are negotiated separately by each label and these rates are not made public. It would not be unusual for the minimum fees (on either basis) to exceed the actual subscription income received by the MSS from subscribers (hence most such services are losing money).

As far as I can tell, labels (when accounting to their artists) generally treat the subscription revenue as the same whether it has been calculated by reference to minimum fees or by actual subscription income. The artist’s share will be calculated by reference to the number of streams, which data the MSS will have an obligation to provide. Essentially, the label will calculate the proportion which the number of streams relating to the artist in question bears to the total number of streams for that label and then account to the artist for the artist’s agreed percentage share of that proportion.

None of this calculation of the artist’s share will usually be visible on the accounts. ‘Spotify income’, for example, will be shown by reference to the amount of income attributable to the artist in question received from Spotify for the accounting period in question, without reference to the various layers of calculations above. The only visible calculation will be the application of the artist royalty rate. Depending upon the precise terms of any contractual right of audit which may apply in any particular instance, it may be possible for the artist to uncover further information through the audit process.

2.      Advertising revenue

This is a much simpler calculation. Advertising revenue is generally aggregated across the whole of the service and not on a which-ad-was-visible-whilst-that-track-was-playing basis. Again, we understand that the share payable to the labels is around 50-60%. There will be an apportionment by reference to the label’s market share. Whatever ends up being paid through to the label will be allocated to the artist on the same basis as subscription income.

3.      Publishing

MSS negotiate a usage rate for music on a country by country basis with the respective collection society, since most jurisdictions require the ‘end service’ (ie the MSS) to pay the publishing fees. The accepted wisdom is that these negotiations are largely responsible for the delay of the global launch of certain services since the per stream rate can be crippling to a MSS.

In the UK the PRS cut the published rate for streaming from 0.85p to 0.22p per stream. However, it is possible (and if so, would be a highly guarded secret) that some services have negotiated their own rate. A stream in this case will be any amount of time and not just the whole song.

4.      Cloud locker services

Cloud locker services such as Apple’s iCloud and Amazon’s EC2 enable users to store their existing music library on a remote server to be accessed by all of the user’s devices anywhere in the world.

The use of the locker is not limited to music, and so a number of services (eg Amazon) have not sought a licence from the content owners. Apple, however, provide a slightly different service in that instead of uploading your version of the track, the locker simplify identifies that you own it and then grants you access to a central copy. For this service, Apple currently charges its users US$25 per year. I understand that Apple pay a licence fee to the labels. The issue with cloud locker services is that currently we don’t know if the labels will pass on any of the money from the subscription fee to artists – if the locker service is never used, like a gym membership, there may not be any use attributable to the artist’s recording to cause a royalty payment to arise. However, Apple would appear to be paying a licence fee on the basis of the availability of the content and one might argue that the same should be true for the artist. I presume that otherwise the artist will receive income based on how many times an end user accesses an artist’s record (in the same way as Spotify’s per stream model).

5.      Other Considerations

The assumption is that the label is making available its music to the MSS on an ‘all or nothing basis’ but of course some artists have declined to have their content appear on these services, at least initially, for fear of cannibalisation of album launch sales (eg Coldplay, Adele).

MSS are generally bound by strict confidentiality provisions which restrict transparency. However, there is increasing pressure to make full disclosures, and perhaps (as technology permits) allow direct monitoring rights over the activity on these services. However such transparency will have to be requested, and such requests will have to be led by the bigger artists, though EMI have stated that they are prepared to provide this level of transparency to their artists and are encouraging artists to come forward. 

Jocelyn Whinney is an Associate with Lee and Thompson and works as a member of the Digital Group there: