SoundCloud Premieres New User-Centric Payout System
By Hannah O and Greyson Zeng, Associates at CAD Management
Since the invention of Napster, online music streaming has turned the music industry upside-down. Record sales have plummeted within the past 2 decades, and streaming services such as Spotify and Apple Music have taken over as pop culture’s primary resource for listening to music. Although these digital service providers (DSPs) have made music significantly more accessible to society, the free market economy for music has pushed the value of music so low that it’s become nearly impossible for artists to support themselves.
The London-based music organization International Federation of the Phonographic Industry (IFPI) recently released a report showing that streaming revenue grew in 2020 by 19.9% to $13.4 billion. Streaming accounted for 62.1% of global recorded music revenue, with 443 million paid music subscribers supporting these growing numbers. Although this appears to be a significant amount of money, independent artists only saw a fraction of it after DSPs, distributors, and labels took their share.
Soundcharts reported that in 2020 Spotify paid artists $0.0032 per stream, Apple music paid $0,0056 per streams, and Deezer paid $0.00436 per streams. Streaming platform’s payments are not based on a set amount per a stream, but instead fluctuate with subscription pricing, the amount of subscribers, the type of subscription (free/premium), and the country where the music is streamed. Most of them take 30% of the money made from monthly subscriptions and advertisements, and then distribute the rest of it based on the amount of listens each artist has for that month. At first glance this sounds like a fairly equitable system, but in actuality, it favors bigger artists who belong to major labels. According to Music Business Worldwide, major record labels earn roughly $1 million per hour from music streaming alone, meaning chart-topping musicians are taking a significantly larger portion of streaming revenue that is unadjusted to their specific listeners and leaving very little for independent artists. Smaller musicians previously used touring, merch, and live shows to make up for the gap in revenue, but this secondary income source has come to a halt as the pandemic has forced over 300 music venues around the country to close. Although the “pro rata” system is the industry standard, there is another user-centric distribution model that is starting to be explored. Always championing DIY artistry, the leading music sharing website SoundCloud recently presented their new approach to bridging this gap in independent musicians’ income.
On March 2nd, SoundCloud announced fan-powered royalties, a new-and-improved solution for this outdated pooling “pro rata” system. With fan-powered royalties, artists are paid out based on their fan-base’s listening habits. A subscriber’s monetary contributions to the platform, whether it be through the subscription service or through advertisement revenue, are allocated only to the artists they listen to. For example, if a SoundCloud user only listens to one artist on the platform, their monthly subscription fee will go directly to that artist after SoundCloud takes out its share. According to VICE News, 55% of the revenue goes to artists, 20% of it pays for publishing fees, and the other 25% of it goes to SoundCloud’s profits.
The feature which debuted on April 1st, is advantageous for small to middle-tier artists with dedicated listeners. Instead of competing with bigger artists for pools of money that payout per stream, they will be profiting directly from their fans, according to how much they listen to the music. This leaves a lot of potential for independent artists to earn more money from loyal fanbases. The new payout system applies to all SoundCloud artists who are “Pro Unlimited subscribers in the Premier Program, Repost by SoundCloud subscribers and members of Repost Select”. Basically, artists who use SoundCloud as their distributor or qualify as a SoundCloud Premier user are able to take advantage of the new royalty distribution model. This will be the first time the industry has seen a user-centric payout system utilized on a large scale and will be an enlightening experiment for both the company and its creators. SoundCloud’s fan-powered royalties are an exciting prospect for both independent artists and the company.
Fan-powered royalties are likely to drive more traffic to SoundCloud and its distribution service, especially as other DSPs face objections for the pro rata model. In hopes of providing transparency on the current system, Spotify recently released their newest initiative Loud and Clear, a data-driven web portal aimed to clarify the economics of streaming. With SoundCloud’s new payout system putting artists at the forefront of their brand, it is uncertain whether the pro rata system will continue to dominate the streaming industry or if a user-centric model will break through.