Music Industry Revenue Streams: The Advent of Spotify and Music Streaming Services

The company Spotify is a very interesting case study. The amount that Spotify pays the creators, by way of the record companies, for the licensing of the recordings for streaming, as well as the publishers– the people who license the public performance of the song– amounts to about 70% of their revenue that they generate from selling advertising, or from their subscriptions. And they are continuing to increase the number of paid subscribers.

So as they make more strides for attracting more paid subscribers for their services, it’s creating a situation where they are making more money, but can they survive and become profitable on the 30% that they are left with? The margin just isn’t big enough. So what Spotify has decided to do, and just did recently, was renegotiated their agreements with all of the major record labels.

The record labels used to get about 58%– I mean, we talked about 70%. 12 of that would go to the publishers. 58% would go to the record companies for those recordings, to license the recordings for the streaming services. And Spotify decided to, and did, renegotiate all of their agreements with the three major record labels, and even the association of independent labels– Merlin– where they reduced those payments, based on the initial payments that they’re paying now. So they went from about 58%– it’s been said, these are confidential agreements– down to almost maybe 52% with some of the labels. However, the labels have agreed, and Spotify has agreed, that the more subscribers they get, the royalty rates will come up, because the more money they are going to be able to make.

Which is a very, very interesting development. Another interesting development is that Spotify is finding that there are many, many artists, independent artists, that they feel that they can do direct deals with, and may not have to pay that 52% or 58%. The major labels demand it, and they have to pay it. But if there are some independent artists– Chance the Rapper, or other independent artists– that they can make a deal directly with them.

They could possibly play those artists less. Why? Because the artist, if they’re signed to a major label, the major label is making 58% of the revenue, and they’re paying the artist on the artist’s royalty rate of 15%, which is what? Maybe 7% of that? So Spotify feels that they can go directly to the artists, have them license their recordings to them, they could pay the artists maybe 40%, rather than the 50% they’re paying to the major labels.

So that they’re going to be able to benefit more. Spotify has done that on occasion, although they don’t want to create any problems with the major labels, or they they’re really trying to not do that on a broad level at this point. But you have to figure there’s more and more independent artists that may not even be interested in signing with a major label, might be interested because streaming is really taking over, and doing deals directly with Spotify.

So the future for Spotify and streaming is going to continue to grow, and it’s going to be a very fascinating subject for years to come. .

As found on Youtube