I decided to write this post after stumbling across an article in The Atlantic titled “How Musicians Really Make Money in One Long Graph.” It showed how many monthly sales or streams an artist would have to achieve in order to earn monthly minimum wage. The information, which came from informationisbeautiful.net was unbelievable. But not unbelievable as in really surprising or shocking–literally unbelievable. For example, the article said that an artist would need over 4,000,000 streams per month on Spotify to make monthly minimum wage. After doing more research, I found that this claim is untrue, at least in many situations. This post will focus on how money is made from music downloading and streaming because I doubt physical music has much of a future. Although physical music was more popular than purchasing downloads in 2012, physical sales declined a whopping 12.8%, according to The Huffington Post. This post will use information about Spotify, Pandora, and iTunes because they are the most popular online music services, even though using Pandora when Spotify exists is like using a typewriter when you have a computer. I didn’t actually bother to check the claim that those three are the most popular, but how many people do you know that use Napster or Amazon? (Yes, Napster is still a thing and it does streaming now.)
Spotify is a music streaming service that offers users three options: listening for free on a computer with ads, paying $5 a month to listen without ads, or paying $10 for being able to also listen on mobile devices and download music. The actual formula for calculating royalty payments for Spotify is very complicated, but Rolling Stone gave the royalty arrangement of one band manager. In that situation, if a song is streamed 60 times, the songwriter receives 9 cents and the artist receives 38 cents, which is then split with the label depending on the contract. Using the Rolling Stone rates, I calculated that an artist would make over $25,000, which would be split with a label, if people streamed their songs 4,053,110 times, the amount the Atlantic article says would be needed to make monthly minimum wage. I also calculated the combined amount that an artist and label would make using the Atlantic rates, which was over $7,500, less than a third of the money Rolling Stone reported would be made. Since the actual Spotify royalty formula is extremely complicated and is different for different artists, I checked a couple other sources to get an idea of which figure was generally more accurate. According to NPR, Erin McKeown, who doesn’t have a label, gets $0.004 per play, which means she would make over $16,000 if her music was streamed 4,053,110 times. A second Atlantic article, which came out after the unbelievable one, talks about how cellist Zoë Keating’s songs had been streamed 72,800 times and she only made $281.87, meaning she makes around $0.0039 per play, almost identical to the amount McKeown is payed (note that Keating’s figures are after CD Baby’s 9% commission). In a 2011 blog post titled “Spot the Spotify Payment,” independent artist David Harrell writes,
Without any promotion in the regions where Spotify is currently available, our total number of plays is relatively small, though our Spotify activity seems to be increasing each month. The per-spin payouts we receive via CD Baby are quite variable, ranging from around two hundredths of cent to more than one cent for each stream. (We also had a few spins that rounded out to ‘$0.00000000’ after CD Baby’s commission.) I’m assuming the payout amount depends on free vs. premium listens, as well the subscription prices in each region and currency exchange rates.
Harrell says that he made an average of approximately $0.0029 per play from August 2009 to March 2011 before CD Baby’s 9% commission, meaning he would make about $10,500 if his music was streamed the amount of times the first Atlantic article claimed was required to make monthly minimum wage (Harrell later made an updated post where he said the average payment for stream in June, 2012 was around $0.008). Just to clarify, McKeown, Keating, and Harrell are all independent artists. According to Keating:
Spotify does not pay the same per play to Indie rights holders as it does to Major labels. Majors are shareholders in Spotify and their deals are confidential. That matters to me, but doesn’t seem to matter to others.
Therefore, I can’t disprove the original Atlantic article, but the fact that information from three indie artists and Rolling Stone provide much higher royalty situations at least demonstrates that the Atlantic article greatly oversimplified Spotify’s royalty agreements. Also, it is important to mention that a 2013 New York Times article said the following about Spotify’s rates, further explaining how complicated the company’s payment methods are:
Spotify declined to comment on its rates, but according to a number of music executives who have negotiated with the company, it generally pays 0.5 to 0.7 cent a stream (or $5,000 to $7,000 per million plays) for its paid tier, and as much as 90 percent less for its free tier.
is spotify bad for artists?
Keating says she made over $45,000 dollars on iTunes from October 2011 to March 2012, the same time period when she made less than $300 on Spotify. Does this mean artists shouldn’t use the service? Not necessarily. Keating also explains:
I think Spotify is awesome as a listening platform. In my opinion artists should be view it as a discovery service, rather than a source of income. […] I wish Spotify would do more to facilitate the connection between listeners and artists — i.e show that the artist is playing nearby, or add links to buy music. It’s early days, so maybe this will happen eventually. [sic]
I know Spotify currently provides concert notifications because I can see them on my own account. There are other arguments to why Spotify is good for artists as well. For example, it could decrease the amount of piracy because people can stream as much music as they want on their computer for free, although there are ads. Also, it can lead people to listen to more obscure tracks that they otherwise wouldn’t download. I know this from my personal experience. Before I used Spotify, I would rarely buy music from iTunes, opting instead for using Pandora. When I did buy music from iTunes, I usually only purchased my favorite tracks from my favorite artists. With Spotify, I listen to many of my favorite artists’ less popular songs that I would not have purchased on iTunes and likely wouldn’t have shown up on Pandora. In general, I listen to much more music now that I have Spotify than when I used Pandora and iTunes. People being exposed to a greater amount and variety of music means that they are probably more likely to attend live shows.
Rolling Stone explains how iTunes works in this simple image:
The data is based on if an artist receives 16% of sales. Rolling Stone says that artists generally get 12-20% of sales, depending on their popularity. It is also important to note that an artist would get $0.89 if they were not on a label. iTunes does not only use $1.29 downloads, though. The aforementioned New York Times article says that “[o]n a 99-cent download, a typical artist may earn 7 to 10 cents after deductions for the retailer, the record company and the songwriter, music executives say.” However, that download is not specified to be from iTunes.
Rolling Stone explains how Pandora pays royalties:
The rates go up every year, but the broad formula is that big ‘pure play’ companies, such as Pandora and Slacker, pay either 25 percent of their total revenue per year, or a little more than $.001 per song — whichever is greater. These payments go to a music-business collection agency known as SoundExchange, which then pays 50 percent of it to the copyright owner (usually a record label like Warner or Sony), 45 percent to the artist and 5 percent to non-featured performers. Smaller Internet radio companies pay slightly lower rates.
They also provide a graphic to illustrate this concept.
If you want to learn more about how artists make money in today’s complicated music industry, I recommend checking out David Harrell’s blog and money.futureofmusic.org. The latter site provides very in-depth information on how musicians make money.
Update: Since I wrote this post well over a year ago, there have been many more interesting articles written on this subject. Also, many celebrity musicians have weighed in on whether Spotify and other streaming services are good for the industry. Here are a few of the most notable celebrity opinions about Spotify, Pandora, etc.:
- Taylor Swift pulled her entire catalog from Spotify. Her label claims that she earned less than $500,000 for US streams from the service in the 12 months prior to her music’s removal, less than she would make by selling 50,000 albums. Spotify says that she was paid $2 million for worldwide streams and would have been able to make $6 million a year if she stayed with the service.
- Bette Midler made an anti-streaming tweet that got a lot of attention. However, her royalties do not seem typical; if you use the Pandora royalty rates from the Rolling Stone article, Midler should have made around $1,880. A Pandora spokesperson said that the company paid over $6,400 for Midler’s streams (I assume the spokesperson is referring to the total payment before it was divided between Midler and the label). I don’t know why Midler reports that her royalties were so low. Maybe she is in a bad situation with her label.
- Comedian Joe Mande criticized Spotify’s low royalties on Twitter.
- Nigel Godrich and Thom Yorke of Atoms for Peace made a series of tweets explaining why they’re pulling music off of Spotify. In an interview, Yorke called Spotify the “last desperate fart of a dying corpse.” Yorke’s other band, Radiohead, self-released their 2007 album online and let fans pay any price for it.
- Laura Sheeran, Ed Sheeran’s cousin, removed her music from Spotify after she made only £10.84 (about $16) for 40,000 streams.
- Bono defended Spotify by saying, “I see streaming services as quite exciting ways to get to people. In the end, that’s what we want for U2 songs.”
- Ed Sheeran said he supports streaming services because they give exposure to his work, which makes it more likely that people will go to his shows.
- David Lowery of the band Cracker says that he was paid only $16.89 for over a million streams on Pandora of the song “Low,” which he owns 40% of. Using the Rolling Stone rates, he would have been paid a little over $200, so either Rolling Stone‘s or Lowery’s rates are inaccurate.
- Aloe Blacc, who co-wrote and sang Avicii’s hit song “Wake Me Up,” wrote a piece in Wired calling for streaming services to “pay songwriters fairly.” He says that he was paid less than $4,000 by Pandora for co-writing the song, which was streamed over 168 million times in America. However, Pandora says it paid $250,000 to rights holders for “Wake Me Up,” so Blacc’s low royalties must be due to the way the money is split between the rights holders.
- Jay-Z will likely acquire Aspiro, which owns both WiMP, a Scandinavian streaming service, and Tidal, the US and UK version of WiMP. Jay-Z’s company will pay $56 million if the deal goes through.
more interesting articles on streaming services
- Streaming is credited with dramatically reducing the amount of music piracy in Norway. An International Federation of the Phonographic Industry (IFPI) study showed that in 2009, 80% of Norwegians under 30 downloaded music illegally; in 2014, the rate had decreased to 4%. In the first half of 2013, total music sales in Norway increased by 17%, thanks to streaming.
- Spotify now has a website called Spotify Artists, which explains the company’s royalty policy in detail. Spotify says that, on average, artists earn around $0.006 to $0.0084 per stream. (These rates mean that Laura Sheeran should have made around $240-$336 for 40,000 streams, instead of merely $16.) However, the company stresses that it does not pay a fixed royalty for every stream a song gets. The image below shows Spotify’s formula for paying out royalties. Since the label or publisher is paid royalties from Spotify and it then distributes them to the artist, the amount of money an artist makes from streaming varies depending on the artist’s contract.
- Time calculated the Spotify royalties for the most popular songs of 2014.
- Cuepoint, a music blog, published an article with suggestions on how to improve Spotify’s royalty system. The author suggests that profits from users with paid subscriptions should be divided between only the artists that those users listened to. For example, if a user with a paid subscription listens to an obscure death metal band one time and then never uses the service again, that band should get all of the money from that user, instead of it being divided among all of the artists on Spotify, including ones that the user never played. Another blogger, Brendan Moore, made a post explaining what the new payout to artists would be from his subscription to Rdio, a streaming service similar to Spotify, if the company adopted the proposed royalty model.
If you’re interested in this subject and have a lot of time on your hands, you can read some of The Guardian‘s ten recommended articles about Spotify. If you really have a lot of time on your hands, you can read a 25-page essay by Aram Sinnreich, an assistant professor at Rutgers University, called “Slicing the Pie: The Search for an Equitable Recorded Music Economy.”
If you liked this post, you may want to check out my post on how movie theaters make money and if they should change their pricing system.