How Spotify's Ad-Supported Model and Unlimited Streaming Undermines Royalty Payments
Spotify is the largest music streaming platform according to Counterpoint Research with over 394 million subscriptions in 2020.
While the platform is immensely popular, it's been known to pay out very low royalties to artists, sometimes a tenth of a cent for every stream of a song. For popular artists with billions of streams, that can mean substantial income, but for many others it can mean pennies in annual income that some accuse of undermining the music industry as a whole.
But because Spotify has an immense catalog of music and no limits to the number of songs any user can play, its royalty payments can be watered down into tenths of pennies. Netflix has around 15,000 titles at a time, whereas Spotify hosts music from over 1.2 million artists.
The company's approximated licensing costs—the cost of revenue minus marketing, sales, and technical costs—per artist was around $3,112 in 2019. For Netflix and their limited catalog, it was approximately $488,549 per title based on 15,000 titles.
Popularity of content is anything but evenly distributed, and a handful of songs can represent a significantly larger number of streams than most songs. Olivia Rodrigo’s Good 4 U was listed as one of Spotify’s top hits of the summer of 2021 with 600 million streams globally between May and August. Ed Sheeran’s Shape of You may hold the top spot with over 1.3 billion streams in total. But that still works out to less than one-tenth of one percent of the amount streamed in a year like 2019.
Those payments can be divided different ways based on the agreements producers of music or video have with the artists. Spotify also has different agreements for different artists that can vary the rate per stream, and certain shows and songs can be paid far above or below those averages, but the average provides a approximate scale of what is being paid out.
While Netflix also has unlimited streaming, their limited catalog means that even if every title was played millions of times, their spending could only be spread so thin.
If Spotify limited the amount of streams any user could have, it would limit the total streaming hours that their licensing payments were split across. If they charged a higher rate for an unlimited streaming plan, it would provide more capital for licensing payments.
Additionally, Spotify provides a free ad-supported plan that represents 55 percent of all users, yet that plan only provides 10 percent of revenue. Spotify filings don't provide a breakdown as to how many streaming hours are represented by ad-supported users, but assuming that it is the same portion as that of users, 55 percent, then the ad-supported model would provide 1/9th the amount of payments per stream as the subscriber model does. Without the ad-supported model, payment rates would be on the order of double their current amounts.
In 2014, Taylor Swift removed her entire catalog from Spotify in protest against the services ad-funded tier, which she described as devaluing the work of artists, but she has since brought certain albums back on to the platform.
Stock Payments to Music Labels
While many artists may not get much from licensing, the major record labels like Warner Music, Universal, and Sony, received Spotify stock in exchange for their licensing agreements, sometimes worth hundreds of millions of dollars. While Spotify the company has struggled to turn a profit in any year of its existence, its stock has thrived since it went public in 2018. After which, some of those record labels have since divested their holdings of the company, including Warner Music which sold 100 percent of their stock in 2018 for $504 million.