August 5

Are Fan-Powered Royalties The Future?

Finance, Musicians, Web3

Are fan-powered royalties for music streams the future? More than 10 years after Spotify entered the mainstream, the issue of fair pay rages on. We've seen improvements both major and minor along the way, but recent developments may be just we need in order to see a bigger shift.

Warner Music Group has reportedly implemented what many are calling "fan-powered royalties" for its roster. This makes them the first major label and first major company after SoundCloud to start using the payment method. The catch?

Well, those payments only apply to what artists earn on SoundCloud. Because it's technically an agreement between WMG and SoundCloud. But it's still a big step forward. Here's why.

What Are Fan-Powered Royalties?

To understand why fan-powered royalties could be a big deal, you need a basic understanding of how people get paid for their music on platforms like Spotify in the first place. The whole ordeal can get pretty convoluted, but here are a few key fundamentals:

  • The artist isn't always the one getting paid; it's whoever owns the master recording, which is often a label (either partially or entirely). But for this article, let's just assume it's the artist for now.
  • Artists get paid per stream, but that number isn't consistent from stream to stream — it also depends on what type of user is listening (like where they live, if they're a paying user or a free user etc.).
  • Every platform pays differently and there is no single accurate amount "per stream" that an artist gets paid.
  • In general, payouts for artists across the board increase when there are more paying subscribers.

Alright, so those are some basic factors that don't change even with a shift  to fan-powered royalties. But the thing that does change is how much more a stream matters to a smaller artist than a major one. 

Here, let SoundCloud explain it: 

"Under the old model, money from your dedicated fans goes into a giant pool that's paid out to artists based on their share of total streams. That model mostly benefits mega stars.

Under fan-powered royalties, you get paid based on your fans' actual listening habits. The more of their time your dedicated fans listen to your music, the more you get paid. This model benefits independent artists."

Let's explore a little deeper.

How Does The Current Pro-Rata Model Benefit Major Stars Over Smaller Acts?

Basically, major artists with a lot of visibility are more likely to get more streams and support from platforms. They'll often get more passive listeners as well. It's not unreasonable to see them rack up millions of streams on new songs simply from being placed in algorithms and editorial playlists. 

Meanwhile, an indie artist who is only getting streams because they're out there hustling their butts off (and probably running ads) has to fight for every new listener. They are basically getting paid against a curve set by acts with disproportionate growth.

Let's say a smaller artist consistently gets 50,000 streams per month from a small but dedicated group of fans. Every time a major artist racks up a billion streams but the overall revenue pool doesn't grow much, the smaller artist's 50,000 streams are suddenly worth less, even if they're coming from the same core fans.

That's because even if a paying Spotify user only listens to smaller acts, their money is still probably going to Drake, Beyoncé, Ed Sheeran etc. more than any artists they listen to.

And from a fan's perspective, they may take a lot of pride in listening to the smaller artists they listen to. But most of their money is still going to major artists they may only occasionally — or never — stream.

So What Does Warner Introducing Fan-Powered Royalties Mean?

This is kind of an interesting one. Warner Music Group is a major label that owns a bunch of smaller labels. Their agreements with artists certainly vary from artist to artist. But it's pretty likely that Warner makes at least some, if not the vast majority, of the money coming to their artists from platforms like Spotify. 

So shifting how they personally pay their artists may not make as big of a difference as if the entire streaming ecosystem shifted. Because Warner has artists like Ed Sheeran as well as developmental acts. And Warner is still getting paid the same amount from streaming services.

But it is, at least on the surface, an important moralistic decision. It means they recognize their smaller acts are still fighting an uphill battle on streaming and deserve to be paid more fairly.

The fact that it only applies to what artists earn from SoundCloud is, of course, less exciting than if they were to shift to this model for all the revenue they bring in from streaming platforms. Major labels rarely innovate in this field (unless you consider 360 deals innovation). And in this case, WMG agreeing to SoundCloud's payment model for their artists is kind of minimal effort for a major step.

But progress is progress.

Ok But Do Fan-Powered Royalties Definitely Mean More Money For Smaller Artists?

We have limited data on whether fan-powered royalties are doing what many in the industry hoped they would do. And it's also currently related only to SoundCloud, which is a bit of an outlier from typical streaming platforms.

But so far, the data is promising.

Research from MIDiA shows that 56% of artists earned more under fan-powered royalties. More importantly, the artists making more the most did so because of "superfans," or listeners who tend to stream them more than anybody else. Oh, and the artists who earned less under fan-powered royalties were typically the largest acts on the platform with more than 100,000 followers. Which, again, lends credence to the hypothesis that the current model favors large acts and undervalues smaller ones.

Overall, SoundCloud saw a 9.2% increase in artists who earned over $1,000 in streaming payouts between April 2021 and February 2022.

Streaming royalties are weird because they can be a major source of consistent revenue for artists if you reach scale. But then there's also a point where the revenue major artists earn (or in most cases, their labels earn) is statistically significant compared to other artists — but much a smaller chunk of their revenue compared to their overall earnings from things like touring and merch.

Put simply, more listeners means way more to artists who have fewer listeners and are trying to reach scale. Which, you know, makes sense. 

Financially, the difference between 200,000 monthly listeners and 300,000 monthly listeners could be the difference between making enough money to pay your bills or having to getting a side hustle. For a major artist, the difference between 10 million monthly listeners and 15 million monthly listeners is certainly significant, but not as tangibly impactful to their ability to live off their art.

Cool So When Will We See Fan-Powered Royalties Across All Streaming Platforms?

Ah yes, there's the rub? In order for fan-powered royalties to really make a big difference, they need to be the norm over the old pro-rata model.

And we're still a ways away from that. But there's been serious progress. 

Deezer started touting this model back in 2019. Unfortunately, Deezer is a fairly small platform that didn't really have major label buy-in. Tidal has been doing a version of fan-powered royalties for a little while where 10% of their monthly subscription goes straight to the artist they listened to most. 

Both of these are progress. But both Tidal and Deezer only have a small share of listeners. SoundCloud is significant because it's one of the largest streaming platforms out there — by artists and listeners though, not by paying users. 

Having one of the three major labels buy in to SoundCloud's payment model for their artists is the biggest wave in this ocean yet. The next step will be to get the others on board and then expand it to a streaming service with more paying users. 





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