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SoundCloud announces shift to user-centric royalty distribution for its 100,000 independent creators

By | Published on Wednesday 3 March 2021


SoundCloud yesterday gave a significant boost to the campaign that is promoting a user-centric model for streaming royalty distribution by, well, confirming recent rumours and announcing it was shifting over to a user-centric model for royalty distribution. Although only for the creators who have a direct relationship with the platform. Royalties due to the labels and distributors that have licensing deals with the company will continue to be paid under the existing model.

At its core, streaming is a revenue share based on consumption share business. So streaming services commit to share up to 70% of their monthly revenues with the music industry via their deals with record labels, music distributors, music publishers and collecting societies. Those licensing partners, of course, then share the money with artists and songwriters.

There are two stages to the royalty payment process at the services.

First, all the money that a service has made by selling subscriptions or advertising needs to be allocated to individual tracks and songs. This is done on a pro-rata basis, so if your track accounted for 1% of all streams, it is allocated 1% of all the money.

Then, secondly, the revenue share agreement kicks in. The service pays whoever controls the rights in that track a percentage share of the allocated money. A label or distributor would usually get 50-55% of the allocation, and a publisher or songwriter collecting society would get 10-15%.

The service-centric versus user-centric debate relates to the first stage of that process. Currently the services pool all the money made by any one subscription package – so, for example, all premium subscriptions in the UK – and takes data for all the streams serviced to that group of subscribers.

The pro-rata-ing then happens at that level. If your track accounted for 1% of total streams, 1% of all the pooled money is allocated to your track.

On a user-centric model, the maths is done separately for every subscriber. So you take the money paid by each user and the streams serviced to each user, and you allocate that user’s money to the tracks they specifically streamed. Under the current model low-level users of a service are basically subsidising high-level users, with some of the former group’s money being allocated to tracks streamed by the latter. That doesn’t happen with user-centric.

In recent years there have been increased calls for the streaming music business to shift to user-centric approach. Advocates of user-centric argue that the system is fairer; it benefits middle-level artists over top-level artists; it’s what most fans assume is happening to their money anyway; and it also cuts off various scams that have been employed that exploit the current model to pull money out of the system by having machines repeatedly listen to tracks uploaded by the scammers.

Deezer, of course, has been the biggest advocate of user-centric to date, even launching a consumer-facing website explaining why it’s a better system. It has been trying to persuade labels and distributors to agree to a pilot, adopting user-centric in France – and possibly Germany – allowing everyone in the industry to see exactly what impact such a shift would have.

There are, however, critics of user-centric. Although most of those critics do actually concede that the user-centric approach seems fairer at a basic level and would certainly stop some of the scams.

However, it does make an already complicated royalties system even more complicated, in that average per-play rates would not only differ from service-to-service, country-to-country and subscription-type-to-subscription-type, but also from user-to-user. So that two artists could be getting similar levels of streams on a platform, but wildly different royalties, because one artist’s fanbase is mainly low-level users and the other mainly high-level users.

That also makes auditing streaming royalties harder. And there may be other additional administrative costs with user-centric, certainly when first shifting over to the new model, but also possibly on an ongoing basis. That would arguably be more of a problem on the songs side, where the industry generally incurs more of the costs associated with processing payments.

During the recent inquiry into the economics of streaming in Parliament, independent record companies raised various concerns about the user-centric approach, including the added costs and complications.

They also pointed out that while some high-level users on the streaming services are young pop fans who are streaming mainly major label released mainstream music from pop stars twelve hours a day, other high-level users are classic full-on music fans who spend their twelve hours a day delving deep into the catalogue, seeking out new and alternative music. Therefore independent artists and labels could actually lose out with a shift to user-centric.

At the majors, opinion seems divided within the companies, possibly depending on whether a senior executive is running a division whose specific catalogue or roster is likely to be a winner or a loser. However, via the Parliamentary inquiry, each of the majors’ have basically adopted a position along the lines of “we’re agnostic on this, but here’s list of reasons why user-centric could be a problem”.

All three majors, in their recent written submissions to that inquiry, also cited the recent study in France looking at how a user-centric approach would change things. The conclusion of that study is that the impact of shifting to user-centric wouldn’t be all that significant. Yes, there would be a slight redistribution of monies from top-level artists to middle-level artists, but in financial terms, the benefit for those middle-level acts would the nominal, to the extent that it would almost be unnoticeable.

If the benefit for middle-level artists is as nominal as that report suggests, critics ask, is it worth incurring the costs and increased complications of user-centric, especially if some independent artists and labels would actually see their streaming income go down? The indies, of course, have also proposed an alternative approach called the artist growth model, which would benefit lower-level and middle-level artists in a different way.

That said, the current position of many in the music industry is that we should further test the user-centric approach, and then scrutinise the resulting data to make a more informed decision along the line. Which brings us back to SoundCloud’s big announcement.

The consensus to date has been that to test user-centric, the entire record industry would have to sign up to a pilot. No platform could be operating both a service-centric and user-centric system at the same time. But, it turns out, that assumption was incorrect.

SoundCloud is arguably unique in the audio streaming domain in that it already concurrently operates a number of different models, having one side of the business providing services for individual creators who set up their own profiles on the platform, and another side of the business that licenses music from labels and distributors, like Spotify et al.

That already requires some extra complexities behind the scenes when it comes to managing and processing royalties, and working out how to share subscription and advertising revenues with the creator community and the wider music industry.

However, with those extra complexities comes some flexibility. This means that SoundCloud can move one side of its business – that built around the independent creators on its platform – to user-centric, while keeping the other side – that built on catalogues licensed from labels and distributors – on the existing service-centric model.

That basically adds a third stage into the royalty process.

First, a SoundCloud Go subscriber’s subscription money will seemingly be split between the independent creator side of the business and the label/distributor side of the business, approximately based on what percentage of listening came from each catalogue. The monies allocated to the label/distributor side will then go into a central pot and be allocated to tracks on the current model. The monies allocated to the independent creator side will be allocated on a user-centric basis.

It means that, if a consumer had a Spotify subscription and a SoundCloud Go subscription, and only used the latter to stream music from independent creators, all their SoundCloud subscription money would allocated to independent creators, and only the independent creators whose content they consumed.

A similar system will also apply to any ad income on the recordings side. On the songs side, things aren’t quite so simple, so the big shift seemingly won’t be happening there just yet. There are extra complexities with songs because an independent creator may be posting recordings of songs owned or co-owned by other people. And if the independent creator is a member of a collecting society like PRS, technically they’re not empowered to license all the rights in even their own songs.

SoundCloud is calling the new system for paying its independent creators ‘fan-powered’ royalties. It will apply, it says, to “the nearly 100,000 independent artists monetising directly on SoundCloud through SoundCloud Premier, Repost by SoundCloud or Repost Select”, and will “level the playing field for independent artists by tying payouts to fandom”.

Given that the user-centric approach probably has most support in the artist and songwriter communities – and given that SoundCloud has been prioritising the creator services side of its business again in recent years – launching the ‘fan-powered’ royalties systems seems like a shrewd move. And for labels and distributors, it provides an actual real-world pilot scheme that can greatly inform the wider debate.

Announcing the shift yesterday, SoundCloud CEO Michael Weissman said: “Many in the industry have wanted this for years. We are excited to be the ones to bring this to market to better support independent artists. SoundCloud is uniquely positioned to offer this transformative new model due to the powerful connection between artists and fans that takes place on our platform”.

Bigging up again the differences between SoundCloud and the other major audio streaming services out there, Weissman went on: “As the only direct-to-consumer music streaming platform and next generation artist services company, the launch of fan-powered royalties represents a significant move in SoundCloud’s strategic direction to elevate, grow and create new opportunities directly with independent artists”.

Of course, by going live with ‘fan-powered’ royalties next month, SoundCloud has somewhat stolen Deezer’s thunder – given that it’s still trying to persuade labels and distributors to take part in its French pilot. Nevertheless, Deezer welcomed the announcement yesterday. Although stressed that its proposed pilot would be bigger, if it can get the whole music industry on board.

The firm’s Chief Content And Strategy Officer, Alexander Holland, said: “It’s great to see SoundCloud moving towards a user-centric model for artists who monetise directly on their platform. We think it’s a step in the right direction and we’re happy to welcome SoundCloud as a supporter of user-centric payment, a model that we’ve been spearheading since the beginning”.

“The pilot is a great first step”, he added, “but only captures independent and self uploaded artists. Deezer stands ready to launch a full [user-centric] pilot and we look forward to having SoundCloud on our side in convincing the labels to do it”.