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Warner Music signs up to SoundCloud’s user-centric initiative

By | Published on Thursday 21 July 2022


Warner Music is joining SoundCloud’s user-centric licensing party. The two companies will today formally announce that the major is signing up to the streaming platform’s Fan-Powered Royalties initiative.

Most streaming services operate a revenue share based on consumption share business model, which is to say services commit to share their revenues each month with their licensing partners in the music industry, ie record labels, music distributors, music publishers and collecting societies.

To do that, services first need to allocate the money they’ve made to individual tracks that have been streamed, which is the ‘consumption share’ bit of the deal. That’s done by pooling all the data and money linked to any one subscription type in any one market, and then doing some maths.

So if one track accounted for 0.1% of all the streams delivered to premium subscribers in the UK in a particular month, 0.1% of all the money made selling premium subscriptions in the UK that month would be allocated to that track. That allocation is then shared with whichever label or distributor delivered the recording, and whichever publisher or society represents the song.

That approach has its critics. Because some streaming service subscribers will be high-level users – streaming lots of music each month – and others will be low-level users – streaming less music each month. Under the current system, some of the subscription money paid into the system by the latter group of subscribers ends up with the labels, distributors, publishers and societies – and ultimately artists and songwriters – behind the music listened to by the former group.

With the user-centric approach, there would be no pooling of data and money, and instead each individual subscriber’s monthly payment would be allocated to the tracks that subscriber listened to. It means that, once averaged out, the per-stream pay out would be a lot higher with low-level streamers, and a lot lower with high-level streamers.

Over the years it has been argued that the current system favours more mainstream music and superstar artists, and that switching to user-centric would see some of the money currently going to the biggest tracks and acts being redistributed to more niche music and artists.

Although there hasn’t to date been any consensus that this would definitely be the outcome, with some arguing that their number crunching suggests some independent labels and artists would also lose out under a user-centric system. Plus, the user-centric approach is slightly more complicated.

Initially it was Deezer who was championing user-centric, trying to persuade the labels to agree to a pilot, so that its revenues would be allocated to tracks on a user-centric basis in France and/or Germany. Although many labels are officially agnostic on the proposal that the industry should shift to user-centric, to date Deezer hasn’t managed to get such a pilot underway.

In the end, it was SoundCloud which became the user-centric pioneer. That was possible because SoundCloud is different to most other streaming services, in that – although it gets music from and has deals with labels and distributors – a decent portion of its catalogue actually comes from independent artists that directly upload their tracks onto the platform.

It could therefore switch those independent artists over to a user-centric system without getting the labels and distributors on board. And that’s what it did last year.

So, basically, SoundCloud currently operates two systems – one for music provided by labels and distributors, which works like all the other services, and one for independent artists, which uses a user-centric system.

By concurrently running two systems, an extra stage is inserted into the royalty calculation process, in which monies are initially split between labels/distributors and independent artists, again based on consumption share. Track allocation within the two groups is then done differently, so with a pooled consumption approach for the former group, and user-centric for the latter.

SoundCloud calls its user-centric system Fan Powered Royalties. And the industry has been watching the Fan Powered Royalties initiative closely to see how it works and what impact it has.

SoundCloud insists that it is having a positive effect for the majority of its independent creators. And music consultancy MIDIA recently published a report based on SoundCloud data that reckoned 56% of the independent creators on the platform are better off under the user-centric system, and with artists who have between 100 and 100,000 fans, 63% are better off.

MIDIA also said that, under the SoundCloud system, an artist’s super-fans become key. So, of the artists who were better off under the Fan Powered Royalties scheme, while on average super-fans account for 1.9% of any one artist’s audience, they contribute on average 42% of that artist’s royalties. This also arguably strengthens the relationship between artist and super-fan, which is also important for capitalising on all the other opportunities in the direct-to-fan space.

However, while all that is very interesting, because user-centric at SoundCloud only currently applies to independent artists, we are yet to get a full picture of what an industry wide switch to that approach would look like. Which makes Warner Music’s decision to take part in the Fan Powered Royalties initiative an important development.

Confirming its decision to join SoundCloud’s user-centric party, the major’s EVP Of Business Development Oana Ruxandra says: “The evolution of the music industry brings new ways to create, consume and monetise. As the ecosystem expands, WMG is focused on advancing and experimenting with new economic models to ensure the opportunities for our artists and their communities are maximised. SoundCloud has been an amazing partner in connecting artists and fans, deepening our relationship will allow us both to proactively build for the future”.

SoundCloud getting a major on board for this initiative is quite a coup. It seems likely that this agreement was achieved, in part at least, by former Warner Music exec and now SoundCloud President Eliah Seton working hard to persuade his former colleagues to get on board.

He says of the development: “Today’s deal is a major milestone because, under Fan Powered Royalties, more artists get paid more money. But even more importantly, Fan-Powered paves the way for artists to create even more opportunities to monetise their art beyond streaming and create more value, driven by engagement with their fans”.

“Warner Music Group is known for developing some of today’s biggest superstars and helping them build long-term careers by investing in technologies and models which grow and support their fan communities”, he goes on. “This makes them an ideal partner for SoundCloud and we’re excited to bring our game-changing fan-driven product to their incredible roster of artists”.

It remains to be seen quite how exactly Warner’s involvement in Fan Powered Royalties works – and whether it will persuade it and others that a user-centric approach on other services is desirable. But, needless to say, supporters of that user-centric approach will be hoping that it does.

This story is discussed on this edition of our Setlist podcast.