Sharky Laguana and “Fair” Spotify Royalties

Over at medium.com, someone who goes by the name Sharky Laguana posted an article called How To Make Streaming Royalties Fair(er). It’s an interesting take on the whole Spotify royalty system. It’s also completely misguided. In this post, I’ll explain why.

For those who don’t know (which is probably all of you), his post is a continuation of some comments he made on a Hypebot article by Spotify’s Daniel Ek. I am the one who was debating him in those comments. I was actually thinking about posting a story about this sooner, because I find it kind of interesting, but figured that an entire post about someone else’s comments was probably not interesting to anyone else. But his article has gotten widespread attention from others – including Trichordist, in their ongoing war to present Spotify as The Most Horrible Thing Ever – and a response actually seems justified.

Laguana’s logic may seem sound at first blush, but quickly unravels the more you think about it. Here is the gist of his argument:

Let’s say I am a huge fan of death metal*. And nothing pumps me up more than listening to my favorite death metal band Butchers Of The Final Frontier. So I sign up for Spotify in order to listen to their track “Mung Party”. I listen to the track once, and then I decide Spotify isn’t for me. OK, So who got the benefit of the $10 I paid in subscription fees? […]

That money will largely wind up in the pockets of major pop artists like Calvin Harris, Meghan Trainor, Maroon 5, and Avicii. That’s right: essentially all of the revenue that was solely generated by a small death metal band will be divvied up among a bunch of major dance-pop artists.

His basic complaint is that all of the Spotify subscription revenue gets put into a giant “pool,” and distributed equally among all of the streams on Spotify. That is: people sign up for the service, and the service providers divvy up the profits according to how that service is actually used.

That probably seems fair to most people. Even Laguana admits as much: “It sounds perfectly fair and reasonable: if an artist wants to make more money all they need to do is get more plays.” But Laguana is against it. Instead, he suggests divvying up the money on a per-subscriber basis. When it comes right down to it, his solution is this: the less artists are listened to, the more they should get paid.

Faulty Assumptions

In order to claim that Spotfy’s system is unfair – and, hence, that his solution should be adopted – Laguana makes some fundamental mistakes.

• He claims that his subscription money “will largely wind up in the pockets of major pop artists,” but this is not true. His subscription money raises the per-stream rates for every artist on Spotify. Just as the subscription money from people who listen to major pop artists raises the per-stream royalty rates for “Mung Party.” He may not like that pop artists get more streams, but that’s basically saying “I don’t like pop artists.” Fair enough for him, but not unfair on Spotify’s end.
• He assumes people sign up just to Spotify only to listen to one band. This is a completely assinine assumption. Nobody (or almost nobody) will sign up to Spotify to listen only to “Mung Party.” (They would simply buy the single, and save $8.99 that month.) The people who sign up for Spotify do so because Spotify has a deep catalog. If a particular band or song isn’t on Spotify, it won’t keep most people from signing up, and it won’t cause people who did sign up to cancel their subscription. In reality, they’ll still be on Spotify; they’ll just listen to someone else. (This is one reason why I think Taylor Swift’s decision is short-sighted.)
• He assumes that “music genres that have dedicated but small fanbases” have lower numbers of plays per subscription. I have no idea why he would believe this; in fact, it’s much more likely that this type of music would have more listens per subscription, with a wider variety of artists. In which case those artists would earn less than they are now. (I’ll go into this shortly.)
• Later in the article, he claims money from inactive (but paying) subscribers “should be divided among all artists proportionate to their cumulative subscriber share.” But he never actually says what a “cumulative subscriber share” is supposed to be. It is somehow different than “artists who simply have listeners more likely to listen to the same tracks repeatedly.” Except that in the “Mung Party” example he brought up, Butchers Of The Final Frontier is exactly an artist whose subscriber “listens to the same track repeatedly.” By his own standards, Butchers Of The Final Frontier would have no “cumulative subscriber share” whatsoever.
• He claims the only losers would be artists “who do not have passionate fans, have only released a single or two, or who mainly get played in passive listening enviroments in combination with large numbers of other artists.” In fact, this perfectly describes artists who are unknown indie artists – they gain exposure by being played with other artists who are (presently) more popular. In any case, if they’re only played “in combination with large numbers of other artists” and don’t eventually “have passionate fans,” they won’t get many streams, and won’t be getting large payouts under the current Spotify system. They wouldn’t be “losers,” because they’re not “winning” now.
• He makes elitist assumptions about “passive listening.” Simply put, there is no way for Spotify (or anyone else) to tell if someone is listening to a song “in a passive listening environment,” or if they are an active listener who simply listens to more music. In addition, there’s absolutely no reason whatsoever to think that “passive listening” is less valuable to listeners than “active listening.” Say I passively listen to “Music for Airpoirts” in the background while writing code, but actively listen to “You’re Living All Over Me” if I want to rock out. Why should Brian Eno be less worthy of royalty payments than Dinosaur Jr.?

The End Results

If Spotify were to adopt Laguana’s system, the end result would not be that indie, “niche,” or underground artists would be paid more. In fact, they would almost certainly be paid less. Much less.

To see why, let’s see an example of what happens with two types of listeners. Now, obviously, this example is completely artificial; it also makes certain assumptions, and uses back-of-the-envelope calculations. Still, I think it’s a lot closer to reality than anything Laguana presents.

Our first type of listener is the casual listener. He is just your average Joe, who is not a particularly big music fan, but listens to enough music to pay for Spotify. He streams fewer songs overall, and when he does, he tends to listen to the same artists, all of whom are in the Top 10. In our example, our casual listener streams 800 songs, from 10 different artists, in one month.

Our second type of listener is an indie music fan. She considers herself a music lover, and seeks out different artists to listen to. She streams more songs overall, and when she does, she listens to a wider variety of artists. In our example, our music fan streams 2000 songs, from 40 different artists, in one month. For the sake of argument, we’ll assume that none of these 40 artists are from the Top 10.

Each one pays the same subscription cost per month, which we’ll round up (by a penny) to $10.00. Of this, 70% goes to the rights holders, so they get $7.00 from each listener.

The way Spotify royalties are distributed now, both the subscription money and the streams are pooled. This means that their combined $14.00 (to rights holders) is divided evenly among their combined 2800 streams. This works out to a rate of $0.005 per stream. (Depending upon who you talk to, this is a pretty accurate Spotify per-stream rate.)

Here’s how those payments are distributed now:

• Casual listener
  10 artists: 80 streams ea. * $0.005/stream = $0.40 per artist
• Indie music fan
  40 artists: 50 streams ea. * $0.005/stream = $0.25 per artist

Now, obviously this isn’t very much, and it does show that listeners with more streams result in lower overall payouts. Still, it’s pretty fair; the per-stream payout is the same, whether you’re a Top 10 artist or an indie artist.

The picture changes drastically under Laguna’s system, where per-stream payouts are calculated per subscription:

• Casual listener
  800 streams: $7.00 / 800 = $0.00875/stream
  10 artists: 80 streams ea. * $0.00875/stream = $0.70 per artist
• Indie music fan
  2000 streams: $7.00 / 2000 = $0.0035/stream
  40 artists: 50 streams ea. * $0.0035/stream = $0.175 per artist

Under Laguana’s system, the gap between payouts is vastly widened. The Top 10 artists make roughly 43% more than they do now, while the indie artists make 30% less. The fact that Trichordist supports this scheme is especially surprising, given their (supposedly) pro-indie bent.

Now, again, this example is artificial, and you can disagree with the assumptions. For example, you may think that the “casual listener” actually has more spins, and the “indie music fan” less; or you may think that fans of niche music actually listen to fewer artists than fans of pop music.

But I don’t think so. I believe that the underlying assumptions (if not the actual numbers) are sound. They certainly make a lot more sense than the unrealistic edge cases that Laguana presents.

But no matter how you slice it, the overall result is the same. Under Laguana’s system, the artists that are played by subscribers who listen to more music – no matter what that music is – are paid significantly less than the artists played by subscribers who listen to less music. You’re doing nothing other than punishing artists for having enthusiastic fans.

And I can think of nothing less “fair” than that.

Are PRO’s Unfair?

There’s one thing that I brought up in the Hypebot comments – that Laguana, for whatever reason (likely boredom), did not respond to. And that is that Spotify’s royalty system works exactly the same as the royalty system used by PRO’s (such as ASCAP or BMI).

…Well, it’s not always exactly the same. ASCAP, for instance, does not (and cannot) collect “per-listen” data. Instead, they use “sampling” of area radio stations, at different times of day, to calculate how many “spins” a song gets, and how many listeners are reached through each “spin.” They pool their collected royalties, then pay out songwriter royalties according to those calculations – whether they’re collected from terrestrial radio, bars, restaurants, live venues, or what have you. I’m not exactly criticizing ASCAP for this; they simply don’t have the ability to get the sort of granular information that you can get from online streaming.

So, you cannot claim that Spotify’s royalty system is unfair, without also claiming that the PRO’s royalty system is unfair. The problem with the former is exactly the problem with the latter: royalties – no matter who pays them – are doled out solely by what radio stations actually play, and not (for instance) by how much advertising money an individual spin brings in, or how many people a specific song brings into a bar, or which song a performer actually covers.

The main problem I have with this is that listeners generally don’t choose what songs are played on the radio. (It is a market that is almost entirely monopolized by the major labels.) But even that issue doesn’t apply to Spotify’s subscription service. The entire royalty system is determined by what the users choose to stream.

No matter what Laguana thinks, I just don’t see how that could possibly be unfair.