Spotify’s New Royalty Model

Spotify is overhauling its royalty model to combat streaming fraud and establish a minimum payment threshold. The strategy involves redirecting $1 billion in payouts toward "working artists" over the next five years.

New royalty payout model

This is significant news, and its arrival has been anticipated for quite some time. MBW has verified that Spotify is gearing up for substantial alterations to its royalty payout model in Q1 2024, aiming to channel USD $1 billion in royalty payments toward ‘legitimate’ artists and rights holders over the next five years. In recent weeks, Spotify has engaged in discussions with various music rights holders, outlining the blueprint for the new royalty model.

Sources familiar with these discussions have now confirmed to MBW that, while Spotify will maintain its pro-rata royalty system (also known as ‘Streamshare’), it intends to implement three specific major changes to the existing model. As one source succinctly stated, Spotify is orchestrating these changes to address three factors currently hindering the flow of money to working artists from the royalty pool.

In summary, the three modifications include:

  1. Implementing a minimum annual stream threshold for a track to commence earning royalties on Spotify. This is anticipated to de-monetize certain tracks that previously accounted for 0.5% of the platform’s royalty pool.
  2. Imposing financial penalties on music distributors, including labels, upon the detection of fraudulent activity related to tracks they’ve uploaded to Spotify.
  3. Establishing a minimum playtime requirement for each non-music ‘noise’ track to qualify for royalty generation.

Today’s announcement follows a month after Deezer and Universal Music Group jointly introduced their experimental “artist-centric” royalty model. This model is slated to debut for UMG artists in France this month. While there are some similarities, there are also notable differences between Deezer’s “artist-centric” approach and the forthcoming changes on Spotify. For now, let’s delve into the specifics of Spotify’s planned three changes and explore their implications for the music industry.

Implementing a minimum stream threshold before a track begins earning royalties on Spotify.

Presently, every play on Spotify lasting over 30 seconds results in a royalty payment. However, this will no longer be the case come early next year. Starting in Q1 2024, according to Spotify’s new plans, each track will be required to achieve a minimum number of annual streams before it becomes eligible for royalty generation. While the precise number of streams for this threshold remains undisclosed, sources involved in recent discussions have indicated that this measure aims to “demonetize” a segment of tracks that currently earn, on average, less than five cents per month.

In approximate terms, industry insiders suggest that each play on Spotify in the US presently generates around USD $0.003 per month in recorded music royalties. To reach $0.05 per month in royalties for these specific tracks, it would be necessary for them to accumulate around 16 plays a month or roughly 200 plays a year. Spotify assures that tracks currently constituting 99.5% of Stream share will continue to monetize even after these changes, as confirmed by a reliable source.

Why is Spotify singling out a relatively small fraction of tracks on its platform that have minimal popularity and revenue? In an industry inundated with the daily upload of 100,000 tracks or more to streaming platforms, the collective payout to these tracks amounts to a significant sum. In total, the tracks Spotify is addressing here contribute to royalties that accumulate to tens of millions of dollars annually, and this figure is on the rise, shared one source with MBW. Without implementing this measure next year, Spotify estimates they would have generated approximately $40 million.

In the new scheme, the $40 million will be reinvested into Spotify’s ‘Streamshare’ royalty pool and redistributed among tracks that enjoy greater popularity.

This initiative specifically addresses royalty payouts that are being diminished by transforming them into fractional payments, often just pennies or nickels, as mentioned by a source closely involved in the discussions.

Frequently, these minuscule payments fail to reach individuals; aggregators commonly impose a minimum threshold of paid-out streaming royalties before allowing independent artists to withdraw funds. We’re referring to tracks whose royalty earnings fall below these minimum levels, resulting in their Spotify payouts remaining stagnant in bank accounts.

Establishing a minimum duration for non-music ‘noise’ tracks to qualify for royalty generation

As observed in various notable instances, creators of ‘non-music noise content’ (e.g., white noise, binaural beats, whale-song, etc.) receive the same compensation as any other music creator on Spotify. A strategy employed by some ‘non-music noise content’ uploaders to maximize earnings involves breaking down their ‘noise’ playlists into 30-second tracks. This implies that, for instance, when someone plays a white noise playlist continuously for sleep or focus, Spotify registers hours of playtime, triggering a royalty payout at every 30-second interval.

As of Q1 2024, it has been confirmed that Spotify intends to substantially extend the minimum time unit required for each ‘non-music audio content’ track before a payout is initiated. MBW has not yet been able to verify from our sources the exact duration of this minimum unit of time. However, for the sake of illustration, let’s assume it’s 4 minutes.

In this hypothetical scenario, a playlist of white noise tracks—currently 30 seconds each—would need to be taken down, split into 5-minute segments, and then re-uploaded to qualify for Spotify monetization.

Here’s the ingenious part: The same playlist, accompanying the same number of hours for sleep or focused work as before, would now generate only one-eighth of its previous earnings under Spotify’s 30-second payment model. Meaning each royalty payment would take eight times longer to register than it does currently.

Spotify recognizes that ‘noise’ is a crucial category for certain consumers—many people sleep to it, work to it, or meditate to it, shared an MBW source close to Spotify’s ongoing discussions with rights holders.

While ‘noise’ constitutes a small percentage of Spotify streams presently, according to our sources, it’s becoming an increasingly significant revenue category as the platform’s overall royalty pool expands into multiple billions of dollars annually.

Spotifys threefold strategy and its $1 billion overall initiative

As reported earlier, sources have informed MBW that Spotify is communicating to key figures in the record industry its aspiration for its new three-fold strategy to redirect $1 billion in royalties away from fraudsters, micro-transactions, and individuals exploiting Spotify’s royalty model, and instead channeling it towards ‘real working artists’ over the next five years.

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