After weeks of rumors and industry reports, Spotify officially announced a significant change in the way its royalty system works on Tuesday, bringing in several new policies that the company hopes will help it combat streaming fraud as well as the sheer volume of content that now lives on the streaming platform.
“As Spotify payouts to the music industry continue to grow — over $40 billion and counting — we want to make sure that money is going to the people our platform is designed to enable: emerging and professional artists,” Spotify said. “However, as the royalty pool and catalog on Spotify have surged, three particular drains on the royalty pool have now reached a tipping point. So, we’re working in close collaboration with industry partners — artist distributors, independent labels, major labels, label distributors, and artists and their teams — to introduce new policies to (1) further deter artificial streaming, (2) better distribute small payments that aren’t reaching artists, and (3) rein in those attempting to game the system with noise.”
Most notably, stating early next year, Spotify is introducing a payment threshold in which songs must reach at least 1,000 streams before they can generate any royalties. According to Spotify data, of the 100 million songs on the platform, only about 37.5 million have more than 1,000 streams, meaning that more than 60 percent of all tracks on Spotify don’t reach the threshold. But those songs make up less than 1 percent of all streams on Spotify, reflecting the significant volume of tracks that aren’t getting many streams.
Since news leaked of the change, the policy has been understandably alarming among indie musicians worried that their already small slice of the streaming pie will further deplete. While streaming has largely saved the record industry — which flailed for years after digital downloads tanked traditional sales — many artists still can’t rely on streaming revenue, and artists have viewed adding another benchmark for them to see even minuscule earnings as adding insult to injury.
Some artists like Damon Krukowski of the indie group Damon and Naomi criticized the new policy as a measure to take the earnings from their songs and give them to the fewer larger artists instead. “This will move an estimated $40-$46 million annually from artists like Damon & Naomi to artists like Ed Sheeran,” Krukowski tweeted. “Spotify will tell you it’s not about artists you know. Why would you believe them?”
That critique is similar to issues some in the industry have with streaming services’ “pro-rata” model, which divvies up all the collective streams on a platform and awards artists on their individual percentage of the pie rather than their specific streams. Some streaming services have explored whether the model should change to a more “user-centric” model where streams are accounted directly to an artist, but it’s unclear how much of a difference that would make.
But as the industry has shifted to streaming and $11 a month (or no money for an ad-supported subscription) gets users access to more songs than they can possibly imagine, an individual stream is worth less than a traditional sale, and fewer than 1,000 streams in a year amounts to a few dollars at best. Spotify claimed that the affected songs earn about 3 cents per month on average. And with music distributors often requiring a minimum withdrawal amount — on DistroKid, for example, it’s $2 — some of those payments wouldn’t have been accessible regardless.
Individually, those small payments seem insignificant, but in aggregate Spotify said it amounts to about $40 million the company says it can instead spread out among the songs that do meet the threshold. While those higher streamed songs represent a minority of tracks on the platform, they also account for 99.5 percent of all streams on the service, Spotify said.
Along with increasing payouts for songs driving more of the revenue, Spotify is adopting the new system in an effort to disincentivize the streaming fraud strategy of uploading a high volume of tracks and taking in the small earnings from each one. Spotify said songs can go in and out of eligibility for the 1,000-stream minimum as the company will account for stream share at the end of each month.
Spotify also announced that it would start charging record labels and music distributors over “flagrant artificial streaming, instituting a penalty for each fraudulent track detected. Spotify also said it is increasing the minimum track length for “functional” music such as white noise two minutes for the tracks to be eligible for royalty payments to eliminate “the perverse incentive to cut tracks artificially short with no artistic merit, at the expense of listener experience.”
“These policies will right-size the revenue opportunity for noise uploaders,” Spotify said. “Currently, the opportunity is so large that uploaders flood streaming services with undifferentiated noise recordings, hoping to attract enough search traffic to generate royalties.”