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Spotify, Rdio, And MOG On Artist Payments: Don't Blame Us

In the beginning, music industry watchers hailed subscription streaming services such as Spotify, MOG, Rdio, and Rhapsody as saviors of the industry, an alternative for listeners and labels to the tyranny of the 99-cent iTunes download.

But artists weren't singing the same happy song.  

There was the cautionary (and inaccurate) tale of Lady Gaga earning a mere $167 from a million streams of her hit single "Poker Face." Then came scores of complaints and horror stories related to shockingly minuscule streaming artist payouts, as low as $0.004 per play. Last week, Wired reported that more than 200 labels had withdrawn from Spotify over "poor revenues."

Without question, Spotify and the others have given labels a scapegoat. But behind the finger pointing is a pile of monthly subscription revenues that the streaming companies such as Spotify, Rdio, and MOG share with those labels. How it's subsequently distributed to artists, "I have no idea," says MOG founder and CEO David Hyman. "It's like a black hole. It's based on individual contracts the labels have with their artists. I have no control over it."

Drew Larner, CEO of Rdio, argues the same. "I don't pay the artists directly. I have deals with all the major labels and all the major indies, and they have deals with their artists," Larner told Fast Company recently. "I have no insight into what their artists are paid because every artist deal is different. One artist may have a huge advance, while one may get different royalties."

Spotify, too, has said calculating revenue per stream "totally misses the point." Spotify is "not a unit-based business," says a spokesperson. Rather, as the company told Wired, echoing a earlier statement made to us, value ought to be determined by the following metrics: "1) how many people are being monetized by Spotify; 2) who these people are (usually young people previously on pirate services which generate nothing for artists and rightsholders); and 3) how much revenue per user Spotify generates for rightsholders. Artists can—and do—receive very substantial revenues from Spotify, and as Spotify grows, these revenue streams will naturally continue to grow."

MOG's David Hyman broke down the math for me during a recent trip to the company's headquarters. Standing at a whiteboard, Hyman jotted down numbers and sketched pie charts, passionately arguing why the business model makes sense, and why it's potentially more lucrative than iTunes. Here's how Hyman explains the value of a $10 premium subscriber, using ballpark figures: "Out of every $10, we pay a percentage to the label. I won't give you the exact number, but let's say the labels got $6. They split that $6 amongst themselves based on frequency of plays. In a given month, we tell them, 'Hey Warner [Music Group], you were 30% of plays. You will get 30% of that $6 now.' So let's say we have 1 million subscribers. So Warner would get 30% of that $6 million that month. All the labels split from that pie."

Beyond that, Hyman repeats, he has "no idea" and "no control."

Of course, this all assumes the value of a paying premium subscriber instead than a freemium user—it will take time for conversion rates to increase, although promotions via Facebook have helped draw attention to subscription streaming services. Spotify reportedly already has 250,000 paying subscribers in the U.S., and more than 2 million globally. The company boasts that it's "now the second single largest source of digital music revenue for labels in Europe," and has driven "more than $150 million of revenue to rights holders (i.e. whoever owns the music, be it artists, publishers or labels) since our launch three years ago."

As for any criticism from indie labels and artists, Hyman says he's unsure why they might be upset. "The indie labels get the same deals as major labels," he says. "How they negotiate their deals with their artists, I have no idea. I don't know why indies would be different than a major. Maybe because nobody is listening to their music?"

And even on iTunes, he says, the average consumer pays roughly $40 per year. "That's like $3 and something-cents a month," Hyman explains. "This is the average iTunes consumer: $3 and change. Out over every $10—again, this is just a ballpark, I'm not giving the exact number—but let's say we pay $6 [per month] to the labels."

"So, which one is going to make them more money?"

[Image: Flickr user sirsneak]

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