Spotify Reveals the Math Behind Its Music Royalties

Spotify Reveals the Math Behind Its Music Royalties

Streaming Service Pays Less Than a Penny for Each Use

SVEN GRUNDBERG

Dec. 3, 2013 7:27 p.m. ET

Ever wonder how much an artist gets every time you click their song on services like Spotify? The Swedish streaming-music provider is looking to provide some answers amid continued debate over whether artists and music rights holders get a fair shake from their business model.Spotify Ltd. on Tuesday disclosed, among other things, that each time a user listens to a song, rights holders are paid between 0.6 cent and 0.84 cent. Over the course of 2013, the company said, it will have paid $500 million in royalties, representing half of the $1 billion Spotify sent to rights holders since setting up shop in 2008.

The stats were unveiled as part of a new Spotify Artists Web page, a site where rights holders can access analytics tools to track their performance on the streaming-music platform.

Spotify has been a lead player in the growth of streaming music, with revenue more than doubling in 2012 to $590 million and its user base growing to more than 24 million people, at least six million of whom are paying clients.

As the music-streaming industry grows, concern over compensation for the music makers has expanded.

This was a hot issue over the summer, when artists including Thom Yorke of Radiohead called for a boycott of the service, alleging unfair payment practices. Some of Mr. Yorke’s music was pulled, although Radiohead music remained.

Some big names, including Led Zeppelin, have steered from signing on with Spotify, but a huge portion of the industry has signed deals. The service has more than 20 million songs in its catalog, and can be accessed in 32 countries.

Spotify co-founder Daniel Ek, in an interview this summer, said the complaints from artists “saddened” him, but said the company is trying to usher in a bit of a revolution. The move from physical music to digital, he said, “is the single-biggest shift in the industry since the invention of the recording. We’re selling access, not ownership.”Mr. Ek went on to say, “The focus of the artist ought to be how to maximize the number of streams, because that, in turn, will be better long-term…but that’s hard for people to understand.” He said “all they see is millions of streams and they see, you know, not millions of dollars in the end, but thousands of dollars, and they think that a million streams is comparable to a million downloads, which it obviously isn’t.”

Last year, the Brooklyn band Grizzly Bear complained on Twitter TWTR +1.45% that they received only $10 for 10,000 plays of their tracks. The math Spotify published suggests the total payout for a track over 10,000 plays is actually between $60 and $84.

Spotify’s new data suggest that big hits can make money. The company says, for instance, an unnamed “global hit” album generated $425,000 in revenue from Spotify during July, while a Top 10 album generated $145,000.

Spotify pointed to an unnamed “global star” to which it paid $3 million in individual royalties over the past year, a sum it expects to double in 2014. It added that this particular artist wasn’t its most played artist and that other stars were paid more than $3 million in 2013.

The streaming service can be used free of charge by listeners willing to put up with ads or a limited amount of playing time. For about $10 per month, subscribers can stream unlimited music on an array of devices, including smartphones.

When the whole group of paid and unpaid clients is tallied up, Spotify says it generates an average of $41 per user, higher than the $25 that Spotify says the average U.S. adult pays for music in a given year.

As Spotify has grown, it has taken on an increasing amount of red ink. Last year, the company lost nearly $80 million. About 70% of the money taken in, Spotify says, goes right out the back door in the form of a payment to rights holders.

This means Spotify is a bit limited in how much more it can ratchet up compensation if it wants to stay afloat. The company attracted $250 million in new funding last month, in a round valuing Spotify above $4 billion. If Spotify hopes to take itself public in the future, public investors may have less appetite for the big losses that currently accompany the business model.

Spotify said its service offers better returns to rights holders compared with alternative digital music services. One million listens on Spotify generates between $6,000 and $8,400, which—according to Spotify—compares to about $3,000 on video streaming such as Google Inc. GOOG -0.12% ‘s YouTube and between $1,300 and $1,500 on radio streaming services like that offered by Pandora Media Inc. P +0.07%

Spotify remains dwarfed by YouTube, which has some one billion users, and Apple Inc.AAPL +2.74% ‘s iTunes with its almost 600 million users.

“When Spotify grows to even a fraction of the size of these services, for example to 140 million total users and 40 million paying subscribers, we will increase our total payouts by five times,” it said.

Pandora couldn’t be immediately reached for comment on Spotify’s royalty rates.

A spokeswoman for YouTube said: “Because of the complexity of the algorithm that determines what ad runs on what video, it’s impossible to directly equate a YouTube view with a certain amount of money.”