The Way Streaming Services Pay Artists Is Broken. SoundCloud Is Trying to Fix It

This week, SoundCloud announced it's making a major change to the way artists on the platform get paid in an effort to help smaller acts make more money from their music. If you're not someone who follows the jargony, complicated world of music streaming closely, the new system, which SoundCloud dubbed "fan-powered royalties," might seem confusing. Allow us to break it down for you. 

When you pay for a subscription to a streaming service like Spotify, Apple Music, or SoundCloud, your money goes into a big pot, along with the money the streamer earns from every other subscriber and from advertising. A chunk of money from that pot goes to the company itself. Then, it divvies up the rest among artists, based on each artist's share of total streams every month. The bigger slice of overall streams an artist gets, the more money they get from the pot.

All the major streaming services use that system, known as a "pro rata" royalty model—but there are problems with it, which musicians have been complaining about for years. For one, your subscription money winds up going to artists whose music you don't even listen to. Even if you're using Spotify to listen primarily to, say, indie rock bands, your money doesn't necessarily go to those artists. Instead, it goes into the pot, then gets split up according to which musicians rack up the most streams. Most of your cash gets funneled to superstars like Drake, Taylor Swift, and BTS because they're the artists who net the highest number of streams—even if you, personally, didn't listen to them at all. At the end of the day, huge artists end up earning a ton of streaming royalties, and lesser-known artists get meager payouts.

SoundCloud's new royalty system is designed to change that. As of April 1, your subscription money will only go to the artists you actually listen to. The more you listen to one particular artist, the more of your money goes to them. If you listen to one artist exclusively, all of your money goes to them—minus the portion of it SoundCloud takes for itself. 

If an artist on SoundCloud has a loyal fanbase, even if it's small, they stand to make more money through this new system than they did through the old one. That's because they won't be competing against the biggest artists on SoundCloud anymore; they'll be getting money directly from their listeners.

While SoundCloud calls this system "fan-powered royalties," it's more commonly known as a user-centric royalty model, and artists have been pushing for streaming services to adopt it for years. The reason why, according to Larry Miller, the director of NYU Steinhardt's music business program, is simple: It's more fair.

"At its most basic and fundamental level, user-centric streaming is the right thing to do," Miller told VICE. "If you love an artist enough to listen to them—especially repeatedly—then isn't it more fair for the money that you're paying the service to go directly to the artists who you love? And not to be aggregated in a pool so that, basically, the rich get richer?"

It's impossible to say exactly how much more money lesser-known SoundCloud artists might earn under this new system. The company provided two examples—one in which an artist's monthly revenues purportedly jumped from $120 to $600 a month through fan-powered royalties, and another in which a separate artist's monthly revenues rose by 217 percent—but they didn't explain how they arrived at those numbers, and they didn't provide any data to back up those claims. (As the Future of Music Coalition pointed out, they didn't even provide the artists' full names.)

Still, Miller said that lower-tier and middle-tier artists do stand to benefit from the new system.

"They will get a significant bump," Miller said. "[Artists] will generate more money this way. How much more? And for how long? We don't know yet." 

There are other aspects of SoundCloud's new royalty system that, in its announcement, were left unexplained. The biggest one: how much of an artist's earnings SoundCloud will keep for itself. While SoundCloud made no mention of this publicly, eligible artists will keep 55 percent of the revenue they generate from fan-powered royalties, according to Michael Pelczynski, SoundCloud's head of rights administration and strategy. The remaining 45 percent goes to SoundCloud—but they don't keep it all as profit. Instead, they use part of it to pay out publishing royalties and cover other costs. Ultimately, they retain about 25 percent of the revenues from fan-powered royalties and publishing royalties, which is in line with industry standards. (Spotify and Apple Music take roughly 30 percent under their pro rata models.). 

Another wrinkle, here, is the fact that not every artist on SoundCloud will get fan-powered royalties. Instead, only those enrolled in three specific monetization programs will: SoundCloud Premier, Repost, and Repost Select. (Those last two require artists to use SoundCloud as their distributor.) According to Tim Ingham, who runs the industry blog Music Business Worldwide, there are about 100,000 musicians in those three programs combined. That represents roughly 20 percent of all the musicians on SoundCloud, Ingham wrote. In short, this new royalty system won't apply to everyone on SoundCloud—it'll apply to about a fifth of them. The rest of SoundCloud's artists are either enrolled in its Basic program, which is free, and doesn't allow users to make money from their music, or its SoundCloud Pro Unlimited program, which costs $12 a month, and does allow them to make money from their music. Pro Unlimited users will continue to receive pro rata royalties, Ingham reports.

Because only a fraction of the artists on SoundCloud are eligible for user-centric royalties—and because SoundCloud is a much smaller platform than Spotify or Apple Music—what SoundCloud has done here isn't necessarily a "game-changing" development, Miller said. But it is a step towards normalizing the idea of user-centric royalties, and—potentially—convincing other, bigger streamers, like Spotify and Apple Music, to get on board.

"I see it as being an important milestone in what is, to me, an inevitable adoption of user-centric royalty distribution," Miller said. "This is an idea whose time is coming. It may not be here yet. But it is coming."

Correction (3/11): An earlier version of this article claimed that SoundCloud kept 45 percent of the revenue from fan-powered royalties for itself. In fact, SoundCloud retains roughly 25 percent of that revenue. The article has been amended to reflect that fact. We regret the error.

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