Founded in Sweden in 2006, Spotify has risen to become one of the world’s largest music streaming service providers. The platform can now boast 356 million active users, with approximately 44% of those being paid subscribers. The company has a mission to unlock the potential of human creativity and allow billions of listeners to enjoy and be inspired by music. Spotify plans to fulfill this mission by paying 1 million artists enough money to live off their creative work through royalties based on stream shares.
Musicians and related professionals on the Spotify platform earn two different types of royalties:
- Recording royalties – this is money owed to rights holders for tracks streamed on Spotify that is paid through the licensor delivering the music. In most cases, the licensor is a record label or distributor.
- Publishing royalties – these royalties describe money paid to a songwriter or owner of a composition. Publishing royalties are issued to publishers, collecting societies, and mechanical agencies based on usage territory.
It’s important to note that rightsholders receive royalties whenever a qualifying song is played on Spotify. The song does not need to be played as part of a premium user subscription.
How are artists and songwriters paid?
Spotify revenue generation depends on:
- Users signing up to Spotify Premium and paying a monthly subscription fee.
- Brands paying to advertise to users on the free version.
The company says that approximately 66% of the revenue from these two sources is paid to music rights holders. In 2020, this equated to over $5 billion.
Taking 2020 as an example, the $5 billion royalty pool is then divided amongst rights holders based on their respective streamshare.
Streamshare is calculated by:
- Determining the total number of streams each rights holder receives, and then:
- Dividing that number by the total number of streams in the applicable market. Spotify markets are typically represented by countries or geographic regions.
In terms of the royalty pool itself, the share each market receives depends on the total revenue it earns from advertising and premium user subscriptions.
It should also be pointed that royalty pool fund distribution is not based on each musician’s streamshare alone. In other words, musicians do not earn a fixed dollar amount per stream because Spotify Premium subscribers do not pay to listen to music on a per-stream basis.
Funds are usually distributed to eligible artists once per month. In some cases, they may be distributed to record labels and distributors first and then shared with musicians as per contractual agreements.
- Spotify pays artists through a combination of premium subscription and advertising revenue.
- Musicians and related professionals earn two different types of royalties on the platform. Recording royalties are paid to record labels and distributors while publishing royalties are paid directly to the songwriter or owner of a composition.
- Spotify claims to pass on two-thirds of all its revenue to musicians. In 2020, this amounted to over $5 billion. Musicians are not paid on a per-stream basis because premium users pay a flat subscription fee for access to ad-free content.
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