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Spotify royalty calculations explained

Streaming music consumption is still reaching new heights year on year. It has proven to be a solid business model, replacing physical carriers and increasing the total amount of annual revenue accrued in the music industry. It makes music easily accessible and solves the problem of illegal downloading.

This sounds like a great plan for developing music even further, especially in countries where purchasing music is still expensive. But with this new luxury, new problems occur. The biggest problem in the streaming music industry is the unclear situation of how royalties are being distributed.

To put it simply: what does Spotify pay an artist per stream? After all, there are free tiers on Spotify, does that mean artists do not receive any income?

Let’s have a closer look at how it works on Spotify.

Copyright law

To understand how royalties are being divided, we first need to understand how copyright works. Basically, there are two separate assets that can be protected by copyright: the musical composition and the sound recording.

Musical compositions explained:

Musical composition is the song itself, it is the original piece of music. Consider it the art of creating music, vocal or instrumental. A collection of all elements that form the song and can be protected by copyright. 

Sound recordings explained:

A sound recording is the copyrightable work which is created when an artist performs musical works and records them, the so-called master right. Also described as the reproduction of soundwaves into a fixed form. It is a separate intellectual property from the composition.

Copyright law: musical compositions and sound recordings

Owning the copyright to a track also means you have the right to create copies of that content; these rights are called mechanical rights. And added to this also comes the public performance right: the right to perform your work publically.

Income from mechanical royalties are paid to both the songwriters and their publishers. 

Copyrights in regards to streaming music

Looking at streaming, from the perspective of the songwriters, a stream is a combination of a mechanical use and a public performance. It is both a ‘reproduction’ of the original work and a performance for an audience. Public Rights Organizations (PRO’s) collect mechanical- and public performance royalties for artists.

Copyrights in regards to streaming music

Spotify pays the rightsholder a license fee to use the master recordings, in most cases the label or distributor.

This is the part where the percentage that ends up at the artist's is no longer fixed: Spotify pays fixed percentages for all types of content but a record label or distributor doesn’t follow this example. This is to be negotiated between the artist and the label; a record deal. This can vary from 10 to 15% up to 50% or more for the artist.

It varies per label, per deal, per artist and labels often recoup expenses like marketing and promotion.

How Spotify divides royalties

How Spotify divides royalties

Streaming music: pro rata model explained

Income from streams are accumulated and divided pro rata amongst the rights holders.

On Spotify, this is a bit elaborate. Spotify uses a ‘pooling’ system. Not every stream on Spotify generates the same amount of income, this varies per territory and type of stream (coming from a paid subscription or a free account). 

Spotify does not charge the same prices per subscription per country; subscriptions in India for example are not as expensive as in the USA. 

Per pool, all streams are accounted for and divided equally amongst all performers.

What does an artist get per Spotify stream?

On average, Spotify pays between USD 0,003 and USD 0,005 per stream to the master license holder.

As described above, this depends on the deal he or she has with its record label. Spotify pays the master license holder 60%, and then that particular record label pays the agreed royalty percentage.

The other 15% (100% - 60% for master and 25% of Spotify’s share) goes to the PRO’s and publishers and they pay the artists their share of that income.

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