Maybe Spotify Isn’t Cannibalizing Music Sales, But Artists Still Aren’t Getting Paid1

Spotify has become something of a punching bag for Everything That’s Wrong with the Music Business Nowadays. I once held out tremendous hope that Spotify would Fix Everything. It didn’t. Well, that’s not quite true. It did deliver on the consumer end. But as the years went by, the initial, hopeful trickle of new revenue for musicians never really increased. Millions of streams, but only a few bucks in royalties. What the heck was going on? Did Spotify somehow pull the wool over everyone’s eyes, including the eyes of the savvy giant music labels? Given how long the major labels held out before licensing their music to Spotify, that seemed unlikely. It was more likely that the labels got the better of the deal. But there was no one else to punch. And, where, precisely, was all the money going?

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Some Light Shed, but Not Where We’d Like It.

FiveThirtyEight’s2 much-discussed article, “Maybe Spotify Isn’t Killing the Music Industry After All”, doesn’t really get into this, unfortunately. Keep that in mind when you see people citing the article to show that Everything Is Fine.

The FiveThirtyEight article is about the “music industry” as a whole, not about “musicians,” or, as they’re called in the biz, “artists.” Instead, it examines whether Spotify is helping or hurting the music industry as a whole, using the research and results of Luis Aguiar and Joel Waldfogel’s working paper Streaming Reaches Flood Stage: Does Spotify Stimulate or Depress Music Sales?. In fact, we have narrow the article’s scope even more. Aguiar and Waldfogel weren’t looking at whether Spotify was a net-negative or a net-positive to the industry as a whole, but how it affected sales of recordings (i.e., when you spend money to actually own3 recorded music, e.g., a CD or digital download from iTunes). Since streaming adds about $2 billion a year to the industry—about one-quarter of all revenues4—this isn’t insignificant. To be net negative, Spotify (and other streaming services) would need to cannibalize about $2 billion for them to hurt the industry as a whole.

The whole debate arose because of Taylor Swift’s decision last year to remove her catalogue from Spotify. She did so not because she wasn’t earning enough, but because she didn’t like giving the music away for free.5 She felt it cheapened her music and, indirectly, cannibalized other music sales. And unlike most songwriters and musicians (who hold different copyrights on the recording of music, as I’ll explain in a minute), she was in a position to actually do with her music as she pleased.6

Aguiar and Waldfogel conclude that Spotify depresses sales, but only very, very slightly.7

Where Is the Spotify Money Going?

But this doesn’t explain the puzzling plight of artists. Their income from Spotify is truly tiny. Because the whole system is opaque, it’s almost impossible for us to figure where the money is going to.

The money doesn’t go straight to the artists. This is because the artists don’t own the copyright in their own recordings. The music labels do. This isn’t crazy. For any recording, there are a number of “authors” (i.e., performers), who might not agree on a fair division of royalties (does the lead guitarist earn more than the bassist?). So it’s simpler to let the label take the copyright and handle the administration. At the same time, most artists have zero bargaining power and sign contracts that would make most people’s hair stand on end. How much the artists get for each stream depends on two contracts: their contract with their label (the terms of which they know, obviously), and the label’s contract with Spotify (the terms of which are secret).

Artists may not be ecstatic about their agreements with their labels—I mean, they suck, for a variety of well-documented reasons—but they used to do all right by those agreements. But they don’t do all right with Spotify. So the problem must be with the labels’ agreements with Spotify, but they were a mystery. But the recent hack of Sony has shed some light on their terms. If the Sony-Spotify agreement is typical, then we might have our answer. The contracts seem to be structured so that the labels get lots of money but the artists get very little. This is because most of what Spotify pays Sony is in the form of an “advance.” Sony says it distributes to artists “all unallocated income from advances,” as if that resolves the issue, because it won’t say how much of the Spotify advances are “unallocated.” I’m just speculating here, but I’m going to guess that, with some accounting jiggery-pokery, a music label can find some way to “allocate” almost all of the advance.

And besides, if the labels really are distributing this money, where is the freaking money? Perhaps Sony is telling the truth but the money is being distributed to certain favored artists, cutting out your typical session musician and up-and-coming talent.

There’s not much artists can do about this. There’s zero point in complaining to Spotify. Because the artists don’t own the copyrights, Spotify had no reason to negotiate with them—or even take their interests into account. It had to make the best deal it could with the labels, which also didn’t have any obligation to take the artists’ interests into account.

Spotify ≠ Pandora

It is important not to mix Spotify up with services like Pandora (at least with respect to artists). Pandora takes advantage of a hyper-specific provision in the Copyright Act that permits internet-radio operators to play copyrighted music so long as they comply with certain rules and play a royalty that’s determined by special “copyright royalty judges.” I discuss the process in more detail here, but the basic concept is that listeners can’t control precisely what they’re going to listen to (i.e., no requests!).

These amounts are completely transparent. But they’re also quite small, in part because Pandora itself isn’t doing very well, and the judges are supposed to take into account Pandora’s need to make money.8 More important, perhaps, there is not a “Taylor Swift” option for Pandora: you can’t yank your catalogue of songs from Pandora. Not even Taylor Swift can. All she can do is make strong arguments before the copyright royalty judges and lobby Congress.

Musicians ≠ Songwriters (Legally, at Least)

It’s also important not to mix up artists with songwriters. They own different copyrights on a given recording and are paid through different revenue streams. A songwriter has a copyright in the underlying composition, no matter who performs or records the song. The artist has a copyright only in the recording of a particular performance of the song.9

This is important because copyright law treats songwriters and artists very differently, which is why they are paid so differently. For example, songwriters are paid for terrestrial10radio play of a recording; artists get nothing. But an artist can “cover” an other song, so long as there is already a publicly-available recording, by payment of a very modest statutory royalty. Heck, federal copyright law didn’t even recognize any artists’ copyright until 1972 (i.e., there was no copyright protection for sound recordings until then).11

While it’s clear that artists are being paid minuscule amounts for Spotify streams, the effect on songwriters is…. confused. This is mostly because the amount that songwriters stand to gain, even under the best case, is pretty small: about one-fifth to one-sixth what the artists stand to gain. Most articles that purport to report on or examine the issue actually mixed up Spotify with Pandora, where the songwriters really do have a major beef.12

Before you go feeling too sorry for songwriters, remember they get revenues streams that artists don’t, most notably terrestrial radio. Until you address that disparity, there’s no point talking about fairness between songwriters and artists.

Whereas artists assign their copyrights to their label, songwriters routinely sell their copyrights to “music publishers.” While there are some big publishers out there, I think the majority of music compositions are still handled by very small publishers.13 Typically, the songwriter assigns his or her copyright to the publisher in exchange for 50% of the royalties. The theory is that the publisher can do a better job exploiting the song than the songwriter can.14 Publishers come and go, and they sell whole catalogues of music to each other, and they generally do a horrible job of documenting, well, everything.

Mechanical Bull****

It appears that Spotify makes two different royalty payments to songwriters: “mechanical” royalties and performance royalties. Despite the new format, both are very old forms of royalties. And both are very, very small. Performance royalties are collected by “performance rights organizations” (PROs), like ASCAP or BMI, who distribute them the songwriters. In theory, the PROs could negotiate hard and effectively on behalf of its songwriter members, but they’re hamstrung by the fact that they’re illegal monopolies and have to comply with “consent decrees” that curb their monopolistic activities just enough to be legal. These consent decrees are themselves very old and pre-date digital music by some time.

“Mechanical” royalties are set to a tiny, out-dated amount15 Mechanical royalties run into another problem: they aren’t collected by PROs, so Spotify has to pay the royalty directly to the copyright owner. The Harry Fox Agency (HFA) administers most mechanical royalties, but if not, it can be pretty difficult to figure out who actually owns the copyright. What’s more, when copyrights are sold, the buyers aren’t always good about telling HFA about it.

In any event, even if Spotify paid songwriters all they’re entitled to, songwriters are still going to get about one-fifth or one-sixth as much as artists, er, labels get. And that’s because of antiquated laws, not anything horrible that Spotify is doing.16

The music industry is an unholy mess. New technologies are not only changing how we obtain and enjoy music, but, because the music industry was so slow to adapt, they’ve created intermediaries who siphon off much of the revenue. Labels and publishers seem powerful, but there’s the sneaking suspicion that we don’t really need them anymore. Certainly, they no longer perform their primary functions, like identifying and developing talent. And the law is completely out of date and in need of fundamental reform, but no one knows how it’ll end up. None of this is Spotify’s fault, really.

Through it all, some damn good music still gets made.

Thanks for reading!