Streaming royalties from subscription services like Spotify, AppleMusic, and others are distributed using the "Big Pool" (pro-rata) distribution method. There are questions as to whether this method of royalty distribution is fair or even in the best interests of the music industry (artists, labels, and services). A new approach is the "Subscriber share" model. Subscriber share distributes royalties based on the plays of each individual subscriber instead of pro-rata across all subscribers. Can the subscriber share approach to royalty distribution increase royalties for artists with fan bases as music streaming services start to scale? Dick Huey, Founder & CEO, Toolshed

1. Making Streaming
Royalties Fair(er)

2. How Royalties Work Right Now: Pro-Rata
Spotify

3. Spotify: December, 2014
Spotify
Source: Section 115 DMCA Disclosures, courtesy of Audiam

4. Source: Section 115 DMCA Disclosures, courtesy of Audiam

5. OK, Cool.
So What’s The Problem?

6. alt-j

8. Ten People Are Subscribers

9. Ten People =
$70 of Royalties Generated

10. Example #1:
All Users Click The Same Amount

11. Example #1: All Users Click The Same Amount
4,000 Total
Alt-J
3,200 total
Nickelback
800 total
400 400 400 400 400 400 400 400 400 400

12. Example #1: All Users Click The Same Amount
4,000 Total
Alt-J
3200 is 80% of
4,000 clicks
80% of $70 = $56
Nickelback
800 is 20% of
4,000 clicks
20% of $70 = $14
400 400 400 400 400 400 400 400 400 400

13. Example #2:
One Heavy User

14. Example #2: Heavy User
16,000 Total Clicks
Alt-J
3,200 total
Nickelback
12,600 total
400 400 400 400 400 400 400 400 400 12,200

15. Example #2: Heavy User
16,000 Total Clicks
400 400 400 400 400 400 400 400 400 12,200
Alt-J
3,200 clicks
20% of the clicks
20% of $70 = $14
Nickelback
12,600 clicks
80% of the clicks
80% of $70 = $56

16. Example #2: Heavy User
One Heavy User Changed Everything
Alt-J
3,200 clicks
20% of the clicks
20% of $70 = $14
Nickelback
12,600 clicks
80% of the clicks
80% of $70 = $56
400 400 400 400 400 400 400 400 400 12,200

17. Example #2: Heavy User
Six Alt-J Fans Now Support Nickelback
400 400 400 400 400 400 400 400 400 12,200
Alt-J
3,200 clicks
20% of the clicks
20% of $70 = $14
Nickelback
12,600 clicks
80% of the clicks
80% of $70 = $56

18. Message To Artists: Get Clicks

19. “People Respond To Incentives”
- Gregory Mankiw,
10 Principles Of Economics
“First rule of economics: people do more of
something when the reward increases.”
- Glen Whitman, CSUN
Ten Things Debaters Should Know
About Economics

20. Click Fraud

21. “I Built a Botnet that Could Destroy Spotify with Fake Listens”
Source: William Bedell, “I Built a Botnet that Could Destroy Spotify with Fake Listens”, (Vice, October 16th, 2015)
“With minimal effort, I was generating $32.26 per day in royalties. Inevitably, my
thoughts wandered to greed: how profitable would this music royalty factory be if I
turned it on music I owned the rights to?”

22. Streaming Services: “We stop click fraud with algorithms”
Major Internet Companies: “O RLY?”
Combined market cap: Over $1.5 Trillion
Source: Internet Advertising Bureau
Click Fraud in 2017: $16.4B
Up 32% from 2016!
“The World Federation of Advertising said ad fraud "is second only to the drug trade"
and has predicted the amount of money lost to fraud will hit $50 billion by 2025.”

23. Dr. Evil

24. Example #3: Dr. Evil
87,412 Total Clicks
Alt-J
3,200 total
Nickelback
400 total
Dr. Evil
83,612 total
400 400 400 400 400 400 400 400 400 83,612

25. Example #3: Dr. Evil
87,412 Total Clicks
400 400 400 400 400 400 400 400 400 83,612
Alt-J
3,200 total
3.2% of the clicks
$2.56
Nickelback
400 total
0.4% of clicks
$0.32
Dr. Evil
83,612 total
96% of clicks
$67.20

26. Example #3: Dr. Evil
Alt-J + Nickelback = $63 In Royalties
100% of fans are supporting Dr. Evil!
Alt-J
$80 in fees
$2.56
Nickelback
$10 in fees
$.32
Dr. Evil
$10 in fees
$67.20

27. That’s bad for fans & artists,
but it’s bad for services &
labels too: Pro-rata grows
clicks, not subscribers.

28. Light Users = Low Value
1. Most serious music fans already subscribe to a streaming service.
2. The people who have not yet subscribed are mostly light users.
$0.32 Each $67.20
Source: “Turn It Up: Music Fans Could Spend Up To $2.6B More Annually” (Nielsen, 2013)

29. What Are We Doing Here?

30. The Music Industry Should Be Incentivizing This:

31. ...But Is Incentivizing This Instead:

32. Is There A Better Way?

35. Example #4: Subscriber Share
Alt-J
100%
8 * $7.00 =
$56.00
Nickelback
100%
1* $7.00 =
$7.00
Dr. Evil
100%
1 * $7.00 =
$7.00
400 400 400 400 400 400 400 400 400 83,612

37. Source: Section 115 DMCA Disclosures, courtesy of Audiam

38. Comparing pro-rata vs.
subscriber share
Actual scrobbled plays
Dick Huey / Jan 2016

39. Problems With Pro-Rata:
1. Fans are supporting music they don’t like
2. The number of fans doesn’t matter
3. The only thing that matters is the number of clicks
4. Click fraud is easy and profitable
5. Light users are worth very little

40. 1. Fans are supporting music they don’t like
2. The number of fans doesn’t matter
3. The only thing that matters is the number of clicks
4. Click fraud is easy and profitable.
5. Light users are worth very little
Fans support only the music they like
The number of fans matters
Fans AND clicks are BOTH important.
Click fraud is not easy and is less profitable.
ALL fans are equally valuable.
Subscriber Share

41. Who Benefits Under Pro-Rata?

42. Who Benefits Under Pro-Rata?
Artists with “above average” users.

43. Define “Average” User?

44. Spotify: The Average User Streams 148 Minutes Per Day!
Source: Tom Kitchen, Spotify
http://www.slideshare.net/DigitalJourneys/digital-journeys-2014-understanding-music-consumption-in-the-digital-age

45. 148 minutes a day = 1,110 streams a month.
Is the typical user streaming that much?
No

46. Source: Paul Lamere, Spotify/Echonest
http://static.echonest.com/talks/sxsw2015/
PLAYS PER MONTH: 255 PLAYS PER MONTH: 401

47. Average Does Not Mean Typical

48. Average Does Not Mean Typical
Outliers Matter!!!

54. A minority of users controls
most of the royalties.

55. Pop Music

56. Indie Music

57. Indie Music
Indie users are ABOVE median, but BELOW average.
MEDIAN!

58. Mega Users

59. Who Are The Mega Users?
● Unlicensed Gyms, Hair Salons, etc
● Unlicensed Offices
● College Dorms
● Teenagers
● Click Fraud

60. Revenue Per Listener
● Unlicensed Gyms, Hair Salons, etc: Very Low
● Unlicensed Offices: Low
● College Dorms: Low
● Teenagers: Low
● Click Fraud: Very Low

61. Users generating the least revenue
per listener are controlling most of
the royalties!

62. Subscriber Share Critiques:
● Moves money to more popular artists
● Will upset major and indie label market share
● If it doesn’t upset market share what’s the point?

63. Subscriber Share Critiques:
● Moves money to more popular artists
● Will upset major and indie label market share
● If it doesn’t upset market share what’s the point?

64. Popularity Doesn’t Mean Big.

65. Subscriber Share Critiques:
● Moves money to more popular artists
● Will upset major and indie label market share
● If it doesn’t upset market share what’s the point?

66. Source: Arnt Maaso, “User-centric Settlement for Music Streaming”, (University of Oslo 2014)

67. Subscriber Share Critiques:
● Moves money to more popular artists
● Will upset major and indie label market share
● If it doesn’t upset market share what’s the point?

68. ● Supports Emerging Artists
● Incentivizes Subscriber Growth
● Reduces Fraud
● Makes Every Fan Matter
● Brings Artists & Fans Closer
● Creates Opportunity For New Genres
● Cures Cancer
Subscriber Share:

69. Thank You!