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A More Equitable Model of Royalties' Distribution

SoundCloud introducing fan-powered royalties.

By Sofia Ghezzi

April 24, 2021

The world of online music platforms 

In just a few decades the internet has profoundly changed our society. Individuals are now able to communicate virtually, access information, make international transactions, and enjoy entertainment in a completely different way. In particular, within the entertainment industry, the music business has gone through a metamorphosis by transitioning towards online streaming music platforms.

Music platforms have been a game-changer for the way we now understand music and its fruition (Quinn, 2018, p.52). A plethora of music is now easily available for the public free of charge, or for a small flat fee (Bender, Gal-Or & Geylani, 2021, p.1083). This has brought a change in the perspective of the value of the music product in economic terms, as being available for free on the internet causes an obvious damage to the artist and owner of the copyright work (Towse, 2020, pp.1461-1462). As opposed to the traditional deals in the music industry requiring the individual consumer to buy a single product in the physical shop (Bender, Gal-Or & Geylani, 2021, p.1083), nowadays, marketing music and music consumption are mainly digital (Lestari & Laksono, 2018, pp.329-330).

Music platforms have arisen around the first years of 2000; specifically, SoundCloud was created in 2007, but only launched a year later. SoundCloud is a music streaming platform based in Berlin and provides music streaming services. It functions by uploading the artists’ music by placing a file in a network address and distributing their music tracks. This platform has been around for quite some time now, and it is the very first that is trying to tackle one of the biggest issues in the music streaming world: transparency of royalties’ distribution (Quinn, 2018, p.59-60). In fact, SoundCloud has recently introduced fan-powered royalties as a new model to pay its artists on the platform.

Legal background

Royalties are legally binding payments made to an individual or a company for the ongoing use of their assets, including copyrighted works. In the music world, copyrights can be defined as “the right of an artist who engages with generic musical forms and notes to create a new musical work, to ownership of that work, and the financial benefits flowing therefrom” (Quinn, 2018, p.49). The purpose of copyright law is to strike a balance between three different interests: the public right to access and enjoy the copyright work, the artist’s right of remuneration for its work, and the inspiration of new copyrights works (Quinn, 2018, p.50). Normally, on online music platforms, such as Spotify and Apple Music, the royalties to the artists come from revenue based on listeners’ subscriptions and/or advertising revenue.

SoundCloud’s new system 

In order to tackle the transparency of royalties’ distribution, SoundCloud has decided to change its model of pay-outs to artists. In fact, SoundCloud has defined this move as a way of providing “more equitable pay-outs, transparency, and control over their (artists) own career.” The old SoundCloud’s model of distribution of royalties was collecting the total streams of artists on the platform and pouring them in a hypothetical “pool”. Revenue to the artists, in the form of royalties, were distributed on the base of the artist’s total amount of shares of streams. This system is called “pro rata model”, and it is used by all major audio streaming services such as Spotify and Apple.

Whereas the new SoundCloud’s model of distribution of royalties is called fan-powered or “user centric model”, namely the artist is being paid on the base of its fans’ actual listening habits. A study published by “Digital Media Finland” shows the differences and similarities between the two systems, advantages and disadvantages; in any case, the user centric model gives more power to the users and benefits the independent artists (Muikku, 2017, pp.11-12).

The new system was announced by SoundCloud on the 2nd of March 2021, and it was put in place by the 1st of April 2021. Independent artists who monetize directly with SoundCloud are eligible for this new system of payment; the streams of those artists are distributed directly to the artists that the fan has listed to. The underlying idea is that if a fan is listening to a new emerging artist, part of the revenue of his subscription on the online music platform and the advertisement he/she consumed would go directly to that particular artist.

SoundCloud also claims that the new system should be benefitting more independent artists, as they are more equitable and transparent. In particular, the system pays royalties to artists based on what portion of a fan’s time they listen to each artist. The total amount of money generated by a fan for the artists they listen to is then calculated on the following criteria: (1) how much the fan listens to that artist in proportion  to all of their listening time in a given month, (2) how many advertisements the fan has consumed, (3) whether the fan has a paying subscription to SoundCloud Go+.

SoundCloud is now the first and only platform to have introduced this new model for paying their artists. It may be setting an example for other online music streaming platforms, thus we shall see how its implementation will play out within the next few months, and see if any other major platforms will follow. 

References & Link

1. Quinn, A. (2018). Are online music platforms undermining the principles of copyright law? Journal of Intellectual Property Law & Practise, 13(1), 52. 
2. Bender, M., Gal-Or, E., & Geylani, T. (2021). Attracting artists to music streaming platforms. European Journal of Operational Research, 290(3), 1083. 
3. Towse, R. (2020). Dealing with digital: the economic organization of streamed music. Media, Culture & Society, 42(7-8), 1461-1462. 
4. Lestari, S. N., & Laksono, A. P. (2018). Journal of Dinamika Hukum, 18(3), 329-330. 
5. SoundCloud website. Fan-powered royalties FAQ. Available at: https://help.soundcloud.com/hc/en-us/articles/1260801306810 
6. SoundCloud website. SoundCloud pays artists fairly. Available at: https://community.soundcloud.com/fanpoweredroyalties 
7. SoundCloud newsroom (2021). SoundCloud introduces fan-powered royalties: a game-changing new pay model for independent artists. Available at: https://press.soundcloud.com/197001-soundcloud-introduces-fan-powered-royalties#:~:text=New%20York%2C%20NY%20%2D%2D%20March,to%20earn%20money%20on%20SoundCloud 
8. Banton, C. (2021). Royalty definition. Investopedia. Available at: https://www.investopedia.com/terms/r/royalty.asp 
9. Muikku, J. (2017). Pro rata and user centric distribution models: a comparative study. Digital Media Finland OY. Available at: http://www.digitalmedia.fi/wp-content/uploads/2018/02/UC_report_final_171213.pdf 

Sofia Ghezzi holds a Bachelor’s degree in European Law from Maastricht University, and she is currently pursuing a Master’s degree in European Competition Law and Regulation at the University of Amsterdam. Sofia is passionate about the intersection of law and culture, and the underlying influences of society in law. At the Institute, she is a researcher for the Kittiwake project.