Redistributing The Streaming Wealth: Why Listening Hours Not Artist Popularity May Drive The Divvying Up Of Royalties

Internet_radioThe question of just how to distribute the royalty dollars from music services has moved from a back-office thought exercise to an out-in-the-open debate. Moving forward in this debate is the argument that it would be fairer—particularly to emerging, independent, or less “popular” artists—to distribute royalties on an each pair of ears basis (i.e., per subscriber) rather than on an all pairs of ears basis (i.s., all subscribers). 

                                                                                               

Guest Post by David Touve on the Rockonomic Blog

See Laguana’s “How to make streaing royalties fairer,” and Gottfried’s, “Throw out the big pot: A re-examination of streaming pay” (largely citing Jeremy Silver) as examples of this debate.

Unfortunately, yet perhaps non-intuitively, it may only be the case that these artists, or any artist for that matter, would benefit from a per pair of ears approach to royalty payouts if it is also true that people who listen to these artists happen to spend less time listening to music. People may be confusing what happens when an artist is popular or not (i.e., a large or small number of people listen to that artist) with what happens when listeners spend a greater or a lesser amount of time listening to music.

More specifically, I wonder if folks may be overlooking the fact that what drives the variation in royalty payouts from music services that have adopted a “percentage of listens” (or, pro rata) approach to these payouts is the diversity in listening hours across listeners, leading to differences in the number of tracks streamed, rather than some diversity in artist selections across listeners—a situation that may or may not impact the time spent listening to any number of tracks.

Simply stated: how people are listening matters regardless of to whom they are listening, when the question on the table is the implied price or value of royalty payouts from music services.

My ultimate concern about this debate is that the each pair of ears perspective may be far to focused upon the trees—as in, the per stream payouts—at the expense of the forest—as in, how listening behavior across listeners drives the total value of payouts. That may be a mixed metaphor…

BN-DF456_STREAM_G_20140612162817In this post, we will use some simple scenarios to highlight what I reckon to be the different impacts upon royalty payouts that result from diversity in listening hours versus those from diversity in artist selection. As a result, I hope readers will better understand the drivers of royalty payouts in a pro-rata world.

My apologies for the length of this post, but it would seem that digging into the details of this payout dilemma takes a greater number of words than can fit into a 140 character tweet, or a blurb in the blogosphere.

The ears have it

The great thing about how streaming services pay music stakeholders is that actual listening behavior drives compensation. That said, there is a difference of opinion over how the ears should matter.

Summarizing this difference of opinion regarding the each-versus-all pair(s) of ears perspectives:

Per pair of ear basis
Split the $X royalty pool resulting from each subscriber’s payment according to that subscriber’s listening behavior.

For example, if Jack listened to only a single artist last month, while Jill listened to ten artists, pay all of the royalty dollars from Jack’s subscription to his artist and all of the royalties dollars from Jill’s subscription to her artists.

All pairs of ears basis
Aggregate the $X from all subscribers into a single, royalty pool, and split these dollars according to the aggregated listening patterns of all subscribers.

For example, if Jack listened to a single artist and Jill listened to ten artists, pay these eleven artists out of the total royalty pool resulting from the combination of the dollars from both Jack’s and Jill’s subscriptions, according to that percentage of all listening attributed to each of these artist’s work.

As I claimed earlier, diversity in listening hours leading to variations in the number of tracks streamed—or, how people listen to music—drives the royalty payouts regardless of diversity in artist selection—or, to whom people are listening. Let’s use Jack and Jill to explain this seemingly erroroneous claim.

Meet Jack and Jill

Jack and Jill are subscribers to a music service we will call Noisebox. What can I say, I still like that name.

Jack and Jill each pay $1 per month for access to this Noisebox music service—a bargain, but this example is supposed to be simple.

Jack is a music Monovore: He listens to only one artist. Ever.
Jill is a music Polyvore: She listens to many artists. Always.
Jack and Jill both like Artist A.

The entirety of subscription dollars collected by Noisebox are paid through as royalties to artists—a financial implausibility, but again, this is supposed to be a simple example.

In our simple world, the artists behind the music licensed by Noisebox are not just the featured artists, but also happen to be the writers, publishers, labels, producers, performing musicians, and whoever/whatever else might have a stake in the recordings. And, so we only need to pay royalties to these artists. Dealing with payments to all parties in a multi-stakeholder world is a topic for a book not a blog post.

Noisebox uses a “percentage of listens” (or pro rata) approach to distributing the royalties that result from Jack’s and Jill’s payment for and use of the music service. Which means, we simply take the dollar on the table, divide that dollar by the number of listens, and distribute these smaller sums according to the artists behind the songs.

For example, if there were ten listens in the month, we simply divide $1 by ten, the result being $0.10 (ten cents) to be paid for each listen. Should all listening have been to the music of one artist, that artist would receive ten payments of $0.10. Should a different artist be associated with each of these ten listens, then each of these artists would receive a payment of $0.10.

Now let’s let Jack and Jill listen to some music, so Noisebox can start paying some royalties. The only challenge being, Jack and Jill are not like each other, the result being that how and to whom they listen is quite different.

Let the music play:
Same time spent, different artists

In this scenario, both Jack and Jill spend enough time listening to music this month that they each stream ten songs. However, Jack streams ten songs from the same artist (artist A), while Jill streams ten songs from ten different artists (artists A, B, C, D, E, F, G, H, I, and J — but not JayZ, he has his own music service). And, we have two dollars on the table for royalties, as both Jack and Jill paid Noisebox $1 this month for the music.

Let’s looks at the royalty payout outcomes for this scenario under an all pairs of ears as well as an each pair of ears approach.

All pairs of ears
In this approach, we aggregate all dollars and then pay royalties based upon each and any artist’s percentage of all aggregated listens.

20 Total Plays = ten plays from Jack plus ten plays from Jill
$0.10 per play, royalty = A $2 pool of dollars, split twenty ways

Artist payouts:

$1.10 => A (11 out of 20 plays)
$0.10 => B (1 out of 20 plays)
$0.10 => C
$0.10 => D
$0.10 => E
$0.10 => F
$0.10 => G
$0.10 => H
$0.10 => I
$0.10 => J

Each pair of ears
In this approach, we take the dollars from Jack and pay them as royalties according the each artist’s percentage of Jack’s listening. We apply the same method for Jill and paying her artists.

Payouts from Jack:
$0.10 per play, royalty = $1 divided by ten plays

Payouts from Jill:
$0.10 per play, royalty = $1 divided by ten plays

Artist payouts:
$1.10 => A (ten of Jack’s ten plays, plus one of Jill’s ten plays)
$0.10 => B
$0.10 => C
$0.10 => D
$0.10 => E
$0.10 => F
$0.10 => G
$0.10 => H
$0.10 => I
$0.10 => J

NOTE: Even though the selection of artists varied greatly between our two subscribers, Jack and Jill, the royalty payouts did not differ for the artists involved. In particular, Artist A—as popular as before—saw the same payout across both approaches, even though one fan is exclusive to A, while the other is non-exclusive. Importantly, the example above scales even if we add subscribers who never listen to Artist A. Add 50 more subscribers, none of whom listen to Artist A, but all of whom listen to ten tracks, and you will find that Artist A receives the same payout: $1.10.

Let the music play:
Different time spent, different artists

Now let’s look at a couple scenarios in which Jack and Jill differ in terms of the amount of time they spend listening to music, therefore streaming a different number of tracks.

In the first scenario, Jack will only listen to Artist A once, having spent only a few minutes using Noisebox, while Jill’s listening stays the same as before. This is the scenario many people are actually describing when they imagine the impacts of the each pair of ears approach—Jack not only is an Omnivore, but hardly even listens to music.

In the second scenario, Jill will listen to each of her ten artists twice, the result of spending twice as much time using Noisebox, while Jack’s listening will remain the same as above.

Scenario One

All pairs of ears, Jack listens to Artist A, only once.

11 Total Plays = one play from Jack plus ten plays from Jill
$0.1818 per play, royalty = A $2 pool of dollars, split eleven ways

Artist payouts:

$0.3636 => A (2 out of 11 plays)
$0.1818 => B (1 out of 11 plays)
$0.1818 => C
$0.1818 => D
$0.1818 => E
$0.1818 => F
$0.1818 => G
$0.1818 => H
$0.1818 => I
$0.1818 => J

Each pair of ears, Jack listens to Artist A, only once.

$1 per play, royalty from Jack = A $1 pool of dollars, split one way
$0.10 per play, royalty from Jill = A $1 pool of dollars, split ten ways

Artist payouts:

$1.10 => A (All of Jack’s payment, plus one of )
$0.10 => B (1 out of 20 plays)
$0.10 => C
$0.10 => D
$0.10 => E
$0.10 => F
$0.10 => G
$0.10 => H
$0.10 => I
$0.10 => J

NOTE: The diversity of artists to which Jack and Jill listened stayed the same in this example. Furthermore, Artist A was a popular as before. What drove the difference in payouts to Artist A between the two methods was simply the fact that Jack spent less time listening to music. In this case, if we add 50 more subscribers who never listen to Artist A, but all of whom listen to ten tracks, you will find that Artist A receives the $1.10 payout only in the each pair of ears approach. What is driving this difference in payouts — the time Jack spent listening to music, not the diversity of artists.

Scenario Two

All pairs of ears, Jill listens to twice as much music

30 Total Plays = ten plays from Jack plus twenty plays from Jill
$0.0667 per play, royalty = A $2 pool of dollars, split 30 ways

Artist payouts:

$0.1333 => A (2 out of 30 plays)
$0.0667 => B (1 out of 30 plays)
$0.0667 => C
$0.0667 => D
$0.0667 => E
$0.0667 => F
$0.0667 => G
$0.0667 => H
$0.0667 => I
$0.0667 => J

Each pair of ears, Jill listens to twice as much music

$0.10 per play, royalty from Jack = A $1 pool of dollars, split ten way
$0.05 per play, royalty from Jill = A $1 pool of dollars, split twenty ways

Artist payouts:

$1.05 => A (All of Jack’s payment, plus one of Jill’s payouts)
$0.10 => B (2 out of 30 plays)
$0.10 => C
$0.10 => D
$0.10 => E
$0.10 => F
$0.10 => G
$0.10 => H
$0.10 => I
$0.10 => J

NOTE: The diversity of artists to which Jack and Jill listened stayed the same in second scenario. And again, Artist A was just as popular as before (being in both Jack’s and Jill’s streams). What drove the difference in payouts to Artist A between the two methods was simply the fact that Jill spent more time listening to music. The role of listening time may now be more clear. What drove the difference in payout for Artist A under the each pair of ears approach across the two scenarios was Jill’s listening behavior, not Jack’s.

The end

That was one heck of a post to support a very simple claim:

How people are listening matters regardless of to whom they are listening, when the question on the table is the implied price or value of royalty payouts from pro rata music services. An artist being popular or not (i.e., a large or small number of people listen to that artist) may have a very different effect as compared to that of people spending a greater or a lesser amount of time listening to music.

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