SoundCloud is about to revolutionize streaming payouts, launching user-centric royalties for 100,000 indie artists

One of the most hotly-debated concepts in the modern music rights business is user-centric licensing. This model sees streaming royalties paid out based on individual subscriber behavior – with a percentage of each subscriber’s subscription fee being distributed only to the artists/labels they have individually listened to that month.

This model is in contrast to the current ‘pro rata’ streaming payout system, which sees all royalties on a service like Spotify pooled at the end of each payment period… after which recorded music rights-holders are paid according to their market share of total plays across the platform.

The latter model, obviously enough, most benefits global pop superstars; the former model, it’s thought, would bring more benefit to indie artists and to more niche genres such as classical and jazz.

Critics of the ‘pro rata’ model point out that it regularly leads to a proportion of an individual’s subscription fee being paid to artists whose music they haven’t even played. What’s more, ‘pro rata’ risks turning streaming into a game where only the artists with the most repeated plays across a given month win big. This, in turn, risks triggering market manipulation, either by artists/songwriters creating deliberately short songs (in order to maximize repeated plays) or even in the form of streaming fraud via paid-for stream farms.

On the other side of the coin, some studies have suggested that a switch to user-centric licensing would incur cumbersome administrative costs for services, and even that such a move might not make a material difference to those it’s most designed to help – so called “middle class” artists who might not boast a blockbuster global fanbase, but who draw a significantly-sized loyal audience that streams their music regularly.

SoundCloud is about to settle this debate once and for all.

In an industry-first move, SoundCloud is introducing what it calls “fan-powered royalties” – its own branding of the user-centric model – which it says will mean “each [SoundCloud] listener’s subscription or advertising revenue is distributed among the artists that they listen to, rather than their plays being pooled”.

“Fan-powered” royalties will launch on SoundCloud on April 1 (in 30 days’ time), and the platform suggests the move will “benefit rising independent artists with loyal fans”.

How much will those indie artists gain? A new microsite launched by SoundCloud on the topic today hints at the possibilities.

It cites two independent artists currently operating on SoundCloud – Chevy and Vincent. Chevy currently has 12,700 followers on SoundCloud, Vincent has 124,000.

By switching these artists to a “fan powered” model and away from ‘pro rata’, based on their recent playcounts on SoundCloud, the service estimates that Chevy’s monthly royalties will grow 217%, while Vincent’s will multiply by five, up from $120 to $600.

It’s well known that consensus amongst the three major record companies is yet to be reached on user-centric licensing in streaming – and that, without Universal, Sony, and Warner‘s collective approval, the concept will struggle to get off the ground.

So how has SoundCloud managed it?

In short, because the platform has a direct monetized relationship with around 100,000 independent artists via its SoundCloud Premier, Repost by SoundCloud, and Repost Select tiers. Artists who use these services essentially enlist SoundCloud as a distributor/aggregator, either delivering their music to the SoundCloud platform itself or – in the case of Repost – to other services too.

Because of this, SoundCloud is able to jointly run two royalty ‘calculators’, keeping the majority of artists on its platform paid via ‘pro rata’, while allowing those near-100,000 indie artists to get paid via the user-centric/”fan-powered” model.

As such, SoundCloud is about to kick off the first real-world experiment of user-centric licensing, demonstrating exactly how switching to “fan powered” and away from ‘pro rata’ will adjust the economics for artists on its – and other – streaming services.

Insiders at SoundCloud’s suggest its early tests of “fan powered” royalties have shown the opposite of what some research papers have feared.

SoundCloud’s calculation of these royalties, we’re told, happens far faster than the service’s usual calculation of ‘pro rata’ royalties, with the burden of additional administration easily handled by machine learning.

“SoundCloud is uniquely positioned to offer this transformative new model due to the powerful connection between artists and fans that takes place on our platform.”

Michael Weissman, SoundCloud

Michael Weissman, Chief Executive Officer, SoundCloud, said in a statement: “Many in the industry have wanted this for years. We are excited to be the ones to bring this to market to better support independent artists.

“SoundCloud is uniquely positioned to offer this transformative new model due to the powerful connection between artists and fans that takes place on our platform.

“As the only direct-to-consumer music streaming platform and next generation artist services company, the launch of fan-powered royalties represents a significant move in SoundCloud’s strategic direction to elevate, grow and create new opportunities directly with independent artists.”

SoundCloud logo

One interesting aspect of all of this: with both “fan powered” and ‘pro rata’ payout calculations happening at the same time, it’s entirely possible that SoundCloud may have to pay a surplus in its royalty distributions for some periods.

That’s because a clean break away from pro rata to “fan powered” would be a zero sum game – i.e. where an artist within the 100,000 affected “fan powered” acts (Artist A) might see a larger payout due to the new model, it would typically mean that another artist (Artist B) somewhere else on SoundCloud might see a smaller payout.

Yet if Artist B remains in the ‘pro rata’ bucket of artists, SoundCloud would have to cover this cost increase for Artist A, while also honoring the full royalties Artist B would have been paid in the ‘old’ model.

“MBW is told that nearly 20% of all SoundCloud’s current payouts to the recorded music industry are made to independent artists monetizing directly on its platform.”

Why is this risk worth it for SoundCloud in business terms? Because the promise of “fan powered” royalties isn’t just a crusade for fairness, dummy; it’s good business too.

For SoundCloud, this is a powerful marketing tool to try and win the direct business of independent artists who are currently distributed elsewhere, with the promise of a more equitable way of earning royalties.

Something else that helps: MBW is told that nearly 20% of all SoundCloud’s current payouts to the recorded music industry are made to independent artists monetizing directly on its platform; i.e. a good chunk of the redistribution of royalties post- the “fan powered” launch will happen between the 100,000 artists in SoundCloud’s user-centric ‘calculator’.

SoundCloud clarifies that, in addition to whether a listener is a paying subscriber (to SoundCloud Go+) or a free user, “fan-powered” royalties will also be determined by a calculation of “how much [a] fan listens to [each] artist relative to all of their listening time in a given month”.

SoundCloud currently hosts over 250 million tracks from 30 million creators in 190 countries.Music Business Worldwide