Fan-Powered Royalties (FPR) for Artists in the Age of Online Music Platforms: A Leading Edge or Another ‘Meh.’?

Author: Artha Dermawan (Doctoral Researcher)

Research group: Law, Technology and Design Thinking

Overture: “I Need Appropriate and Transparent Way of Payment”

‘So what better alternative is there

than an agreement between citizens themselves

reached under conditions that are fair for all?’

- John Rawls[1]

Artha Dermawan

Music streaming expenditure has skyrocketed globally as the current COVID-19 pandemic contributes to the shift from physical to digital music.[2] At the same time, many artists around the world have expressed their dissatisfaction with the remuneration they receive for the exploitation of their musical works in the on-demand music platforms.[3] They demand for an appropriate and transparent remuneration framework that enables artists to claim their financial share in the online music platforms industry.[4] One of the questions is why artists argue they do not receive enough remuneration, even though online music platforms claim to pay a huge sum of money to the record label.[5]

At the moment, all of the main streaming services use the pro rata mechanism to distribute the rights holders' shares and some studies show that the system still lack transparency in distributing remuneration to artists.[6] Article 18 of the European Union (EU) CDSM Directive mandates the Member States to ensure that artists are entitled to receive appropriate and proportionate remuneration.[7] Transparency is a critical aspect in order to implement the concept of appropriate remuneration. The EU recognised this by introducing Article 19 in the CDSM Directive. This article imposes a transparency obligation on the revenues generated by exploitation in order to ensure effective control by creators and performers over the adequacy of their remuneration. It states that authors and performers must be provided with up-to-date, relevant, and comprehensive information on the exploitation of their works and performances, including revenue generated and remuneration due, on a regular and at least annual basis.

However, the main question remains: How should profits from music streaming services be paid out to artists in an appropriate and transparent way? The discussion is never-ending because with the current pro-rata model, users also pay for music they don’t listen to. This article finds that the ‘Fan-Powered Royalties’ (hereinafter FPR) could be an alternative to the current pro-rata model. According to the study conducted by Midia Research on the impact of FPR to artists’ and based on an analysis of the earnings of the system's 118,000 artists, 56% of those artists "are better off under FPR than pro-rata."

Oh Yes, the 'Pro-Rata' Model is the Rotten Apple!

The subscription paid by the user in music streaming services is usually divided into three parts: “the streaming service keeps approximately 30 % of the money collected, and the rest is shared to the right holders of works (composers, musicians, arrangers, publishers) and the right holders of recordings (financial producers, performing artists).”[8] Spotify and Apple Music are one of the major music streaming services which uses the pro-rata model.[9] In order to calculate net revenue, Spotify and Apple Music will subtract the money they collected. This net revenue may include any payments, among other things, taxes, credit card processing fees, and billing, along with some other things like sales commissions.[10] All net revenue are pooled and distributed to the artists based on their percentage of the total songs. This also implies that users may be charged for songs they do not listen to.[11] In the light of “pro rata” payment methods, a study published by French public organization for the music industry (CNM) shows that the pro-rata model is no longer suitable to use in the era of online music.[12]

Is Fan-Powered Royalties (FPR) the New Rising Star or Another ‘Meh…’

On April 1, 2021, SoundCloud, a music streaming platform, introduced a new remuneration system called FPR.[13] The term ‘fan’ here refers to the user of this online music platform. Artists who independently upload their music to SoundCloud will be remunerated based on their fans' actual listening habits under FPR. The more fans who listen to a musician's music, the more money they make. This model benefits independent artists, whereas the pro-rata system benefits megastar artists.[14]

SoundCloud's new remuneration scheme pays remuneration based on the percentage of a fan's time spent listening to each artist. A fan's total monetary contribution to the artists they listen to is determined by a few factors such as how much the fan listens to that artist in comparison to their total listening time in a given month and how many advertisement has the fan seen.[15]

FPR has the potential to benefits independent artists with large fan bases who listen to their music frequently. So, if a fan only listens to an emerging artists from Helsinki or an early-stage techno from Berlin the majority or all of their subscription or advertising revenue will go to those artist.[16] On July 12, 2022, SoundCloud has commissioned Midia Research to publish a larger report on the impact of fan-powered royalties to artists.[17] As stipulated in the illustration below, according to the report, 56% of those artists "are better off under FPR than pro-rata."[18]

Illustration 1. Impact of Fan-Powered Royalties to Artists.

The study conducted by Midia Research is an important step toward a more in-depth understanding of FPR distribution model, and it should encourages more future research from the perspectives of both consumers and right holders. Will FPR potentially be an alternative solution to the pro-rata model in the context of appropriate and transparent remuneration to artists? This is a subject of discussion in the public eye and requires further research.

Conclusion: I subscribe and what I pay goes to the artists I have listened to!

There is no time to lose, in order to improve an appropriate and transparent way of remuneration payment, all music streaming services should re-consider their remuneration payment from ‘all profits are pooled on the basis of the share of total tracks’ to ‘pay the artists based on what each subscriber has listened to.’ SoundCloud’s new FPR might be an alternative, but a further study is needed, both from consumer and rightsholder perspective. We must enable people to be confident that ‘I subscribe and what I pay goes to the artists I have listened to.’[19]

The authors advocate for an open discussion about the appropriate and transparent payment model to promote above all niche music and independent artists around the world.

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[1] John Rawls, ‘Justice as Fairness: A Restatement,’ (Harvard University Press 2001) para 6.1. Found in Vanherpe, Jozefien. ‘Towards a fair balance in the digitized music industry - Setting the tone.’ (2022), at 133.

[2] Streaming platforms benefit from the pandemic because they implemented digital-based revenue models that are not susceptible to supply chain frictions. See Denk J, Burmester A, Kandziora M, Clement M, ‘The impact of COVID-19 on music consumption and music spending.’ (Plos One Collection, 2022).

[3] Recent economic studies reveal a shocking wage gap between artists and winners-take-all stars. See CREATE, ‘UK Authors’ earnings and contracts (2018): A survey of 50000 writers’, (2019). See, on similar topic, Report for the French Ministry of Culture, ‘L’auteur et l’acte de création’, (2020). See also, Tirto Indonesia, “Digital Music in Indonesia” (Tirto, March 11, 2016). Available at:  <https://tirto.id/menimbang-musik-digital-di-indonesia-bvv6.>, accessed December 5, 2022.

[4] Ibid, accessed December 5, 2022. 

[5] Ingham, ‘Taylor Swift thinks Spotify is a 'corporate machine.' You be the judge.’ (Music Business Worldwide, January 2019). Available at:  <http://www.musicbusinessworldwide.com/taylor-swift-thinks-Spotify-is-acorporate-machine-you-be-the-judge />, accessed December 5, 2022.

[6] Jari Muikku, ‘Pro Rata and User Centric Distribution Model: A Comparative Study,’ (Digital Media Finland, 2017), available at: <http://www.digitalmedia.fi/wp-content/uploads/2018/02/UC_report_final_171213.pdf> accessed December 5, 2022, at 14. See, a new study by marketing experts at Universität Hamburg and the Kühne Logistic University has now calculated the impact of pro-rata model.  Meyn, Janek, Michael Kandziora, Sönke Albers, and Michel Clement, ‘Consequences of Platforms’ Remuneration Models for Digital Content: Initial Evidence and a Research Agenda for Streaming Services’ (Journal of the Academy of Marketing Science, 2022). Available at: <https://www.uni-hamburg.de/en/newsroom/presse/2022/pm25.html.> accessed December 5, 2022.

[7] The notion of ‘appropriate and proportionate’ refer “to the actual or potential economic value of the licensed or transferred rights, taking into account the author’s or performer’s contribution to the overall work or other subject matter and all other circumstances of the case, such as market practices or the actual exploitation of the work.” Recital 73 EU CDSM Directive. See, Séverine Dusollier. ‘The 2019 Directive on Copyright in the Digital Single Market: Some progress, a few bad choices, and an overall failed ambition. ‘Common Market Law Review, Kluwer Law International, (2020), 57 (4), at 1021.

[8] Jari Muikku, supra note 7.

[9] Spotify Terms and Condition 2022, (Spotify, Inc., 2022). Available at:   <https://artists.spotify.com/guide/your-music> accessed December 5, 2022. See also, Rae, Andrew, Data Matters - ‘Spotify For Artists’, (The University of Glasgow, 2017).

[10] It is also essential to take into account that the performer's share of net revenue also determined by “stream share.” Spotify calculates "stream share" by tallying the total number of streams in a given month and determining the proportion of those streams in people listening to music owned or controlled by a particular performer.  See also Spotify Terms and Condition 2020, (Spotify, Inc., 2020). Available at:   <https://artists.spotify.com/guide/your-music> accessed December 5, 2022.

[11] Meyn, Janek, Michael Kandziora, Sönke Albers, and Michel Clement, supra note 7.

[12] This study is one of the first serious analysis on the consequences of a possible change in the remuneration of streaming listening from a “pro rata” model to a “user centric” model. Centre National de la Musique, ‘Le CNM évalue l’impact d’un changement éventuel de mode de rémunération par les plateformes de streaming’ (2021). Available at: <https://cnm.fr/le-cnm-evalue-limpact-dun-changement-eventuel-de-mode-de-remuneration-par-les-plateformes-de-streaming/> accessed December 5, 2022.

[13]. See Stuart Dredge, ‘SoundCloud goes user-centric with its fan-powered royalties,’ (2021), available at: <https://musically.com/2021/03/02/soundcloud-goes-user-centric-with-its-fan-powered-royalties/.> accessed December 5, 2022. See also, SoundCloud official website, available at: <https://soundcloud.com/pages/contact.> accessed December 5, 2022.

[14] SoundCloud Official Website, ‘Fan-powered Royalties FAQs,’ (2021) available at: <https://help.soundcloud.com/hc/en-us/articles/1260801306810.> accessed December 5,, 2022.

[15] Ibid.

[16] Ibid.

[17] Kriss Thakrar, Tatiana Cirisano and Perry Gresham, ‘Building a fan economy with Fan-Powered Royalties,’ (hereinafter Soundcloud and Midia Research Official Report), (2022). Available at: <https://midiaresearch.com/reports/building-a-fan-economy-with-fan-powered-royalties.> accessed December 5, 2022.

[18] Ibid.

[19] Didier Martin, ‘Music Streaming Must Switch to A Fair and Logical Payout Model’ (Outhere Music, 2021). Available at: <https://www.musicbusinessworldwide.com/the-streaming-music-industry-must-switch-to-a-fair-and-logical-payout-model-there-is-no-time-to-lose/> accessed December 5, 2022.