How Do Record Labels Earn From Online Streaming?

Kevin Ott
Streaming music business

The way the music industry calculates revenue from music streaming is notoriously complicated. As author Bobby Owsinksi explains to Hypebot: "Streaming music royalty rates are such a morass of different percentages and possibilities that few people on the planet totally understand everything." Despite the complexity, it's possible to get a general understanding of how it works, and it begins with understanding the two categories of streaming.

Two Types of Music Streaming

There are two primary categories of streams.

  • Non-interactive: Sometimes called a webcast streaming service, a non-interactive service functions like a radio station. You turn it on, then it takes care of picking all the music for you like a radio DJ. You can't access its library and play whatever you want. Pandora is an example of a non-interactive streaming service.
  • Interactive: Also known as an on-demand streaming service, the user has total access and control. They search the service's library for what they want to hear, when they want to hear it. Spotify and Apple Music are examples of this kind.

The difference is important for understanding revenue models.

How Record Labels Earn From On-Demand Streaming

Spotify and Apple Music gobble up almost the entire online streaming market (as much as around 83 percent of the market in some reports). They use a revenue sharing system with major record labels. (Indie labels are a little different; more on them in a moment.) The system works in the following way, as noted by employees of Spotify and the links above:

streaming music concept
  1. A paying visitor subscribes to a streaming service and pays a monthly fee or pays per track. A non-paying visitor plays music in the service's free tier that has commercials. This generates advertising revenue.
  2. The streaming service takes all revenue from both free and paid tiers and sets aside an agreed-upon percentage for record labels and rights holders.
  3. At the end of each month, the service examines how many plays each record label received for their songs, then divides the revenue to each record label according to the agreed-upon percentage in their contract. These percentages can vary for each record label, though as noted in the links above about Spotify and Apple, the rates are fairly similar for major labels.
  4. A song is not counted as an official "play" unless the song is played at least 30 seconds.
  5. After the record label receives their share of that month's revenue, they divide the profits among its artists according to their contract with each artist.

Artists have complained loudly that record labels are keeping too much of the streaming revenue. A report in 2015 noted labels were keeping close to 45 percent, and artists were lucky to get 7 percent. Or as TechDirt puts it, streaming services are paying large pay-outs, but labels are keeping most of the money and not passing it on to the artists.

Examples of On-Demand Streaming Services

The following examples show how the revenue sharing system works.

Spotify

As the previous links note, Spotify gives 52 percent of its streaming revenue to record labels. If, for example, you buy their Premium service for about $10 per month, $5.20 of what you paid is divvied out to the labels or rights holders who own the songs you listen to. If you use their free ad-filled service, 52 percent of ad revenue goes to the labels.

Apple Music

In the years leading up to 2017, Apple has been giving 58 percent of its streaming revenue to labels. This means that when you paid your $10 for your Apple Music monthly subscription, $5.80 went to record labels. Apple has announced it will be lowering that percentage to around 52 percent, the same as Spotify.

Deezer

Most on-demand streaming companies give a higher percentage of their revenue to labels than Spotify or Apple Music. Deezer, for example, gives 60 percent of its streaming revenue to major labels. It charges about $10 per month, so $6 of your monthly payment goes to labels.

Other On-Demand Streaming Services

Spotify and Apple Music used to pay as high as about 70 to 80 percent when they first began, but as they've gotten bigger, they've gained bargaining leverage and gradually reduced the cut. Other on-demand streaming services are about the same size as Deezer or far smaller, so most companies likely give at least 60 percent if not more to labels.

How Record Labels Earn From Non-Interactive Streaming Services

Radio-styled streaming services, such as Pandora and Slacker, generate less revenue and represent a much smaller portion of the streaming music market share. This is partly because:

  • They are regulated in ways similar to radio stations.
  • They must obtain a license from the federally created Copyright Royalty Board (CRB).
  • The CRB has set the royalty rate to $.0022 per stream, with room for adjustment from 2017 through 2020 to match the spikes or dips in the Consumer Price Index.

Whenever you listen to Pandora and it selects a song from a certain artist for you, it must pay $.0022 to the record label or rights holder of that song. The label then gives the artist however much the label's contract with the artist dictates.

Indie Labels

An unnamed indie label gave a publication total access to its earnings reports. It was a hefty-sized indie label with a 150-album catalogue and 115 million streams. A few things are clear from the report:

  • The per-stream rates are not uniform. Indie labels individually negotiate their contracts with streaming services, and the terms are likely not as favorable as the major labels, and they likely vary widely from label to label.
  • streaming revenue
    Rates change quickly based on market conditions. The Spotify per-stream rates in this indie label report contradict other reports online that were calculated for Spotify just a little over a year prior.
  • Spotify and Apple Music have become the giants of the streaming world. All other companies look like footnotes in comparison when you analyze each company's share in the streaming market.
  • Indie labels are having a very rough time in this new environment in which major labels and giant tech companies are calling all the shots.

The problem with this report is writers and readers have been taking these numbers that apply only to one indie label and treating it as the uniform standard for what all record labels and rights holders of songs will earn. This leads to the next point.

A Huge Disclaimer: Per-Stream Averages Are not Always True

Major labels and tech companies, such as Apple and Spotify, are opaque about the fine-print of their contracts, which are extremely complex. A leaked 42-page contract between Sony and Spotify in 2011 shows how complex their agreements are. The one-size-fits-all pay-per stream rates you'll read about on the internet are false equivalents that over-simplify a giant machine with many variables and moving parts that include:

  • Publishing contracts, which are negotiated separately from record labels and represent an entirely different topic that would require its own article
  • Different royalty rates for different levels of service such as "freemium" tiers that do not require subscription
  • Different rates for signed versus unsigned artists
  • Two sub-divisions of royalty types with each stream, the sound recording royalty (which is paid to whoever owns the sound recording), and the composition royalty (which is paid to whoever wrote the music and lyrics), which can be different for every record label and artist depending on how much of each royalty type they own

As an aside, when an artist asks, "How much do I make when someone plays my song on Spotify?" it is misleading to tell them their payout will be a certain amount per stream because Spotify or an article on the internet said they pay artists an average of (for example) $.007 per stream. Every per-stream rate will be different for every artist because there are too many individual factors that come into play for each artist.

Do Record Labels Still Make Money From iTunes?

The royalty rate-per-iTunes download is still the same as it always has been:

  • About 70 percent is paid to the record label or rights holder.
  • When you pay $1.29 to download a song from iTunes, $.90 goes to the label who gives a share to the artist according to their contract with the artist.

However, labels do not make nearly as much as they did before Spotify and Apple Music existed. As this label executive notes, iTunes and other digital downloads have been declining 20 to 30 percent year-to-year, and that decline will only increase as Apple slowly but surely lets digital downloads die to make room for streaming.

How Illegal Downloads Affect a Label's Bottom Line

Many people believe the days of music pirating are over. The opposite is true. The pirating of music has increased steadily over the last fifteen years at least, as this data analysis from 2015 notes. What this means for record labels is fairly simple:

piracy
  • The illegal peer-to-peer digital download phenomenon of the early 2000s gutted the music industry, and it has not recovered.
  • A report in 2017 showed the first sign of hope: an increase in the music industry's profits that hasn't been seen since the '90s. This is all thanks to the new streaming service model.
  • Despite signs of what might be the beginning of a recovery, the music industry's revenues in 2017 are still only half of what they were in the late '90s. The pirating of music is still a big part of an environment that prevents record labels and artists from returning to the glory days when Prince partied like it was 1999.

Yes, things like Spotify and Apple Music are finally giving the music world a sliver of hope again, but illegal downloads are still causing massive damage to the music industry, and the pirating continues to increase.

Will Big Tech Companies Replace Record Labels?

Musicians like Chance the Rapper are declaring the mid-to-late 2010s the golden age of the independent artist, thanks to the music streaming revolution. Though Chance has not signed to a record label, he seems very dependent on Apple, which begs a bigger question: will record labels someday be replaced by giant tech companies like Apple? Though the streaming model has created a boom for labels, it's hard not to wonder if it might someday be their doom.

How Do Record Labels Earn From Online Streaming?