For all the discussion surrounding streaming royalties, there is often much confusion regarding how they actually work. Here we break down the various types of streaming, the difference between paid and unpaid, and sound recording vs. composition royalties.
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Guest Post by Bobby Owsinski on Music 3.0
Streaming music royalty rates are such a morass of different percentages and possibilities that few people on the planet totally understand everything, and the ones who do are attorneys working in that narrow end of the music business. Even label and publishing execs who have been in the business for 20 or more years can be confused. That’s one reason artists and songwriters frequently cite low rates on what seem to be a large number of streams. It’s also why an average royalty rate is used in articles about this side of the business. Here’s an excerpt from my new Music 4.1 book that tries to clarify some of the misunderstandings by starting with the streaming royalty basics.
“Let’s see if we can at least make sense of why it’s frequently impossible to determine what an exact streaming royalty rate is.
First of all, there are two basic variables to remember that everything streaming works from:
1. There are two kinds of streams—noninteractive or webcast (Pandora), and interactive or on-demand (Spotify). On-demand pays more because it generates more money.
2. There are two tiers for each stream—premium (paid subscribers) and freemium (ad supported). The paid tier generates a higher revenue per subscriber than the free, ad-supported tier.
With this in mind, there are two different copyrights for each stream (the same as for a CD, vinyl record, or download), regardless of the tier, which provide a royalty stream:
1. A sound recording royalty (that the owner of the sound recording gets)
2. A composition royalty (that the publisher and songwriter get)
You can think of the sound recording as what you hear played on Pandora or Spotify (or a CD, vinyl, or download for that matter), while the composition is the notes and lyrics on paper.
Within those parameters there are a tremendous number of variables that can occur, all of which affect both the payout for the sound recording and the composition. Let’s explore the different types of streams first.
The Different Types of Streams
What most artists and bands don’t realize is that there are two types of streaming services, and they each operate differently and therefore pay at a different rate.
Noninteractive Streams
The first type of streaming is called a noninteractive or webcast stream and comes from either a platform that acts as an online radio station, like iHeart Radio or any traditional broadcaster with an online presence (like your local radio station), or a service like Pandora where the user has a certain amount of control over what plays but can’t directly select a song or make it repeat. Streaming platforms in this category include services like Pandora and Last.FM. SiriusXM and the music channels on cable television also fit into this category.
All noninteractive streaming services must obtain a congressionally created “compulsory” license with the rate set by an entity called the Copyright Royalty Board (CRB), which I write about in more depth later in the “How Royalty Rates Are Set” section. The CRB recently set the rates for 2016 and beyond for radio broadcasters with terrestrial radio stations at $0.0022 ) per stream. Noninteractive platforms like Pandora pay $0.0022 per stream from a paid subscriber and $0.0017 per stream on the free tier.
Interactive Streams
Interactive or on-demand streams are treated differently from the radio-style streams in that the rate is considerably higher (between $0.005 and $0.009, depending on how much the listener pays per month, among other factors). Services that provide interactive streaming include Spotify, Google Play, Tidal, Apple Music, and Slacker.
The down side here is that if you’re signed to a label, money from interactive streams is paid directly to them. You’ll then be paid by the label based on the royalty amount negotiated in your agreement with them. For instance, if you negotiated a 15 percent royalty rate, then you’ll be paid 15 percent of $0.005 (using that number as an average), or $0.00075 per stream.
If you’re not with a label, the money will be collected by SoundExchange or an aggregator like TuneCore, Ditto Music, or CD Baby if they distributed your songs to the online streaming services.
Average Streaming Type Royalty Paid
Interactive On-demand – $0.005 to $0.009 (average depending upon the tier)
Commercial Broadcasters – $0.0022
Noninteractive – $0.0022 (paid tier) $0.0017 (free tier)
On top of the royalty paid to the artist and label, there’s also a publishing royalty that varies yet again from the above rates, which we’ll cover in the next section.
You can see why artists, bands, musicians and even record labels can be confused about how much they’re receiving from streaming. As The Temptations once sang, it’s a “ball of confusion.”
This is just the tip of the iceberg when it comes to revenue splits and royalty payments from streaming music. It also doesn’t cover the publishing side of streaming, which is another issue entirely. That said, in the coming weeks I’ll go beyond the basics to explain more about how each streaming music royalty actually works.
You can read more from Music 4.1: A Survival Guide To Making Music In The Internet Age and my other books on the excerpt section of bobbyowsinski.com.