While brand names like Spotify and Pandora have become synonymous with music streaming on the Internet, most customers do not understand that a subtle but significant difference between the business models of Spotify and Pandora greatly impact the way licensing revenues are treated and how artists are compensated.
Traditionally, radio play has accounted for a large amount of income generated by music artists. Music artists and their publishers are generally paid a percentage of royalties each time a song is broadcast via radio waves. Naturally, because radio play constitutes public performance of a musical piece, copyright law often governs radio play as well as the streaming of songs through Internet services. As such, performance rights organizations (“PROs”) generally manage and handle the negotiation of royalties, percentages, and distribution of income to music rightsholders.
Even if you are not in the industry, most of the general public has become familiar with famous PROs such as Broadcast Music Inc. (“BMI”), the American Society of Composers, Authors and Publishers (“ASCAP”), and the Society of European Stage Authors and Composers (“SESAC”).
As the digital revolution has brought about new streaming services, new PROs have also arrived on the scene to negotiate the percentage of royalties to be collected for music streamed or performed via a digital platform. SoundExchange, specifically, has emerged as one of the most preeminent PROs operating in the digital space. .
While most recognize that Pandora and Spotify stream music through different models (i.e., on-demand vs. station-play), few recognize that this significantly impacts the licenses each company negotiates with rightsholders. For instance, to be able to provide songs on-demand, Spotify must specifically request permission and pay specific royalties tied to that song whenever a user selects a song to be played on-demand. Pandora, on the other hand, has historically negotiated large, overarching licenses to an artist’s music catalogue, allowing them to stream an artist’s entire catalogue, subject to less control from the artists and PROs, because the end-user consumer has no direct control over which song is to be played or if that song can even be repeated or rewound.
While Spotify’s on-demand model has made it incredibly popular with end users, Spotify claims that is has been unable to turn a profit since its inception, particularly because its income streams must often be immediately funneled back as payment for rights to play each song. Spotify’s “market share” payment approach, which pays artists a fixed price per song or album based on their market share (i.e., the number of streams per songs in proportion to the total songs streamed) has led to Spotify paying approximately 70% of their income to rightsholders directly, who then go on to pay artists from that compensation received. As a result, Spotfiy has come under fire from many high-profile artists, including Taylor Swift and Radiohead, who claim that they receive very little compensation despite massive streaming of their songs on Spotify.
Despite Spotify’s woes, however, Pandora has decided to move forward with plans to launch their own premium on-demand subscription service. Even though Pandora has also long been intertwined in legal disputes with PROs (e.g., ASCAP) over the payment of royalty fees, their entrance into the on-demand streaming service marks a new chapter in the digital streaming revolution. Industry experts are eager to observe Pandora’s maneuvers in the new space and see how licensing law and contracts adapt to the increasingly expansive presence of music streaming services and their impact on royalties and artists’ compensation.