Spotify's Two-Tier Licensing Update

Spotify's Two-Tier Licensing Update

In the dynamic realm of music licensing, Spotify continues to make significant strides, reshaping the landscape with its latest licensing strategies. As industry enthusiasts, we delve into Spotify's recent repositioning of two-tier licensing, recognizing the pivotal advancements that signal a closer alignment with artists, labels, and listeners alike.

​The Evolution of Spotify's Licensing Model

Understanding Two-Tier Licensing

Spotify's recalibration of its licensing approach introduces a nuanced two-tier system. This model addresses the intricacies of music rights, creating a more equitable framework for both emerging and established artists. The first tier caters to mainstream content, while the second tier opens avenues for independent and niche genres. This strategic move not only diversifies Spotify's music library but also fosters inclusivity within the industry.

The main benefits outlined by Spotify are:

• Reducing fraud (financial penalties for actors that manipulate streams)
• Cutting back on ‘noise’ (increasing the minimum stream length to two minutes

The cumulative impact of these measures will be more money going into the royalty pot for ‘honest hard-working artists’. This is all positive and represents part of a much needed recalibration of the wider model to tackle the long-term rise of unintended consequences of the streaming economy.

However, because the two-tier royalty system is also deployed alongside these measures, it will still be bigger artists that benefit from the larger royalty pool. Spotify states that redistributing the revenues from the end of the tail will be more impactful for ‘these tens of millions of dollars per year to increase payments to those most dependent on streaming revenue — rather than being spread out in tiny payments that typically don’t even reach an artist’. Spotify also makes the important point that most of the royalties from <1,000 stream tracks do not even make it to the artists because they do not meet the minimum payout levels set by labels and distributors.

Of course, this means that labels and distributors who have a substantial numbers of songs with <1,000 streams will see portions of their income withheld. For smaller labels this could be impactful. All labels shoulder risk knowing that a majority of their artists are unlikely to deliver them a profit. Bigger labels, major labels especially, hedge this bet by only paying artists royalties once they have generated more income than the advances the labels pay them. Smaller labels can rarely afford to pay advances and they also typically pay a higher share of royalties (e.g., 50%) to artists. So, having a payout threshold of, say, $50 per track, is their means of hedging risk. Some of that hedged risk will go out of the window for smaller labels. 

And to be clear, I am referring here to genuine smaller labels, not to sinical ones that who trade in 30 second noise clips to gain the system. Those labels will suffer in this system, and rightly so.

A larger label might argue that smaller labels should simply focus on signing tracks with more potential, but the label marketplace is a competitive one. The ‘bigger artists want to go to bigger labels’ dynamic applies to the bottom of the tail too – it just translates to ‘not-so-small artists want to go to not-so-small labels’. Unless a label is investor backed, they all need to start small. There is a risk that these smaller labels do not have a voice in this debate.

But, let’s revisit this objective: ‘increase payments to those most dependent on streaming revenue — rather than being spread out in tiny payments’. 
(It is also important to note that the 1,000 streams threshold is for songs, not artists. So, many artists (and labels) will receive royalties for some, but not all of their songs. So this is not just about artists with <1,000 streams.)

While this is true at the input stage, it does not necessarily translate on the output stage. Assuming that the <1,000 streams revenue was worth around $60 million in 2023 (Spotify says “tens of millions”). Then, taking Spotify’s own Loud and Clear figures, applying the $0.03 per stream royalty, and distributing that on a share-of-streams basis for all other artists, provides an income translating to an extra +/- 1% of annual Spotify royalty income for those artists. So, the system takes money that is insignificant to the bottom of the tail and then divides it up into amounts that are insignificant, in relative terms, to the rest.
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To be clear, some artists will get a good payout, peaking at somewhere around $20,000 for the top artists. However, as they already earn over a couple of a million each, that amount is probably not meaningful to them in relative terms.

Impact on Artists and Labels

Empowering Independent Voices​

Spotify's commitment to nurturing emerging talent is evident in its revamped licensing structure. Independent artists and labels now find a dedicated space to showcase their creations. This democratization of the platform ensures that musical diversity flourishes, offering a broader spectrum of choices for listeners.

Strengthening Artist-Platform Relationships​

The repositioning of licensing tiers strengthens the bond between Spotify and artists. By acknowledging the unique challenges faced by various segments of the industry, Spotify demonstrates a proactive stance in fostering symbiotic relationships. This not only enhances artist satisfaction but also positions Spotify as a trailblazer in promoting a fair and sustainable music ecosystem.

​User Experience and Market Penetration

Enriching User Experience

Spotify's meticulous approach to licensing extends beyond the artist-label dynamic. It directly influences user experience by tailoring content to diverse preferences. With an expansive library catering to both mainstream and niche tastes, Spotify emerges as the go-to platform for a comprehensive and satisfying musical journey.

Market Penetration and Competitive Edge

As Spotify refines its licensing strategies, it secures a competitive edge in the market. The two-tier model positions Spotify as a pioneer in accommodating the evolving needs of both artists and listeners. This foresight not only strengthens its current user base but also attracts new subscribers, solidifying its standing as an industry leader.

​Future Possibilities and Industry Implications

Paving the Way for Industry Innovation

Spotify's strategic licensing evolution sets a precedent for industry-wide innovation. By challenging conventional norms, the platform propels the music industry into a new era of adaptability and collaboration. This not only benefits Spotify but also sparks a ripple effect, inspiring other platforms to reassess and refine their licensing approaches.

Shaping the Future Landscape​

In anticipating the future of music licensing, Spotify's proactive measures position it as a key influencer in shaping industry trends. The platform's commitment to flexibility and inclusivity establishes a benchmark for others to follow, ensuring a harmonious and progressive future for the global music landscape.

Spotify’s new positioning of two-tier licensing is fair, reasonable and positive in most respects. The associated (but separate) noise and fraud measures are super important and will help bring greater fairness and equity to the system. But distribution of the <1,000 stream royalties remains a sticking point. As it will have such a small impact on the income of other artists, surely funneling these “tens of millions” into an artist development fund is a win-win.