What Are Spotify Royalties?

Spotify royalties refer to the payments made to rightsholders and creators for the music streamed on the platform. These payments compensate for the use of both the sound recording and the underlying musical composition.

The most commonly discussed type of Spotify royalty is recording royalties. This is the money owed to rightsholders for recordings streamed on Spotify. These funds are not paid directly to artists by Spotify but rather to the licensor that delivered the music, which is typically their record label or distributor. It is then up to the licensor to pay the artist based on their specific contractual agreements.

Types of Royalties on Spotify

Spotify's royalty system is designed to compensate various parties involved in music creation and distribution. Payments are broadly divided into two main categories:

Recording Royalties

• What they are: Payments made for the actual sound recording that listeners stream.
• Who earns them: These royalties are earned by the owners of the sound recording, typically record labels, independent distributors, or the artists themselves if they own their masters directly.
• How artists receive them: Spotify pays these royalties to the record labels or distributors. Artists then receive their share from these entities based on their individual contracts, which often include deductions for advances, marketing costs, and the label's share.

Publishing Royalties

These royalties are paid for the underlying musical composition (the song's lyrics and melody) and are distinct from the sound recording. They are further broken down into two types:

• Mechanical Royalties:
  • What they are: Payments for the reproduction and distribution of the musical composition. When a song is streamed, a mechanical royalty is generated because the composition is essentially "reproduced" digitally.
  • Who earns them: Songwriters and their music publishers.
  • How they are collected: These are typically collected by mechanical rights organizations or publishers and distributed to songwriters based on their agreements.
• Performance Royalties:
  • What they are: Payments for the public performance of the musical composition. Streaming a song on Spotify is considered a public performance.
  • Who earns them: Songwriters and their music publishers.
  • How they are collected: These are collected by Performing Rights Organizations (PROs) such as ASCAP, BMI, SESAC (in the U.S.), or equivalent societies internationally, and then distributed to songwriters and publishers.

How Spotify Calculates and Pays Royalties

Spotify does not pay artists or songwriters a fixed "per-stream" rate. Instead, it uses a complex "pro-rata" system based on market share. Here's a simplified overview:

1. Revenue Pool: Spotify generates revenue primarily from premium subscriptions and advertisements from its free tier. This revenue is then aggregated into a large pool.
2. Royalty Pool Allocation: A significant portion of this revenue pool is designated for royalties (usually around 70%).
3. Pro-Rata Share: This royalty pool is then divided among rightsholders (labels, distributors, publishers, PROs) based on their "market share" of total streams. If a particular artist's songs account for 1% of all streams in a given month, their rightsholders would receive 1% of the total royalty pool designated for that type of royalty.
4. Factors Influencing Payments: The actual value of a stream can vary significantly based on several factors, including:
   • Subscription Tier: Streams from premium subscribers generally generate more revenue than streams from free, ad-supported users.
   • Geographic Location: Royalty rates can differ by country or region due to varying market conditions, currency exchange rates, and local licensing agreements.
   • Negotiated Rates: Spotify enters into direct agreements with labels, distributors, and publishers, and the terms of these agreements can influence the payout rates.

Understanding the Payment Flow to Artists

It's crucial for artists to understand that Spotify does not typically send royalty payments directly to them. The money follows a specific path:

This multi-layered system means that an artist's final payout depends not only on their stream count but also on the specific agreements they have with their record label, distributor, and music publisher or PRO.