SoundCloud is adopting the user-centric payment model, branding it ‘fan-powered royalties‘. I’m a proponent of the system and was even product director at a music streaming service that employed a user-centric model (IDAGIO’s ‘Fair Artist Payout Model’). Yet, recently I wrote a piece in which I worried about fan-powered royalties being a distraction for SoundCloud, so here are four reflections on the latest announcement.
[Out of the loop? Read my primer on user-centric payment models.]
#1 Recalculations of revenue distribution don’t tell the full story
I’ve sat in on more than a few discussions about user-centric payment models. These discussions often cite research papers that compare how the status quo of music revenues would differ in a user-centric model versus pro rata model. While it’s important to use the data at hand, this also causes a bias.
The streaming landscape, including the vast majority of all digital strategy employed by labels & artists, are based on a pro rata model. What types of services would succeed in a user-centric landscape? What type of strategies would emerge?
#2 SoundCloud should consider fan-powered royalties a platform pivot
The way music streaming services function is strongly influenced by their economics (funding models, user payments, rightsholder compensation models).
Music streaming services sell the catalogue to get new subscribers, who are treated as listeners first, fans second. “Music for every moment”: radio stations, curated playlists, autoplay – all ways to stretch people’s listening sessions to get more value out of the service & either subscribe or stay subscribed (or at the very least trigger more ads).
In a user-centric model, encouraging high listening diversity runs counter to artists’ interests. If I start a rap career (under an alter ego, to avoid another trademark claim) and I bring a fan to a platform because it’s user-centric, I do not expect that platform to then do everything in its power to make sure that fan listens to many other artists, thus diluting the value I get per fan. Rather, I’d expect the relationship to look a bit more like fan clubs (e.g. some crossover between the Patreon / OnlyFans walled garden model and streaming’s attention diffusion model).
In other words: SoundCloud should follow these fan-powered royalties with feature sets that make the platform more fan-centric.
#3 The flaw is in the subscription model, more so than the remuneration model
60,000 songs are added to Spotify daily. The democratization of music has been great if you think it’s important that more people than ever participate in the creation of recorded music. It’s also creating an increasingly competitive landscape.
What happens when the entire potentially addressable market has been sold streaming subscriptions? The pie stops growing. Long before that, the growth of that pie will slow down much faster than the number of new artists adding their music to services’ catalogues.
Streaming subscriptions are a dead end road. A user-centric model only rewards those artists whose fans don’t listen to a lot of music or are extremely loyal, thus maintaining a high “average listening-share per user“. User-centric models don’t generate more revenue.
One of the most insightful people about this problem, who regularly writes & speaks about it, is Mark Mulligan.
#4 Music streaming services need to become ‘music services’ with revenue models that scale vertically
I’m going to skip over some important nuance:
Streaming is not a feature. Music access wasn’t a problem. Piracy solved that. Legal music access was a problem. Rightsholder remuneration was a problem.
For nuance, read my 2016 piece “Streaming is not the future of the music economy“.
When you look back at the history of streaming services like SoundCloud and Spotify, you find an era with APIs that allowed external developers to tack on all kinds of additional experiences. Much of that has been shuttered (in part due to licensing agreements) and an assumption has emerged that music streaming subscriptions paired with the familiar UX conventions are the definitive model. They’re not.
Music streaming was only supposed to be the base layer. It’s a layer on which we need to build alternative revenue streams that scale vertically. I may be butchering economic terms here, so what I mean with that is this:
Music streaming has done a tremendous job at scaling horizontally: getting millions of people around the world to pay a flat monthly fee of $10, or the local equivalent. It has done a horrible job at scaling vertically: fans with more to spend basically go unmonetized.
Meanwhile, the model for artists still looks the same:
- Make great music.
- Grow your fan base.
- Monetize your most limited resource.
That most limited resource is time. A live show is a limited event. A virtual meet & greet is limited. A livestream is limited. An autographed shirt or record is limited. An NFT is limited.
Streaming services, besides integrating merch, have done very little to create new revenue opportunities for artists. This is a failure of the landscape, rather than specific services. It’s hard to run a music streaming service: the economics are brutal. You have a high burn rate with upfront ‘minimum guarantees’ paid to rightsholders, you need to justify that burn rate to investors with fast growth, so streaming services tend to get locked into a single model.
The first link in this article, about SoundCloud’s fan-powered royalties, goes out to Fred Wilson‘s blog – an investor in SoundCloud. Hopefully it’s a signal of an understanding between SoundCloud’s leadership & investors that the company has to pivot from being a music streaming service, to being a music service that supports fan-centric business models.
That’s essential, because what happens now is that an expectation has been created with artists. They expect fan-powered royalties to work out better for them, but what’s the strategy to grow the pie?
