Why We Wrote This Guide

This guide serves as a logical continuation of our previous guide, the Digital Download. In order to better understand the context and content of On-Demand Music Streaming and its role within the music industry, we recommend starting there first.

Thanks to the advent of the Internet and ever-improving digital technology over the last decade, the digital music industry has gained significant momentum. A wide range of digital platforms—streaming services, downloads, digital media players, webcasters, and more—have grown and consolidated to become major players in an entirely new sector of the music industry. Streaming is one of the most popular digital formats among digital music listeners, with an estimated 92.2 million U.S. streaming users in 2016, according to Statista, an online market data portal.

The trend does not appear to be slowing any time soon. Streaming is expected to take over as the main source of digital music in the United States by 2021, based on a projected total of 119 million streaming users. Not only is streaming estimated to become the most popular digital music format in the U.S., but it is also estimated to become the most profitable. In the past decade, a plethora of businesses within the music industry—Spotify, Amazon Prime Music, Apple Music, Soundcloud, iHeart Radio, Deezer, TIDAL— have attempted to meet this demand for digital music. Spotify ranks among the most popular services among younger digital music listeners: In 2017, 38% of Spotify users were between the ages of 12 and 24, according to Statista.

Americans spent roughly 6.7 billion hours listening to digital music per month in 2016. According to Statista, among the most popular music genres, dance/electronic, R&B/Hip-Hop, and Latin music were more likely to be consumed via streaming services than on physical albums. These numbers continue to rise.

Music industry standards in relation to on-demand music streaming are changing in real time as major players reach various agreements with each other and address the challenges and opportunities of new sources of digital media.

Table of Contents

The Meaning of "On-Demand"
Performance Royalties for the Master
Performance AND Mechanical Royalties for the Underlying Composition
Types of DSPs
Sources

The Meaning of “On-Demand”

On-demand music streaming contrasts with non-interactive webcasting because it is an interactive service, meaning the user is able to listen to any song in the Digital Service Provider (DSP)’s database without any restrictions on time or playback capabilities. The user can pause, skip, rewind, and create playlists—but not copy the digital file.

Popular on-demand music streaming services include Spotify, Tidal, SoundCloud, Apple Music, and Bandcamp. In the world of computing, such DSPs are considered “cloud servers,” meaning they operate via remote servers which store data and allow users to access them wherever there is accessible Internet.

To date, two tiers of on-demand music streaming exist:

  • Advertiser-Supported/“Freemium”: The on-demand digital service provided is free to the listener and supported by advertisements.
  • Subscription/Premium: The on-demand digital service provider charges a monthly subscription fee to users, who can listen without advertisements.

Performance Royalties for the Master

The Digital Performance Right in Sound Recordings Act of 1995 instituted a public performance royalty for artists and record labels when certain sound recordings are performed through digital audio transmissions, opening a world of royalty revenue previously only available to songwriters and music publishers.

The 1995 Act only refers to subscription-based on-demand music streaming. However, the Digital Millennium Copyright Act of 1998 extended this right to webcasters offering non-interactive streaming (to learn more about this, visit Non-Interactive Streaming). License rates and terms between DSPs and master copyright owners are decided by voluntary negotiation or compulsory arbitration.

From the DSP to the Record Label to the Recording Artist

On-demand music streaming deals between record labels and DSPs (e.g. between Sony Music Entertainment and Spotify) typically award the record labels a large percentage of the DSP’s advertising revenue and/or subscription fees, multiplied by the fraction of plays for each master over the number of plays that occur in total on the DSP.

It is important to note that these deals do not occur on a recording artist to recording artist basis; a record label will negotiate with a DSP for royalty rates that apply to every artist on its roster. A recording artist may negotiate for better terms separately with the record label in his or her recording contract, but is it highly unlikely that an artist will negotiate directly with a DSP.

  • Step #1: A Per Subscriber Minimum To All Record Labels

Most agreements involve a per-subscriber minimum, which means the record labels receive a certain royalty for each subscriber, regardless of how many times a master gets played on the DSP or how much the DSP collects. This provision is included to discourage a DSP from dropping prices too low to build more subscribers.

For Example: A contract between a record label and a DSP might specify that the total amount of royalties due to the record label cannot be less than 60% of $5 per subscriber. In this case, the total amount of money the record label receives, no matter which masters get played, cannot drop below $3.00 per subscriber. If this agreement were between Sony Music and Spotify, then Sony Music’s per subscriber minimum would be $249,000,000, given Spotify’s 83 million subscribers in 2018 multiplied by Sony’s per subscriber minimum of $3.00.

  • Step #2: A Fraction Based on Master Plays for Individual Record Labels

Then, this per-subscriber minimum is pro-rated against all the other record labels that license masters to the DSP based on the number of plays, meaning the record label’s royalty total gets multiplied by a fraction, the numerator of which is the number of the record label’s masters played on the DSP and the denominator of which is the total number of masters played by every record label licensing to the DSP.

For Example: Thanks to the per subscriber minimum specified above, the DSP must pay $3.00 per subscriber to all the record labels which licensed it to use the masters on its site. But if Sony Music’s masters attributed for 40% of Spotify’s total streams in a month, Sony Music would receive 40% of $3.00, or $1.20 per subscriber. Given Spotify’s number of subscribers, Sony Music’s TOTAL ROYALTIES from the DSP would equal $99,600,000.

  • Step #3: A Fraction Based on Master Plays for Recording Artists

Finally, the pro-rated per-subscriber minimum is pro-rated again to a given record label’s individual recording artists based on each master’s number of plays on the DSP.

For Example: If a Sony Music recording artist’s masters were streamed on the DSP 300,000 times, and Sony Music’s total streams across all of its recording artists were 12,000,000, the recording artist’s streams would equal 2.5% (300,000/12,000,000) of Sony’s total streams. Given the per subscriber minimum totals specified above, $0.03 would be attributed to the artist’s masters.

  • Step #4: A Recording Artist’s Specific Royalty Rate

A recording artist’s royalty rate would determine what percentage of the recording artist per subscriber minimum specified in Step #3 would apply to artist royalties.

For Example: If the Sony recording artist had a royalty rate specified in his or her contract equalling 10%, then he or she would receive $0.003 per subscriber.

Keep in mind these figures are hypothetical. Real numbers will vary from case to case.

Performance AND Mechanical Royalties for the Underlying Composition

In order for a website to play a song, the site must obtain a performance license from the applicable PRO—in the United States, either ASCAP, BMI, SESAC, and/or GMR—or obtain a direct license with the underlying copyright owner, usually a music publisher.

In 2008, the Copyright Royalty Board affirmed a settlement agreement between the National Music Publishers Association (NMPA), the Nashville Songwriters Association International (NSAI), the Songwriter’s Guild of America (SGA), the Recording Industry Association of America (RIAA), and the Digital Media Association (DMA) which established a compulsory statutory mechanical rate for on-demand music streaming.

Most interactive streaming mechanicals in the United States are collected and paid via Harry Fox and Music Reports—for now. The Music Modernization Act (MMA), signed into law on October 11, 2018, is establishing the Mechanical Licensing Collective (MLC). The MLC will be the new home for mechanical licensing from streaming.

Types of DSPs

The royalty breakdown depends on the exact type of service offered by a DSP. Below is a list of DSPs which pertain specifically to on-demand music streaming.

DSP Description of Service Provided Example
Standalone, Non-portable, Streaming-Only User can listen to sound recordings only in the form of interactive streams and only from a non-portable device which transmits streams over a live network connection. A user streams Spotify from his or her work computer at the office over a live network connection.
Standalone, Non-portable, Mixed Use User can listen to sound recordings via a limited download or interactive stream, but only from the non-portable device where the stream or download was originally transmitted. A user downloads a song from Spotify onto his or her desktop.
Standalone, Portable User can listen to sound recordings via limited download or interactive stream from a portable device. A listener accesses Spotify from his or her cell phone.
Bundled Services User can access one or more products or services bundled together for the same price (e.g. when a user can buy a portable device and a one-year subscription to a streaming/downloading service for the same price). A smartphone provider might offer a one-year subscription to a streaming service like Spotify.
Free, Non-Subscription / Ad-Supported Services User can listen to sound recordings via interactive stream or limited download free of charge. (e.g. Spotify free tier) Spotify offers a “freemium,” ad-supported version of its services.

“Pass-Through” Licences mentioned in the following tables refer to licenses in which record labels license mechanical rights directly on a music publishers’ behalf to DSPs.

Stand-Alone, Non-Portable, Streaming Only

  • Step #1: Calculate the All-In Royalty Pool*
Whichever amount is greater between... (a) ...10.5% of DSP revenue
(b) ...whichever amount is least between... ...$0.50 per subscriber per month
...22% OR 18% of DSP payment to the record label for sound recordings**

* Contains the mechanical AND performance royalty for the underlying composition.

**22% if the licenses are not pass-through, 18% if they are pass-through.

  • Step #2: Calculate the Payable Royalty Pool
Whichever amount is greater between... (a) ...the mechanical royalties from the all-in royalty pool
(b)
...$0.15 for each qualified subscriber per month

  • Step #3: Allocate the Payable Royalty Pool
[Payable Royalty Pool] / [Total Number of “Plays”] = Royalty Per “Play”

Stand-Alone, Non-Portable, Mixed Use

  • Step #1: Calculate the All-In Royalty Pool*
Whichever amount is greater between... (a) ...10.5% of DSP revenue
(b) ...whichever amount is least between... ...$0.50 per subscriber per month
...21% OR 17.36% of DSP payment to the record label for sound recordings**

* Contains the mechanical AND performance royalty for the underlying composition.

** 21% if the licenses are not pass-through, 17.36% if they are pass-through.

  • Step #2: Calculate the Payable Royalty Pool
Whichever amount is greater between... (a) ...the mechanical royalties from the all-in royalty pool
(b)
...$0.30 for each qualified subscriber per month

  • Step #3: Allocate the Payable Royalty Pool
[Payable Royalty Pool] / [Total Number of “Plays”] = Royalty Per “Play”

Stand-Alone, Portable, Mixed Use

  • Step #1: Calculate the All-In Royalty Pool*
Whichever amount is greater between... (a) ...10.5% of DSP revenue
(b) ...whichever amount is least between... ...$0.80 per subscriber per month
...21% OR 17.36% of DSP payment to the record label for sound recordings**

* Contains the mechanical AND performance royalty for the underlying composition.

**21% if the licenses are not pass-through, 17.36% if they are pass-through.

  • Step #2: Calculate the Payable Royalty Pool
Whichever amount is greater between... (a) ...the mechanical royalties from the all-in royalty pool
(b)
...$0.50 for each qualified subscriber per month

  • Step #3: Allocate the Payable Royalty Pool
[Payable Royalty Pool] / [Total Number of “Plays”] = Royalty Per “Play”

Bundled Services

  • Step #1: Calculate the All-In Royalty Pool*
Whichever amount is greater between... (a) ...10.5% of DSP revenue
(b) ...whichever amount is least between... ...$0.50 per subscriber per month
...21% OR 17.36% of DSP payment to the record label for sound recordings**

* Contains the mechanical AND performance royalty for the underlying composition.

** 21% if the licenses are not pass-through, 17.36% if they are pass-through.

  • Step #2: Calculate the Payable Royalty Pool
Whichever amount is greater between... (a) ...the mechanical royalties from the all-in royalty pool
(b)
...$0.25 for each qualified subscriber per month

  • Step #3: Allocate the Payable Royalty Pool
[Payable Royalty Pool] / [Total Number of “Plays”] = Royalty Per “Play”

Free Non-Subscription / Ad-Supported Services

  • Step #1: Calculate the All-In Royalty Pool*
Whichever amount is greater between... (a) ...10.5% of DSP revenue
(b) ...whichever amount is least between... ...$0.50 per subscriber per month
...22% OR 18% of DSP payment to the record label for sound recordings**

* Contains the mechanical AND performance royalty for the underlying composition.

** 22% if the licenses are not pass-through, 18% if they are pass-through.

  • Step #2: Calculate the Payable Royalty Pool
Separate mechanical royalties from the All-In Royalty Pool.

  • Step #3: Allocate the Payable Royalty Pool
[Payable Royalty Pool] / [Total Number of “Plays”] = Royalty Per “Play”

Sources

https://www.statista.com/topics/1386/digital-music/

https://support.tunecore.com/hc/en-us/articles/115006688388-What-are-downloads-and-streams-

https://www.billboard.com/articles/business/7476929/music-licensing-pricing-primer-copyright-royalty-board-statutory-mechanical-performance

https://www.harryfox.com/find_out/rate_charts.html

https://blog.songtrust.com/streaming-royalties-explained

http://www.mgonzalezlaw.com/www.mgonzalezlaw.com/GLOSSARY_OF_TERMS_USED_IN_THE_MUSIC_INDUSTRY.html

https://blog.songtrust.com/publishing-tips-2/the-2-types-of-digital-music-streams-how-you-can-collect-royalties-from-both

https://www.easysonglicensing.com/pages/help/articles/music-licensing/music-licensing-for-streaming.aspx

https://themusicsolution.songtradr.com/2017/02/21/what-you-need-to-know-about-streaming-royalties/

https://dima.org/wp-content/uploads/2018/04/DiMA-Streaming-Forward-Report.pdf

This guide was composed by Luke Evans, Mamie Davis, Jacob Wunderlich, Rene Merideth, Jeff Cvetkovski, & Aaron Davis.

Want to use this guide for something other than personal reading? Good news: you can, as long as your use isn’t commercial and you give Exploration credit.

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