How Do Streaming Services Calculate & Distribute Royalties?

Streaming revolutionized the music industry, transforming how labels, artists, and other stakeholders make revenue. While there was undeniably a rocky start to streaming, it's now a multibillion-dollar industry. Globally, the music streaming market will generate nearly $30 billion in revenue, and projections show that figure climbing in the coming years. Streaming has long surpassed physical sales, reportedly contributing 84 percent of the entire music industry's revenue.

Many great streaming services are available, including Spotify, Pandora, Apple Music and more. But how do streaming services calculate and distribute royalties to artists? Streaming platforms distribute music to the masses, and artists often receive royalties from multiple digital service providers (DSPs). In this blog, we'll dive into the complex work of music royalties and provide insight into how artists get paid.

What Are Music Royalties?

First, let's define music royalties. Royalties are payments made to individuals who own the rights to a piece of music. These days, a single song can have many right holders. Most people know that songwriters and recording artists own some rights. However, intermediaries like labels, producers, and publishers can also own rights. Every time a song plays on a streaming platform, all those rightsholders must get their piece of the pie.

DSPs must pay royalties for the song's licensed use. It's important to remember that streaming platforms don't own the songs they make available to users. Instead, they license them from rights holders and must legally pay to stream them to subscribers. 

Music rights and loyalties are a complex beast. If you're an artist or rightsholder, you should consult attorneys well-versed in copyright law and licensing agreements to understand the royalties owed. The amount generated depends on many factors, including how well a song performs on streaming platforms, usage, and licensing.

How Do You Earn Them?

The most straightforward way to earn royalties is to produce content people want to listen to. If you write a song, it's your intellectual property. You can register your song with the U.S. Copyright Office and relevant organizations. From there, you can record and license it to a streaming platform, publishing it for all to hear. 

Of course, songwriters don't have to record the music themselves. You earn royalties even if an artist other than yourself records the song you own the rights to.

There are other ways to earn royalties. Many musicians and songwriters will sell their rights to others. For example, several high-profile artists sold the rights to their back catalogs to major companies for millions. These include Katy Perry, Justin Bieber, and Bruce Springsteen.

Ultimately, you earn royalties when you're a rightsholder. Whether you become a rights holder by creating art yourself or receive the rights to someone else's creation, you have a legal right to earn royalties whenever the music tied to them plays on streaming platforms.

Who Pays the Artist?

Here's where things get complicated. Streaming services usually don't directly negotiate agreements with artists or send payouts to them. There are some exceptions, particularly in the indie space. However, more popular artists have entire teams to handle the logistics.

Generally, music streaming platforms pay royalties to record labels, publishers, or distributors, depending on the licensing agreement. Some artists also work with collecting societies, which manage copyrighted works on behalf of the rights holders. Streaming companies typically pay those entities directly. They then distribute the royalties to artists based on their individual agreements.

Smaller artists without major backing from publishers or record labels may receive payments directly from streaming platforms, but the logistics vary.

Streaming companies collect revenue in several ways. The most common is through a monthly subscription fee. Popular platforms like Apple Music provide unlimited access to a catalog of over 100 million songs for a relatively manageable service fee. Subscription costs vary, but most charge users around $10. That might not seem like much, but the streaming industry thrives thanks to economies of scale. Apple Music had over 93 million paid subscribers in 2023, translating to billions of dollars in revenue they can use to pay royalties.

Different Payment Models for Calculating Payments

Now that you understand music royalties and how to earn them let's explore how platforms calculate them. Streaming services have massive catalogs and millions of subscribers listening to many different artists. Calculating what each artist should receive in royalties is no easy task!

Fortunately, streaming uses loads of technology to track how often listeners enjoy a song. That technology plays an integral role in calculating royalties, ensuring every artist gets their fair share. That said, there are many different ways that a DSP can calculate payments. Below are the three most common payment models.

Pro-Rata

The Pro-Rata payment model is the go-to in the modern streaming era. It's the model of choice for streaming juggernauts like Apple Music, Spotify, Amazon Music, and more. Several smaller factors make every platform's royalty payment model different, but most use the Pro-Rata system as the standard.

With this payment model, platforms pay royalties based on net revenue. The revenue can come from paid subscriptions, ads, etc. Whatever the case, the company pools net revenue into one giant pot. It distributes royalties to rightsholders based on the number of streams an artist receives in a given territory and period. It's important to note that the royalty pot comes from net revenue, which is the amount of money a platform earns after subtracting its direct operating costs from gross revenue. Let's look at an example.

Say that a DSP earns a net revenue of $250 million in a fiscal quarter. Under the Pro-Rata model, the DSP would distribute that $250 million to rightsholders based on the number of streams an artist gets. So, if a popular artist receives 3 percent of all streams on the platform during that quarter, they would receive 3 percent of that $250 million.

What's unique about the Pro-Rata model is that, in our example, 3 percent of the royalties generated by every subscription would go to that popular artist, even if most didn't listen to them. That's a point of controversy in the music industry, and some argue that the model favors popular artists over lesser-known ones.

User-Centric

Many opponents of the standard Pro-Rata model say the User-Centric model is more equitable. As the name suggests, this model looks toward individual streaming subscribers and the royalties they generate. While the Pro-Rata model pools all net revenue into one pot, the User-Centric model distributes royalties based on the artists every individual subscriber listens to.

For example, say that a subscriber spends the quarter listening to only a handful of artists. The streaming platform would attribute revenue directly to the tracks the user listened to, paying right holders accordingly. 

SoundCloud is the most popular streaming platform that uses the User-Centric model. For this reason, it is a favored choice for up-and-coming artists who don't have the audience to compete with industry titans. The model ensures that artists get paid whenever a fan listens to their music.

Artist-Centric

User-centric payment models look like a viable solution to potential biases with Pro-Rata but are imperfect. Some detractors say that User-Centric models give more power to the least engaged listeners. Meanwhile, those who use streaming services more frequently have the royalties they generate spread more thinly. As a result, artists producing music in less popular genres might suffer. The solution that some in the industry developed to address those problems is the Artist-Centric payment model.

While User-Centric models focus on the royalties individual subscribers generate, the Artist-Centric model focuses on the number of actual streams an artist gets. The calculations prioritize the total number of streams an artist receives, distributing revenue generated from paid streaming plans and ads directly to the artist. 

Of course, there are detractors of the Artist-Centric model, too. Some believe this model will discourage artificially inflated play counts and reward artists for engaging fans and bringing them to the platform. However, others say it's another way to show bias to high-performing artists while indie artists with smaller fanbases suffer.

Benefits of Using a Payouts API

How streaming platforms and music distributors calculate music royalties will always be controversial. The music industry continues to evolve, and there are several kinks to iron out until everyone is happy. One thing we know for sure is that music streaming is here to stay.

While royalty calculations are complicated, royalty payouts don't have to be. A payouts API like Dots is an innovative new way to distribute payments quickly and efficiently, eliminating the hurdles of traditional processing. In the past, the only way for distributors to send payouts was to set up direct bank transfers or send checks. While those efforts work, they're highly ineffective, time-consuming, and costly. Furthermore, they have an increased risk of human error during data entry.

A payouts API can streamline your company's entire payout approach, automating the process from start to finish while ensuring artists get their royalties promptly. APIs like Dots can seamlessly integrate with your existing accounting software and tracking systems. The API can then automate royalty distribution, automatically sending funds to artists and labels. Schedule set payout dates, and the API will do the rest to ensure right holders receive their funds quickly.

However, the Dots API offers more than just efficient royalty distribution. It also provides comprehensive support for tax reporting and compliance. The API can collect relevant tax information during onboarding, validate it with the IRS, and securely store it in PCI-compliant vaults until tax season. When it's time to report taxes, the API generates the necessary forms, sends them to the IRS, and provides a copy to the royalty payment recipients, ensuring full compliance with tax regulations.

An API takes the headache out of distributing royalty payments. While your organization should always consult with tax professionals and legal experts to understand your obligations, an API like Dots can make all the difference. Avoid the logistical nightmare of manual payments and automate the process from start to finish.

The right API can even provide more payment flexibility to rightsholders, giving you a competitive edge in a fierce streaming landscape. Send royalty payments through various payment rails with minimal coding. Give artists and labels as many options as they need to receive payments, allowing them to get funds on their terms. That flexibility can improve the experience for artists, making your streaming platform stand out.

Get Started with Dots Today!

A music royalty payouts API like Dots is a game-changer in music streaming and digital distribution. Royalty distribution is already complex, so why make things more difficult with manual payments and old-school processes? Rightsholders deserve their cut of the pie, and Dots can help you ensure every artist and label receives their fair share quickly and efficiently. Automated features, tax-reporting tools, robust security and more directly benefit your business. Meanwhile, rightsholders can enjoy better payment flexibility and reliability.

Ready to see how a payouts API like Dots can improve your streaming business? Contact Dots today to schedule your demo and streamline how your company sends royalty payouts.