The Problem With Apple and Spotify's 'Pay Per Stream' Calculations

Hey! I've been thinking about something since Coinbase went public last week. A bunch of VCs shared "pass emails" from when they turned down Coinbase. I would love to hear more of these stories with hip-hop artists and record labels.

We hear them once in a while. Tons of record labels turned down Jay Z before Roc-a-Fella Records started. Fat Joe turned down Eminem six times. Dame Ritter turned down an investment opportunity from Russ. Every hip-hop artist has stories like this! Let's hear more of them.

This week's memo covers reports that Apple Music pays artists more than Spotify, Warner and Spotify's podcast partnership, and hip-hop's push for a union.

New podcast: BrandMan Sean

Music marketer Sean Taylor (BrandMan Sean) came on the Trapital Podcast to talk about building BrandMan Network, which now was 100K+ YouTube subscribers. His insights have helped artists beat those with 2-3x the budget. He's also worked with 24KGoldn and many more.

Tap in on Apple Podcasts, Spotify, or watch on YouTube.

The problems with Apple Music's "penny per stream" letter

Last week, Apple Music published Apple Music Insights: Royalties, a letter on its artist dashboard about royalty payments. The biggest takeaway is that Apple Music says, "our average pay per play rate is $0.01" which has led to dozens of misleading headlines that say "Apple pays artists twice what Spotify does."

There are several issues with pay per stream calculations and what they imply:

‍1. Apple Music and Spotify pay rights holders the same 50-53% of revenue. This was cited in the Wall Street Journal's coverage of the letter. Digital streaming providers don't pay artists. They pay rights holders such as record labels and publishing companies. The amount artists get paid depends on each artist's agreements with rights holders. Any "pay per stream" differences between Apple and Spotify are dependent on both revenue and consumption, which leads to the next two issues.

‍2. Apple Music has less market share than Spotify in regions with lower average revenue per user (ARPU). Two years ago, Apple Music said it has more U.S. paid subscribers than Spotify. That may still be true, but Apple's U.S. subscribers account for a much larger percentage of its overall business. Meanwhile, Spotify is now in over 80 markets. In many of those markets, the monthly subscription price is less than $2 per month. On both services, artists get "paid less per stream" in India than they would in the United Kingdom, but it's a similar percentage of revenue. Let's not conflate "paying artists more" with "having less market share than competitors in regions where subscriptions are priced lower."

‍3. The companies have different business models. Apple CEO Tim Cook once said that Apple Music is "not in it for the money." It's a loss-leading business unit. It doesn't live in a vacuum. Meanwhile, Spotify has a free tier, which pays less revenue per stream. But Spotify's paid tier is still comparable to Apple Music.

Both streaming services are similarly priced all-you-can-eat buffets. But one company boasts that it's better for artists because of a back-end calculation that's irrelevant to how it runs its business and serves its customers.

It would be like Hometown Buffet saying it was "more profitable" than Golden Corral because customers eat less there. Sure, that's one way to view it. But maybe the food at Hometown doesn't hit like the food at Golden Corral. Who cares if you earn more profit per customer if no one's eating that Salisbury steak??

Read more about Apple Music's letter, which 9to5Mac posted.

Warner Music Group and Spotify partner on original podcasts

Last week, both companies announced a new partnership to develop podcasts built around WMG's catalog of music.

‍The podcast - record label wave. Record labels big and small are on a quest to maximize content. Before long, all of them will have podcast studios or partnerships with existing ones.

Last year, Warner Music CEO Steve Cooper saw podcasts as an opportunity to drive more streams. He didn't have any set deals in place at the time, but he saw Spotify as a lead generation opportunity. Here's what he said on a 2020 analyst call. "There will be people that come to Spotify for a podcast and stay for music, and there will be people that come to Spotify for music and stay for a podcast. It does not impact our economics, either on the free side or subscription side. But hopefully, what it will do is create appeal to a broader audience."

Spotify is expected to surpass Apple Podcasts in U.S. monthly podcast listeners by 2022, so it's a timely move.

‍Harder than it looks. Music podcasts get tons of attention because they are cheap to produce. Podcasts like Song Exploder have taken off and gotten big-time Netflix deals. But podcast growth is hard. It takes a lot of time and a lot of reps, which record labels understand.

The best podcast networks have strong underlying brands, which record labels themselves don't always have. It's the artists who have strongest brands in music. But when it's time for them biggest artists to leverage multimedia, they get the eight-figure checks from a video streaming service.

This puts music podcasts in a peculiar spot. It will be interesting to see which types of podcasts get the greenlight under Warner-Spotify's deal. Maybe we'll see more companion podcasts to the Netflix documentaries. Or Warner will signs podcast talent to be personalities that discuss a particular genre on a regular basis. There's a wide range of opportunities.

The unionization of hip-hop

The deaths of DMX and Black Rob have resurfaced the push for a union to support hip-hop artists.

This topic has been brewing for two reasons. First, today's superstars make a lot more money than the stars before them. Travis Scott grossed over $100 million in 2020. In a pandemic! Even in Lil' Wayne's prime, the most he made in a year is $20 million. The superstars before Wayne saw even less despite the fact that they paved the way.

Second, some of yesterday's rap stars are now struggling. This is why Swizz Beatz wants to start that founder's fund where artists donate 1% of earnings to a set fund, which is distributed back to the past generation. It's also why Warner Chappell exec Ryan Press pledged $10,000 to the Rhythm & Blues Foundation which helps artists in financial need and medical assistance.

‍The SAG-AFTRA awareness problem. All major record label artists are eligible for SAG-AFTRA membership, a union that the major record labels all contribute 12.75% of gross earnings to cover healthcare and retirement for artists and employees.

According to a Rolling Stone article, the union has struggled with a lack of awareness among artists, even though all major record label artists are eligible.

But I wonder if the "lack of awareness" is a welcomed issue. Pensions and retirement benefits were major setbacks for Sears, Ford, and many other 20th century businesses. Their retired employees are living longer than ever with increasingly high healthcare costs. These companies weren't built for this life.

Could SAG-AFTRA manage the costs if all eligible musicians used the service to its full potential?

I'm no union expert. Never been part of one. But I would love to see a model where signed artists are automatically covered, not just eligible.

Read more about the hip-hop founder's fund effort in okayplayer.