The Baffling (and Slightly Insane) World of Streaming Payments, Explained

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We may never know the story behind the story.

Every time an artist publicly complains about how much money they are making from streaming, the blogosphere goes berserk, and I know as sure as God made little green apples, a Billboard editor is going to ask me to analyze it.

The latest to do so is Geoff Barrow from Portishead. Here is his tweet:

You really can't tell much from the blind statement that 34 million streams produced £1,700. You don't have enough information.

So was he paid £1,700 because it is a U.K. service? Or were the streams from somewhere else? Was he paid in pounds because Portishead is a British band and he is signed to a Universal Music Group label in the U.K.? If that's the case, the fact that he was paid in pounds could be because that's how he gets paid as a U.K. citizen signed to a U.K. label. So the service could be from anywhere in the world.

Was it one service's streams or multiple services'? He mentions Apple, YouTube and Spotify — did the artist's royalty statement specifically identify those services, or is he just venting at the largest digital services? If he is talking about Apple, which streaming service is he complaining about? Is it the old Beats service, still awaiting its rebirth? iTunes Radio? The iTunes locker? Each one of those services have different business models and likely different payment levels because they each have different functions. Regardless, things like that never get in the way of a good argument about streaming and payments, so I will explain further.

There is a difference between iTunes Radio and the services of YouTube and Spotify; iTunes Radio is "noninteractive" in the U.S., while the other two are interactive streaming services. This matters because the two types of services make different kinds of payments.

Generally speaking, radio simulcasts on the Internet and services like Pandora and iTunes Radio pay lower rates than interactive services like YouTube and Spotify because those two services allow the listener to choose what they hear, while the former services are passive, and generally speaking, the listener has no control over what is played once they've made their initial choice of what kind of channel they want. In other words, the more functionality, the higher the per-stream payment.

So when you read "34 million streams, £1,700," there isn't enough information to calculate the validity of his complaint. First off, since I am a stupid American, let's convert that £1,700 into dollars, which comes out to $2,511 (according to oanda.com). Then let's analyze with the per-stream rate, which is $0.000074.

According to Wikipedia, Portishead has three members — although sometimes the engineer/producer was in the band, so four members. Were the streams from the band's music with three members, or four?

If there were three members, that comes out to $0.000222 per stream. So if that is the per-stream rate, now we wonder: what kind of contract does the band have? Assuming that the band is still under the terms of the original contract it signed more than 20 years ago, it likely means that the label is treating the streaming deal as a license, which means that artists and labels split revenue 50-50. But not all labels treated digital like that, especially where downloading was involved. (Somewhere along the way, labels realized that the digital world required a change in the wording of contracts, and nowadays licensing deals don't automatically split all revenue 50-50. In fact, the wording has been changed so that in many contracts streaming is treated just like a sold CD, with the artist just getting his typical — lower — royalty payment. A court case was just settled on that point by Universal Music Group.)

Also, when the labels realized the implications of digital, the business affairs executives started getting shrewd — if an artist wanted an advance or some other change, typically negotiations would ensue so that digital payments didn't require the 50/50 split. Back then, streaming was just a gleam in the eye, and the money so small, that it was easy to trade away and get the big payday without realizing what it would mean down the road.

Still, we don't know anything about Portishead and the deals their managers cut, so we don't know if the group is supposed to get that 50-50 split, or a royalty cut. If it's the latter, was the music streamed from when the band first signed, or was it from later in their career? The earlier-career music might be at a 16 percent rate, and the later part of the career might be at a 20 percent rate; or maybe when the manager re-upped, he made sure all the earlier rates were raised to the new level.

Are you noticing a theme? Yeah: We just don't know.

Regardless, let's assume Universal Music Group was shrewd enough to pay Portishead a generous advance in order to get its contract's wording changed, so that the label wouldn't have to do a 50/50 split with Portishead on digital, but that the band's manager was shrewd enough to get the earlier music rates raised to 20 percent.

Before we go further, I should mention that labels typically pay at a reduced rate when revenue comes in from a deal outside the artist's country of origin; they may pay a royalty rate based on 80 percent of revenue, but who knows if this is the case here because, again, we don’t know where the service is located that made the payment.

Getting back to the $0.000222 per stream, assuming it is the equivalent of 20 percent of royalties, the label got paid $0.0011 per stream, which is the rate that Pandora paid per stream in 2012.

So one could assume that the stream payment might have come from Pandora or some other webcaster, and it might be just now catching up with the label. If that's the case, the label doesn't have much say in what the rates are, at least not in the U.S. Here, the Copyright Royalty Board sets rates after the service and the labels present their case.

If that rate is from the iTunes Locker, it is dependent on how much the labels are getting per subscriber and how much usage there is by those subscribers. So: If there is a million subscribers, each paying $25 a year, that means the total pot is $25 million and the per-play rate would be dependent how many songs those subscribers listened to.

But what rate are the labels negotiating with interactive services is the next question, because Barrow complains that they are giving away the music for free.

In this aspect of the digital world, the labels are damned if they do and damned if they don't. When they weren't doing deals, they had their heads stuck in the sand. It's no wonder that piracy was rampant. Now that they are doing deals, they are, according to Portishead, giving away the music for free. But are they?

Typically what has happened is that labels negotiate deals that can derive money three different ways, and whichever of those three pools produces the most revenue is the formula that is used to determine how much the label gets. In most instances, when advertising is involved, the labels and publishers allow the service to take a slice of that revenue out in order to pay a commission to the people generating the advertising (an ad agency hired by the services, which might get 15-20 percent commission). After that comes off the top, the labels generally carve up the remaining revenue between the labels and publishers; the music industry gets 70 percent and the service gets 30 percent.

In the case of Portishead, the low streaming payments could be due to the label taking a chance on a service with a business model that didn't work out. But as I say, no one knows for sure except Portishead, their label and their manager. We may never know the story behind the story.

This article first appeared on Billboard.com. 

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