This is huge news – and it’s been a long time coming.

MBW has confirmed that Spotify is planning to make significant changes to its royalty payout model in Q1 2024 – with the intent to move USD $1 billion in royalty payments over the next five years to ‘legitimate’ artists and rightsholders.

Spotify has been discussing details of its blueprint for the new royalty model with various music rightsholders in recent weeks.

Sources involved in those talks have now confirmed to MBW that, although Spotify will continue with its pro-rata royalty system (aka ‘Streamshare’), it plans to make three specific major changes to its model.

As one source put it, Spotify is planning to execute these changes in an attempt to “combat three drains on the royalty pool – all of which are currently stopping money from getting to working artists”.

In short, the three changes are:

1. Introducing a threshold of minimum annual streams before a track starts generating royalties on Spotify – in a move expected to de-monetize a portion of tracks that previously absorbed 0.5% of the service’s royalty pool;
2. Financially penalizing distributors of music – labels included – when fraudulent activity is detected on tracks that they’ve uploaded to Spotify; and
3. Introducing a minimum length of play-time that each non-music ‘noise’ track must reach in order to generate royalties.

Today’s news comes a month after Deezer and Universal Music Group jointly announced their new experimental “artist-centric” royalty model – which is set to premiere for UMG artists in France this month (October).

There are some similarities, but also some significant differences, between Deezer’s “artist-centric” approach and Spotify’s upcoming changes.

(We’ll leave for another time the debate over whether one of Deezer or Spotify influenced the other, or if one set of royalty model changes is ‘better’ than the other.)

For now, let’s just get into the details of Spotify’s planned three changes – and what they mean for the music industry…

1) Introducing a threshold of minimum streams before a track starts generating royalties on Spotify

Today, every play on Spotify over 30 seconds long triggers a royalty payment. This won’t be the case by early next year.

MBW has confirmed that starting in Q1 2024, each track on Spotify – under the DSP’s new plans – will have to reach a minimum number of annual streams before it starts generating royalties.

Our sources weren’t willing to specify the exact number of streams that will inform this threshold, but we were told by one source involved in recent talks that the move “is designed to [demonetize] a population of tracks that today, on average, earn less than five cents per month”.

Some back-of-a-napkin economics: industry sources suggest that each play on Spotify in the US, in terms of recorded music royalties, currently generates somewhere around USD $0.003 per month.

This would suggest that for these tracks to generate $0.05 per month in royalties, they would need to generate 17 plays a month, or around 200 plays a year.

“Spotify says tracks that [currently] represent 99.5% of ‘Streamshare’ will continue to monetize after these changes,” confirmed one well-placed source.

So why is Spotify specifically targeting a relatively tiny proportion of tracks on its service that are very low-popularity, and very low-revenue-generating?

Because when you’re talking about an industry where 100,000 tracks or more are being uploaded to streaming platforms daily, the amount of money being paid out to these tracks cumulatively results in a substantial sum.

“In aggregate, the tracks Spotify is targeting here generate royalties that add up to tens of millions of dollars a year, and that number is only growing,” one source told MBW.

“Next year, without taking this action, Spotify thinks they would have generated around $40 million.”

“In aggregate, these tracks generate royalties that add up to tens of millions of dollars a year, and that number is only growing,” one source told MBW. “Next year, Spotify thinks they’d come out to around $40 million.”

MBW source

Under the new plans, that $40 million will go back into Spotify’s ‘Streamshare’ royalty pot and be re-distributed amongst the tracks that are… well, more popular.

“This targets those royalty payouts whose value is being destroyed by being turned into fractional payments – pennies or nickels,” said one source close to discussions.

“Often, these micro-payments aren’t even reaching human beings; aggregators frequently require a minimum level of [paid-out streaming royalties] before they allow indie artists to withdraw the money.

“We’re talking about tracks [whose royalties] aren’t hitting those minimum levels, leaving their Spotify royalty payouts sitting idle in bank accounts.”

Fair warning: DIY distributors who rather like all of that money sitting idle in their bank accounts – especially when they can collect the interest on it – might not adore Spotify’s plan here!

(The above details a new system of ‘two-tier licensing’ on Spotify as observed by Midia analyst Mark Mulligan here.)

2) Financially penalizing distributors of music – labels included – when fraudulent activity is detected on music that they’ve uploaded to Spotify

This one’s gonna be fun!

Spotify believes it has the most sophisticated anti-fraud detection technology of any streaming platform – and it’s not afraid to use it.

Witness the moment back in May when Spotify pulled tens of thousands of tracks off its service because it had credible evidence that said tracks were being streamed illegitimately (either via AI tools or via human so-called ‘stream farms’).

Sometimes, those turning to such methods are indie artists – or indeed larger labels – looking to illegitimately boost their stream count or their chart placings via Spotify.

At the darker end of this practice, however, some suggest that organized criminal gangs are now uploading AI-made music to streaming services like Spotify before attempting to use artificial streaming methods to siphon off royalties from the platform’s pay-outs pool.

In every case of this practice, honest artists and rightsholders miss out on Spotify royalties, which are instead paid to those gaming the system.

“Right now, people can try to game Spotify, get caught, see their tracks taken down, and they haven’t lost anything. By penalizing this kind of activity at the point of distribution, Spotify is creating a deterrent both for the bad actors, but also for the distributors enabling those bad actors.”

So, aside from continuing to invest in fraud detection tech, what’s Spotify going to do about this problem in Q1 2024?

It’s going to fine bad actors – real money.

Whenever Spotify detects a track with a play-count boosted by flagrant artificial streaming fraud, it will continue to remove said track from its catalog, just as it does today.

However, in addition, from Q1 2024, it’s planning to charge the distributor of that track a monetary penalty. SPOT hopes this will act as a deterrent for disties (including labels) from continuing to distribute tracks from known bad actors.

“This is a per-track enforcement penalty whenever flagrant artificial streaming is detected,” clarifies a source close to the situation speaking with MBW.

Right now, people can try to game Spotify, get caught, see their tracks taken down, and they haven’t lost anything.

By penalizing this kind of activity at the point of distribution, Spotify wants to create a deterrent both for the bad actors, but also for the distributors enabling those bad actors.

“The hope is that this deterrent will, over time, mean fewer people risking streaming fraud on Spotify – and more money entering the pot for real artists and rightsholders to benefit from,” says a source.

3) Introducing a minimum length of time that non-music ‘noise’ tracks must reach in order to generate royalties

This one is clever.

Today, as had been seen in a number of notable cases, makers of ‘non-music noise content’ (e.g. white noise, binaural beats, whale-song etc.) get paid the same as every other creator of music on Spotify.

One way said ‘non-music noise content’ uploaders have made the most of that fact? By splitting their ‘noise’ playlists into 31-second tracks.

This means, for example, that if someone plays a white noise playlist on repeat to help them sleep or to focus at work, hours of play-time are logged at Spotify, with every 31-second interval resulting in a royalty payout.

From Q1 2024, we’ve confirmed, Spotify is planning to significantly elongate the minimum unit of time that each track of ‘non-music audio content’ must meet before a payout is triggered.

“Requiring that ‘noise’ tracks are longer for monetization means fewer of these streams, which in turn means more money in the ‘Streamshare’ system going back to music content.”

MBW source

MBW hasn’t yet been able to confirm with our sources exactly what this minimum unit of time will become. But for the sake of a helpful example, let’s say it’s 4 minutes.

In this scenario, a playlist of white noise tracks – currently at 31 seconds long apiece – would, in order to qualify for Spotify monetization, have to be taken down, then split into 4-minute-long tracks, then re-uploaded.

But here’s the clever thing: That same playlist, for the same number of hours of sleep or focused work it previously accompanied, would now only generate one-eighth of what it previously generated under Spotify’s 31-second-payment model. (i.e. Each royalty payment would take eight times longer to register than it does currently.)

“Spotify understands that ‘noise’ is an important category for some consumers – a lot of people sleep to it, work to it, or meditate to it,” said an MBW source close to Spotify’s current talks with rightsholders.

‘Noise’ is a small percentage of Spotify streams today, say our sources, but as the platform’s overall royalty pool has grown into multiple billions of dollars per year, it’s a category starting to represent more and more revenue.

“Spotify has seen some uploaders game this system with the 31-second tracks trick. Requiring that ‘noise’ tracks are longer for monetization means fewer of these streams, which in turn means more money in the ‘Streamshare’ system going back to music content,” explains a source.

Spotify’s approach to ‘noise’ content here is notably less aggressive than the strategy taken up by Deezer under its ‘artist-centric’ model, which will see all non-music ‘noise’ content on the platform completely de-monetized.

Spotify’s three-pronged approach – and its billion over-arching plan

As mentioned, sources tell MBW that Spotify is informing leading players in the record industry of its hope that its new three-pronged strategy can result in $1 billion in royalties shifting away from fraudsters, micro-transactions, and those gaming SPOT’s royalty model – and towards “real working artists” – over the next five years.

It’s important to underline here that, as with Deezer’s ‘artist-centric’ plans, Spotify’s soon-to-be-adjusted model won’t in and of itself alter the size of the total royalty pool being paid out to creators and rightsholders.

Instead, it will alter the allocation of money being paid out to each of those rightsholders – specifically, by reducing the money going to (very) unpopular music, as well as the money going to streaming fraudsters, and other parties deliberately gaming the platform.

So what do the world’s biggest music rightsholders and distributors think of Spotify’s plans?

From the conversations MBW has had so far, there’s no way everyone can be 100% aligned on this matter. But the sense we got from one source was that significant rightsholders view Spotify’s Q1 2024 proposal as “common sense steps in the right direction”.

When contacted by MBW for comment on this report, a Spotify spokesperson replied: “We’re always evaluating how we can best serve artists, and regularly discuss with partners ways to further platform integrity.

“We do not have any news to share at this time.”Music Business Worldwide