It’s that time of the year when Spotify comes bearing a gift for its users – Spotify Wrapped. As you review your most-streamed songs and artists, did you ever pause to wonder, where does Spotify get its music from? Usually, artists upload their music on the platform with the help of record labels and distributors who are in charge of licensing and distributing. Spotify has a list of preferred and recommended distributors, which include the likes of Distrokid and Record Union.
Spotify has two kinds of music distribution license agreements:
Sound Recording License Agreement: Spotify legally gets the right to the recordings by entering into a Sound Recording License Agreement with recording labels like Warner Music Group, Universal Music Group and Sony Music Entertainment Group
Musical Composition License Agreement: As the term suggests, this covers the composition, that is, the lyrics and the melody of the song.
Spotify’s system of royalties
Spotify does not pay the artists and songwriters directly. This part of the job is done by the rights holders which include distributors, record labels, aggregators and collecting societies. Typically, there are two categories of royalties: Recording royalties paid through the rights holders, and Publishing royalties paid to music publishers, collecting societies and mechanical agencies. The songwriters and owners of the composition are entitled to public performance royalties and mechanical royalties. Public performance royalties cover the right to perform the musical work publicly, as streaming music digitally is said to be a public performance. On the other hand, mechanical royalties are paid for reproducing the work in any form such as CD, vinyl or even downloading it.
However, the exact amount of royalties paid depends upon factors like their agreement with the rights holder, how the music was streamed, etc. So how does Spotify calculate the royalties? Firstly, it is pertinent to note that artists are not paid according to a per-play rate. It calculates the net revenue earned from Premium subscription fees and advertisement campaigns, minus the expenditures for billing, taxes, credit card processing fees, etc. On arriving at the net revenue, Spotify then goes on to determine the artist’s streamshare.
Spotify is currently engaged in a battle involving royalties with Spoken Giants, a “global rights administration company for the owners and creators of Spoken Word copyrights”. While we wait and watch the events as they unfold, let’s just say that folks, royalties are not a laughing matter!