Spotify’s New DiscoveryTool Should Raise Eyebrows for Major Label Artists
Spotify released their Q3 earnings this week, and with it, announced the launch of a new discovery tool that has already sparked controversy. The product will allow rights holders to influence Spotify’s personalized recommendation algorithm to favor songs deemed to be priorities by opting them into something called ‘Discovery Mode”. In exchange, rights holders will have to agree to be paid a discounted “promotional recording royalty rate” for any streams that are generated in the process. In other words, songs played this way on the platform will cost Spotify less than a regular stream. This means rights holders who decide to opt in to this promotional tactic will be giving Spotify a discount in exchange for new audience reach on the platform.
This new product is divisive to say the least, with some critics saying that it’s just a not-so-veiled pay-to-play type scam that will disproportionately benefit rights holders with the most money to spend — ie major labels— and others saying that it’s a clever use of the platform’s capabilities to offer rights holders some upfront marketing that’s paid on the backend.
Artists signed to major label deals under traditional terms should, however, be wary of this new product for multiple reasons. In order to consider why, let’s define some terms.
When an artist signs a deal with a record label, the label commits certain expenses to the project that are categorized as either “recoupable” or “non-recoupable”. Recoupable expenses will need to be paid back via 100% of the recording royalties before the artist makes any money. The label also typically commits to some non-recoupable costs aka money that they are willing to never see again. Promotional and marketing spends controlled by the label are typically non-recoupable costs. The longer the deal, the more comfortable labels will be including non-recoupable costs.
By requesting a discount on the recording royalty, Spotify might be lengthening an artist’s recoupment timetable and essentially forcing this particular promotional cost to be a recoupable cost by the record label.
More potential issues for artists could surface depending on how these promotional royalties are accounted for on both the paying and receiving ends. At the moment, Spotify pays labels monthly based on the percentage of total platform streams each respective catalogue accounts for. The label then distributes this money to the artists’ accounts it administers. If Spotify’s payments are based on percentage of consumption then it stands to reason that the promotional expenses of a few artists could be distributed across an entire roster of artists.
This is just the newest evolution of Spotify’s two-sided marketplace; an effort to unearth revenue anywhere they can, leaving no stone unturned. As it stands, Spotify is under intense pressure to find ways to create revenue as their subscriber growth rate trends down, and their music streaming market share slips away to the likes of Google and Amazon. This new tool, if successful, could help Spotify curb the margins which they’re forced to pay out to labels on a yearly basis and empower independent artists to grow their fanbase on the platform.