You Asked, We Answered: Digital Sales Payouts

With streaming constantly under scrutiny for its payouts, licensing fees and revenues, the question of profitability and growth stays fresh in our minds. In that vein, we received the following question from our clients, and to answer it, we requested the professional insight of Tom Wheeley, Senior Director of Business Development.

Why do digital payouts vary so much between DSPs? 

This has been a big topic in the music press for some months now with questions over transparency and clarity into streaming rates. Everybody knows what iTunes’ payouts to labels are. The wholesale rate is set, right. This track gets sold and this is the payback, so why for f&*k’s sake isn’t this the case with streaming payouts, I hear you ask? There isn’t any one reason why per stream payouts are inconsistent; rather it’s down to a number of variable factors. Let’s break this out into freemium (free to the user but funded) services and subscription services, two very different cases but ultimately the same inconsistent result.

1. Freemium Services

Free-to-user music streaming services are by and large funded by advertising. Spotify and Deezer are early examples of this model that sets out to recruit music users to try the service and effectively annoy them with ads until they convert to the premium version i.e. paying a subscription and removing the ads. However, the service needs to pay for the content so that labels that have licensed their music to the service will receive a portion of the ad revenue made. This number will be based on how many plays their content has received (their market share). The thing is, advertising revenue is based on how much ad inventory the service can sell, which in turn is impacted by the number of users on the service. Any fluctuation in ad revenue or market share will affect the payouts to labels. Another freemium method to recruit users that is employed by the likes of Rdio and MOG is the ‘Gas Meter’ approach. This limits the amount of music users can listen to over a period of time and can be funded by advertising, a per play minimum (if services want users get a subscription experience), or both.

2. Subscription Services

Subscription streaming services work in much the same way; it’s just the source of the company’s revenue that’s slightly different. Subscription services don’t tend to agree on fixed per-play rates because it can be very expensive, so instead of fixed payments, content suppliers are offered a pro-rata share of the revenue pool. Here the payout will be affected by the number of subscribers paying a subscription fee and the usage share of a given label. MP3 bundle subscriptions rely on subscribers not redeeming their downloads: for instance if a user purchases a 10-track MP3 bundle and only downloads two tracks — both of which are yours — but does not redeem the remaining tracks in the given month, then the pay out of those two tracks is going to be a lot higher than say a user who downloads all 10 tracks in their subscription. This is due to breakage, which can be described as a product sold — such as a gift card — but never redeemed and therefore entirely profit as the gift card company need not provide a service for an unredeemed gift card. Breakage is evident in streaming too, especially where bundle deals are concerned. If you purchase a tariff with a streaming service bundled in and you only stream 100 tracks in an entire month, then the value per stream will be significantly higher than a subscriber who streams 10,000 songs.

So you can see why per-stream returns are a little all over the place! It’s down to the combination and configuration of a number of factors and is not as clear-cut as selling a download. Remember: access (streaming services) and ownership (à la carte services) are different beasts… but there’s no reason why we can’t all get along.