Unpacking the User-Centric Distribution Model in Music Streaming

Jakob Wredstrøm

For this next episode of Sound Connections, we're gonna talk with Rasmus Rijks. He is an expert in streaming. We're gonna talk about the user-centric model and the pro router model. Hopefully we'll learn a bit more about how to make money with streaming. And it's complicated, so let's follow along.

Jakob Wredstrøm

Welcome to Sound Connections. This is an episode I've really been excited and looking forward to. It's going to be about you and your thoughts and your research, and kind of have my questions about entrepreneurship within that. But we've actually known each other for a short while. Well, a while. I used to be a student of yours, and that's sort of where our relationship began. I don't think I got great grades, but I think that had something to do with my effort. But ever since I've sort of I've gotten to know you a lot more and your work a lot more. I've been very inspired by it. But yeah, what do you do? Well for the last 10 15 years I've been doing research and teaching within music industry. I've I started out doing that at the Rhythmic Music Conservatory in Copenhagen where I taught in a bachelor's program in music industry management. And now I'm at Roskilde University. I'm an associate professor and I'm in a media and communication program, but still specializing on the digitalization of the music industries. So my interest is on basically seeing what is it... that digitalization does in terms of new platforms, new business models, new ways of curating, new ways of creating bonds between musicians and fans and stuff like that. And seeing how our digital platforms kind of transforming the culture and the economy and the organization of the music industry. Yeah, that's really cool. Do you come from music yourself or like what's your entrance into the music industry? I think everyone that... does something with music are basically failed musicians. So I am that as well. I used to think that I was going to make a living as a musician, then I ended up playing with people who were far better than me, but I found out that they didn't know as much about the industry as I was figuring out. So I thought, well, that might be a career path for me. Cool, wow. Well, what really interests me about your work is I've been at a few of your talks as an audience and just listening is...

Jakob Wredstrøm

when you talk about streaming, when you talk about business models and talk about what's happening right now and how that's gonna affect the industry. So one of the things that I've heard you speak about is the OCD model, and now we're just blanking, the user centric distribution model contrary to the pro rata model, which is what's sort of like happening mainly in the world right now. Could you define for us what that means? What are those two models and what's happening in the streaming industry in general? Yeah, so one of the- One of the early things that I was wondering about when I came into studying streaming business models was actually in a meeting with a streaming platform. I'm not going to name them, but we were talking about revenue for music streaming and they explained the model that they used to pay out royalties for the rights holders. And I didn't get... that was the way they had been doing it. So I asked questions about, could this be done differently? And the way that music streaming services in general, almost all of them pay our royalties is a revenue share mode. So in contrast to a lot of other royalties things, there's no fixed royalty rate. It's based on the revenue that the platform has at any given month, and they share that with the rights holders. So that is the overall principle for this. They call it a pro rata model because what they do with the revenue once they get it in is they share that according to market share, basically. And so any given month, a streaming service like Spotify will take all the money that they get from subscriptions, they will pull that together. They will take approximately 30% for themselves and for their infrastructure. And then the rest of the 70% will be divided to rights holders according to their market share and market share meaning the share of the total number of streams that given month. So that's the basic principle of all of this. And the thing that I didn't get about that was I always thought that the money I paid as a subscriber for Spotify.

Jakob Wredstrøm

would go to the artist that I listen to. That naturally makes sense. Intuitively, that made sense for me at least. But what happens with a ProRider model is all of the streams and all of the money are pulled together. And then you divide that out by streams and then within that pool, every stream gets the same value. And there is a disconnect in that for me. we might have a situation where I'm the type of listener who has music running all of the time. I wake up in the morning, I turn on music and then I have it running as a background for everything I do all day. And you might be a completely different listener. You might be the one who actively seeks out a couple of tracks each day and intensely listen to that kind of music. And if we are the two only users on a streaming platform, a hypothetical streaming platform, what would happen here is that you would be subsidizing my streaming, my listening. So most of your money in that case would actually not be going to the artist you were listening to, it would be going to the artist I was listening to because I spent more time listening to music than you. I think that's a problem. Like, it was probably a couple of years ago I figured out that actually that was the model. And that kind of disturbed me a bit. Like right now I work with a lot of young upcoming artists that have fans, like diehard fans. So when we go out selling tickets to the shows and they sell like 350 tickets per show, which in Scandinavian context is like an upcoming midsize kind of upcoming midsize kind of thing. Stream wise, it means almost nothing. But there's diehard fans, there's thousands of diehard fans that consumes this artist, but we can just discard. streaming income because it doesn't compare to anything really. And that's a problem when you have bands that has like huge or intense followings and they can't capitalize on streaming because of the pro-rata business model. That's sort of from my perspective. But if you were to explain some other perspectives, what happens with that pro-rata model, who's losing, who's winning? Well, I think the people who are...

Jakob Wredstrøm

are winning from this are the artists and the songwriters that produce music that appeals to people who tend to listen to music a lot. Yeah. Okay. So basically, you could say that there are two ways of being popular, of accumulating a lot of streams. One way is to be listened to a small fraction of... a lot of listeners and they listen a lot in general, or you can have fewer listeners and maybe also have people that listen to fewer tracks but listen almost exclusively to your music. You can have right bands, right? And the people who benefit from the current model are people who have listeners who listen to their tracks a lot of times. no matter how much of the share of those listeners listening, it means something that they listen a lot to your track regardless. So the kind of music that lends itself to being listened to in the background or the kind of music that lends itself to being listened to by younger audiences because we know younger audiences tend to spend more time listening to music than older audiences. the overall general principle behind this model. That makes sense. A way that I've tried to look at it, and I don't know if I understand correctly, is sort of that the current pro router model doesn't necessarily reward fandom that much. And I think that is from an industry perspective, especially in the indie industry perspective, a problem. Because we do tend to build careers around fandom more than we just scale this art-sys, because scaling an art-sys is expensive almost entirely reserved from major labels to do. So all the independent companies that works with fandom are also really not seeing the benefit of a pro rata model often. Is that correct? I think to a certain extent, yes, but I would also be able to produce examples of other things. For example, the kind of music that lends itself for focus playlists. So minimalist,

Jakob Wredstrøm

Piano music would be a type of music that's not necessarily major label content, but that still performs relatively well in the current model simply because if I want to work and I put on a peaceful piano playlist from Spotify, I will spend the next maybe eight hours listening to that playlist and that will mean that the artists that are included on that playlist will be played a lot. So, yeah, the general perspective would be yes, if you produce kind of mainstream pop music, then the current model might be in your favor, but you could also find examples that do something that shows at different tendencies than that. Yeah, so there's really no like true or false to what's the best kind of solution, but what is the alternative solution? So right now we talk about... Yes. Distribution model. What does that mean and how is that different from the pro-router model? Yeah, actually the user-centric distribution model was what I thought the streaming services was doing. It means taking the money from each user and then dividing the money that I paid for my subscription among the artists that I actually listen to. In this case, that might mean that if we go back to this hypothetical example of you and me as the only subscribers of the streaming platform, it would mean that when I listen to a lot of different music, each stream becomes, is not worth very much. But in the case of you only listening to a couple of tracks every day, every stream would count a lot more for the individual artists. And the thing about that for me is it makes sense in an intuitive way as connecting the way the streaming platforms make money on the one hand and the way they pay out royalties on the other side of the equation because they make money from you and I because we find value in having a subscription. And that value is not necessarily equal to the number of streams we have. It might be that I need to stream thousands of times each

Jakob Wredstrøm

To create that value for me. And you might only be interested in listening to 100 tracks in a month in order to make that actually make sense for you to have the value that you want to pay for. So it aligns the input side and the output side of the business model in that sense. But it also creates this connection between the fan and the artist. So the idea that my money is actually going to the artist I like, seems fair to me. And it might also equate some of the imbalances that are in the current model, where we see that younger artists tend to perform better than older, more mature artists, and that the artists that perform very well in a kind of mainstream environment see a better benefit from the streaming models than the ones that are more niche-oriented. Kind of imbalances both in terms of genre and in terms of age distribution of money is where the best potential is in the user-centric model. That, okay, I have maybe a bit of a controversial question because when I hear about the user-centric model and when I talk with industry colleagues, I don't really hear anyone talking against it. Like no one is saying, oh, that's the shit model and like we don't want to do that. And as far as I understand, the streaming services, services won't really be affected, like at least in the in the general like percentage split. So they'll probably it'll be the same for them. So why does it exist? And why does it still exist? Yeah, I think there are a couple of answers to that. I think I wrote the first paper about this around almost 10 years ago now. About the UC centric distribution model. And at that point, people were not interested in just discussing this and they thought, well, the current model works, we don't want to try to fix it. And that has definitely changed. When I talk to people now in the industry, I see that people are interested in doing this. But there is general interest on a major label level, from an indie label level.

Jakob Wredstrøm

From a musician level. So there is a general interest in doing this, but it's not easy to do. I think that's probably at this point one of the main things because the basic principle behind both the current model and the user centric model is a revenue share model. That means that if we shift model, there won't be more money. The money would just be distributed differently. And that means that if we change model, some people will benefit from that change and some people will lose money on that change. And when making the decision, the streaming platforms right now have contracts in place with rights holders in order to provide the catalog that they have. But in order to make a change from one model to another, they would need to persuade everyone to change from one model to another. And if I own some kind of catalog that is on the platform, and I see that I might lose money from changing, I won't be interested in changing my contract. So we're in kind of a deadlock where the streaming platforms might be interested in making the shift, but they need to persuade everyone to sign new deals that... It is based on a different distribution model. Interesting. Do you think it can happen? I think if the interest becomes big enough from all parties, I think it might be something that's happening. But I also think if we look to one of the most popular cases in this would be the DISA has been trying a couple of years now to get a use-centric distribution model running in France.

Jakob Wredstrøm

For their premium tier there and they haven't succeeded with that yet. And I think that might be an indication that even though they're interested in doing that and they really want to push the idea, they still haven't been able to make the transition. I think that tells us a little bit about how difficult it is. I'm positive. I think that it will happen at some point. But I also think that it takes time and it takes persuasion. It needs to be shown what are the implications of doing this and using that for persuading people to actually make the transition. So the problem with these in France, is that because of licensing? Or like what's been the actual issue? We don't know. Well, I don't know. But my guess is that it's because they need to persuade everyone. And so you can't, it's not possible to make a partial transition to a new model. You need to make a clean break with the old model and then move to an alternative model. So if one major label or if one of the major publishers resists doing this, then they have a problem. So in the case of SoundCloud, for example, that's introduced to use a centric distribution model, is it because that they have creators that owns their own rights that it's possible to do? Like what's their thing? It's unclear to me exactly how they do it. But a lot of it has to do probably with the fact that they do it on a subset of creators. That actively enter this program and by doing that accept that's what they do. So they start the program with the user-centric model. It would have been a lot easier if the user-centric model would have been the default model when Spotify and Apple Music and Tidal and Deezer started out 10, 15 years ago.

Jakob Wredstrøm

No, I get that. Wow. Yeah, for me, kind of like a picture I'm getting in my head is like we've embarked on this journey on one type of ship and then we figure out another type of ship is probably better, but like moving the whole infrastructure and everything we do around the business, that just doesn't happen overnight. And there's, as far as I hear, there's not like a huge incentive for like a lot of players to make it happen. So even though it might be what I'll call a slightly better model where some people will benefit a lot, then it's just not enough. To make a quick transition. So it's gonna take time, as you say. And I think one of the main things to also consider in that sense is that this is transitioning from one distribution model to another distribution model doesn't create more money in the industry. No. And that means that it can be a small tweak that makes a difference for some rights holders. But it's not something that's going to radically change your income. So if you're barely making money from your music right now, it's not magically going to create a good business for you in the future. But it might be a small tweak that moves a little bit so that if you are right now struggling to make a living, it might be enough to move you over the hump and get you to the part... Where you can actually make a living from your music. But it's not going to radically be a revolution of the way we make money. Are there any differences besides, you know, the revenue distribution model? Does it affect transparency or fraud in any way, the user-centric model? Yeah, I think one of the best arguments for why we should do this as soon as possible is the... Fast progress that's being made in AI generation of music right now. Yeah, because what is happening right now is it's becoming easier and easier to create music and to put it out there. Not necessarily easier to make good quality music, but definitely easier to make produce music and put it out on platforms. And that increases the...

Jakob Wredstrøm

Problems for streaming platforms in policing stream fraud. So having click farms that generate plays of your music and by that push revenue in your direction. And the most simple form of click fraud is a model where you upload music, obscure music that needs... that doesn't need to be good music, it just needs to be music. And then you own the rights for that music and you get a click farm to play that music in patterns that the stream fraud detection at the platform doesn't detect and then you generate a revenue for yourself. If you have a pro rata

Jakob Wredstrøm

For one subscription every month, and then you can generate more income by playing a lot of music, because it works in the way that we pool the streams from all of the users. So as long as you play, have more plays from your account of your music than an average user of the platform has, you're actively generating income to flow your way. By having a user-centric distribution, this simple way of doing click fraud would be eliminated because it would only be the money that you actively paid for that subscription that would be distributed among the tracks you're playing, which means that if you play them a lot, you're still just reshuffling the money you paid yourself. And on top of that, Spotify is taking 30%, so you would actually be losing money on trying to do it. To do this. So I think that is actually one of the best arguments for the use-centric model is that it eliminates that and that's in the interest of everyone that's doing serious business. Yeah. And I think that there's also the interesting question is like, I don't know how big the click fraud market share is right now, but since it's such a natural business model, as you just described it out, it will increase in intensity over time. So we're looking at if the music industry doesn't do a change. We could risk that just actually losing a lot of money in general because of the Prorata model and the AI generated click farm thing going on. And we have a case being presided over at the courts right now in Denmark where they are testing a case against one user that allegedly has earned millions of Danish kroner by doing exactly this. Through Click Firearms and generating a lot of money for himself. So it's not just a hypothetical issue, it's definitely something that's a real issue that we need to take into account when we do this. And we also need to remember that it's not fraud against the streaming service. The streaming service just takes all the revenue that they have.

Jakob Wredstrøm

Take their cut of approximately 30% and then redistribute that to rights holders, the rest of the 70%. So if you have someone committing fraud in this system, it's committing fraud against all of the other musicians that have music on them because the money is taken from the common pool of all of the rights holders. Interesting. Wow. Amazing talk. I feel like I know a bit more and hopefully the audience knows a bit more. What about you? What's your future focus? Are you gonna focus more on this area or do you have prospects on working on other sides of the music industry? What's your focus? I think in general, all of the things that are happening in algorithms and AI in general within music right now is really interesting, both obviously from a creative perspective, but I'm also thinking that some of the organizational issues and some of the culture we have in music is potentially that these technologies have potentials to change things a lot in the way we've seen with social media in terms of fan artist relation, in terms of the way we've seen streaming revolutionize the business models of the industry. But I see a more fundamental change in the way we curate music, in the way we understand what musical quality is. On the one side as something that machine learning and artificial intelligence is kind of challenging, but also on the creative side. And I think, so I'm thinking that a lot of things going to happen over the next couple of years. I have only very vague clues of what... that's going to be, but as a researcher, I'm thinking this is a potential. I want to follow that and find out what are the interesting questions in this. Definitely something about how we understand rights. Definitely something about how we understand creativity. But I also have a sense that we might be revisiting the notion of authenticity, which was there in the sixties and seventies with the, with our understanding of rock music culture and stuff like that.

Jakob Wredstrøm

But it's kind of gone in the background the last couple of years and I think the idea of being able to differentiate between what's being created by machines, what's being created by humans, I think that's definitely something that we are going to want to know as music fans and that is something that is connected to the way we create sustainable business models in the music industry in general. So I think that's something I'm going to follow very closely. Great, amazing. I stay updated on our work several times a year and I meet you once in a while, so I'm very happy for that. But thank you so much for joining the podcast on Sound Connections. I hope... definitely think we should speak again at one point and talk a bit deeper into this because we did talk about in general and that's very informing, but it could be really nice deep dive into some stuff in the future. But thank you so much for your time. And we'll probably see each other at one point soon. Yeah, hopefully. It was a pleasure participating here. Thank you so much. Thank you.