Music royalties are currently structured so that listeners’ monthly subscription fees are pooled together into one royalty pot that is divided among copyright holders based on their share of listening. Royalties are paid the same regardless of whether the song was created by a top artist or whether the song was listened to passively via an algorithm or actively by searching for it. As long as the song is listened to for more than 30 seconds, the stream monetizes. “Listening to a 31-second song by an independent artist, a full three-minute song by a popular artist, and five minutes of the sound of rain is all treated equally,” a Goldman Sachs analysts noted.
At the peak share of the CD format in 2002, the top 50 artists accounted for 25% of US sales. However, the digitization of music has rapidly transformed the music business, with streaming now accounting for almost 70% of globally recorded music revenue1.
As the music industry landscape changed and streaming took over, so did the way music is listened to. The top 50 artists had in contrast only 12% of US streams on Spotify in 20222. Why does this matter? For music publishers that distribute music mainly from top artists, this means a large part of the content that they used to monetize, isn’t so today. In fact, over 9 M people have uploaded to Spotify, but only 200k artists, who contribute 15% of all tracks uploaded daily, generate 95% of the total royalty pool2.
Since 2018, another problem has arisen: the advent of thousands of computer-generated noise tracks (rain falling, washing machines spinning) that are diluting the payouts to artist (human) generated content. Music executives have expressed concern that fraud and clutter have proliferated on streaming services, taking royalty money away from record labels and artists.
The combination of this royalty payout model and the new way music is consumed on streaming platforms had hard implications. The lack of spotlight on top artists, reward for driving engagement, and the flooding of low quality 'noise' tracks on the streaming platforms have plagued the economics of the music industry for both top artists and music publishers.
Landmark re-structuring of music royalties: the Universal Music and Deezer deal
On September, 7th 2023, Universal Music and Deezer, a France-based streaming service, revamped the structure of how music royalties are paid out on Deezer’s streaming platform. The key changes include:
- Streams of songs from professional artists — defined as those who generate at least 1,000 listens a month — will be doubled weighted relative to streams from non-professionals when calculating royalty payments
- Songs that are actively searched for will also have their streams double weighted, reducing the economic influence of algorithmic programming
We see two main impacts:
- Professional artists will be rewarded with a larger share of the royalty pool, while the royalties that are being paid to amateurs, robots and ‘noise’ tracks will be minimized.
- By emphasizing search-led engagement, artists driving targeted demand, which are usually top artists, will be further rewarded.
The deal will benefit royalties earned by professional artists and music publishers through a single change: putting top artists forward. These artists will benefit from an estimated 10% increase in their payouts. The leading record royalty owner Universal Music for example, will also benefit due to the fact that their royalty pool is focused on professional and leading artists. Profit margins at Universal are already running higher than competitors and we believe that this landmark streaming deal will further underpin the upward margin outlook.
Deezer will roll out the new payment model in October in France, with plans to expand globally from January. These changes have the potential to transform the music business if widely adopted. Streaming companies such as Spotify, Apple Music and Deezer revived the music industry’s prior sales slump with record sales reaching $26bn in 2022. But professional artists failed to evenly benefit from this growth given the legacy structure of royalties. The deal announced this past week may signal a watershed change for the streaming business that will level the economic distribution between artists and music publishers.
Endnotes
1 Source: IFPI, "Industry Data", 2022
2 Source: Spotify For The Record, "Spotify’s Top 10 Takeaways on the Economics of Music Streaming and 2021 Royalty Data", March 2022
Risk Information
Carefully consider the Fund’s investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Fund’s prospectus or summary prospectus, which may be obtained by visiting www.temaetfs.com.
Read the prospectus carefully before investing
Investing involves risk including possible loss of principal. There is no guarantee the adviser’s investment strategy will be successful.
Royalty Trust Structure Risk: the success of the fund is heavily dependent on royalty investments including investments in Royalty Income Trusts (RITs). Cash flows from royalty income can be contingent on the production of energy commodities. As such, the level of income received can be volatile as commodity prices, production levels, and production costs all vary wildly. Another consideration is that some royalty investments own intellectual property. In those cases, the trust could be subject to changes in intellectual property laws, which can impact the value of the assets held by the trust. Royalty trusts generally do not guarantee minimum distributions or even return of capital. Finally, Royalty Income Investments are still subject to market risks, such as interest rate fluctuations, currency risks, and overall market volatility.
Industry Concentration Risk: because the Fund's assets will be concentrated in an industry or group of industries, the Fund is subject to loss due to adverse occurrences that may affect that industry or group of industries.
Sector Focus Risk: the Fund may invest a significant portion of its assets in one or more sectors and thus will be more susceptible to the risks affecting those sectors than funds that have more diversified holdings across a number of sectors. The Fund anticipates that it may be subject to some or all of the risks described below.
Investing in foreign and emerging markets involves risks relating to political, economic, or regulatory conditions not associated with investments in U.S. securities and instruments. In addition, the fund is exposed to currency risk.
Because the Fund evaluates ESG factors to assess and exclude certain investments for non-financial reasons, the Fund may forego some market opportunities available to funds that do not use these ESG factors.
Tema Global Limited serves as the investment adviser to Tema Global Royalties ETF (the “Fund”), and NEOS Investments, LLC serves as a sub-adviser to the Fund. The Fund is distributed by Foreside Fund Services LLC, which is not affiliated with Tema Global Limited nor NEOS Investments, LLC. Check the background of Foreside on FINRA’s BrokerCheck.
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