Universal & Deezer deal: good for music publishers, great for artists, fantastic for royalties

Chris Semenuk
By Chris Semenuk
Investment Partner
September 18, 2023

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.

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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:

  1. 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.
  2. 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.

Footnotes

1 Source: IFPI, "Industry Data", 2022

2Source: Spotify For The Record, "Spotify’s Top 10 Takeaways on the Economics of Music Streaming and 2021 Royalty Data", March 2022