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How should music streaming services pay artists?

How should music streaming services pay artists?

The way people listen to music has changed drastically in recent decades. In a recent survey of Internet users by the International Federation of the Phonographic Industry (IFPI), 78 percent said they listen to music through streaming services.

The emergence of platforms such as Spotify, Apple Music and Deezer has led to a heated debate about how content providers are paid for their work. The question of how to optimally distribute the share of users’ subscription money allocated to the artists on streaming platforms is a problem that caught the eye of Saša Pekeč, a professor of decision science at Duke University’s Fuqua School of Business.

Platforms typically allocate a percentage of subscription and advertising money to content providers—Spotify, for example, claims that two-thirds of every dollar it makes from music goes to content providers. Two main strategies can be used by streaming platforms to distribute that share. They are called pro-rata and user-centric. According to the pro-rata rule, all the subscription and advertising money is collected in one pot, and then a percentage of it is distributed to artists in proportion to the number of streams. For example, if Taylor Swift gets five percent of the total streams in a given month, she will get five percent of the total amount awarded to content providers in that month. Under the user-centric rule, users’ subscription money is distributed proportionally to the artists each user listens to. For example, if one user listens exclusively to Yo-Yo Ma, all the subscription money allocated to content providers goes to Yo-Yo Ma.

While most of the major platforms adopt the pro-rata rule, the fairness of this strategy is often questioned. Critics believe it favors superstars and hurts niche artists. This is an open question that economists, academics, and even judges deciding copyright royalty issues are currently grappling with.

“We saw that there was this interesting discussion, and we could see that it was actually a mathematical problem,” says Pekeč. “So we started thinking about how we could set it up analytically to make that comparison.”

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Pekeč and his co-authors step into the investigation – Saeed Alaei, a researcher at Google Research, Ali Makhdoumi, also a professor of decision science at Fuqua, and Azarakhsh Malekian, a Rotman professor of operations management and statistics at the University of Toronto. School of Management – first thought they were going to prove mathematically that the pro-rata rule was actually unfair and bad for small artists.

They got a surprise. “That’s what drives my interest in research. When something defies conventional wisdom and I can actually prove it, says Pekeč. Their findings were described in the paper “Revenue-Sharing Allocation Strategy for Two-Sided Media Platforms: Pro-Rata versus User-Centric”, which was accepted for publication by the journal Management science.

Pekeč’s work is focused on market design, an interdisciplinary field at the intersection of economics, operations research and computer science. “I study economic problems using techniques from optimization and algorithm design,” explains Pekeč. “In my research, I look at system-wide design of prices and allocation – essentially who gets what and at what price – on a large scale. It’s about coordinating large markets, which is essentially what platforms do.”

Pekeč is currently president of the Auctions and Market Design Section at the Institute for Operations Research and the Management Sciences (INFORMS), and is particularly interested in platform business models. For example, he has studied consumer pricing in ad-supported platforms and the role of bilateral ratings in improving the performance of two-sided on-demand platforms.

Looking at music streaming platforms was a natural interest for him.

Modeling diversity in streaming platforms

To evaluate which revenue distribution strategy was the best, Pekeč and his colleagues worked to develop a model that accurately captured the diversity present on streaming platforms.

“If all the artists were exactly the same, there would be no difference between these two approaches,” says Pekeč. The difference is not only driven by how popular individual artists are among users, but also by how much music each user consumes. “Our model takes both of these things into account: the heterogeneity of how much music people listen to and the heterogeneity of which artists each person prefers.”

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In the mathematical model, there are different types of users based on their overall consumption: some users may listen to a lot of music, getting more for their subscription money, while others listen to little music. Furthermore, users are also differentiated based on how their listening time is distributed between different artists.

In a scenario where there is a fixed set of artists on the platform, when you compare the two revenue sharing rules, you will find that pro-rata hurts niche artists and benefits superstars. This seems to suggest that the user-centric model is fairer. But that scenario doesn’t take into account the fact that artists may choose to leave the platform if the rules aren’t beneficial, potentially taking part of the fan base with them and affecting the artists who stay on the platform.

Capturing the complexity of artists’ and users’ choices

“Our model makes it possible for everyone individually to choose a greener pasture if they can,” says Pekeč. With each artist having the ability to set the optimal price they could get if they offered their music directly to fans, they can decide whether to join the streaming platform under these rules or go solo. Similarly, users can also decide whether they get the best deal by paying for the platform subscription, consuming music directly from their preferred artists, or doing both.

The researchers then asked the question: is the platform better to switch to user-centric or to keep the pro-rata rule? It turns out that in a scenario where there are artists who are extremely popular among users with high consumption of music, the pro-rata rule is preferred, the study shows. In fact, it may not be sustainable for the platform to use the user-centric approach in that context.

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If, on the other hand, there are artists who are extremely popular among low-spending users, the user-centric approach may be preferable. However, the pro-rata rule still manages to ensure sustainability even in some such scenarios.

And even niche artists end up benefiting from the pro-rata approach. High spenders who join the platform to mostly listen to the superstars may end up consuming niche artists available on the platform. “The niche artists get a level of exposure they wouldn’t get otherwise,” says Pekeč. “If you think about it that way, the pro-rata rule is much closer to what should be the mathematically optimal payment rule.”

An additional question posed by researchers was: how can streaming platforms choose the optimal set of artists to be on the platform, assuming they want to pay those artists at least as much as they could earn if they went solo? This turned out to be a very complex problem known in computer science as NP-complete. For this class of computational problems, no efficient solution algorithm has been found. “We show that it is difficult to find the optimal set of artists. Nevertheless, we were able to offer the approach that is guaranteed to come very close to the optimal solution,” says Pekeč.

Although the major streaming platforms currently use pro-rata rules to compensate artists, the details of these rules are opaque. The paper suggests there is room for improvement, notes Pekeč. “It’s an opportunity to make it even better for both the artists and the platform. There is still some value left on the table.”

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