Weighted Pro-Rata: Exploration of a Promising New Music Streaming Remuneration System

Despite driving the recent resurgence of music industry revenue, digital streaming platforms (DSPs) face persistent criticism over the fairness of their pro-rata royalty payout systems, sparking legislative initiatives in the EU, US, and UK. This article asks how much of the perceived unfairness in DSPs’ pro-rata payouts can be ascribed to platforms offering disparate types of music consumption without any organizational separation, and how the status quo could be improved. DSPs offer access to large libraries of records that users can browse and play from, as well as “programmed” listening features, e.g. editorial or algorithmic playlists. The latter channel constitutes 40% of Spotify streams by now, and pays at the same rate per stream as the former channel. Since DSPs pay by streams market share, boosting the streams of some artists via algorithmic or editorial promotion diminishes the payout for all others. I develop empirical and theoretical arguments for why paying every stream the same price is suboptimal, by presenting disconnects between the pure number of streams and consumers’ level of engagement with content. This suggests that under the pro-rata model, the payment distribution does not accurately reflect consumers’ preferences. I further show how a stream-source weighted pro-rata system aka active engagement model can increase the pay rate for active streams by up to 67% depending on the choice of the weighting factor, hereby diminishing the financial impact of platforms’ promotion choices and rewarding artists for creating music that consumers want to actively seek out.