(Bloomberg) -- Universal Music Group NV, the world’s largest record company, is talking with the music service SoundCloud Ltd. about overhauling the way artists are paid, a deal that could help major performers collect more revenue from streaming services.
The companies are discussing changes to the standard industry royalty structure, according to people familiar with the talks, and would like to reach a conclusion before the end of the year. Universal Music Group and SoundCloud declined to comment. The exact details are still being worked out.
Streaming services like Spotify Technology SA have boosted music industry sales for close to a decade. But some major artists and labels say they haven’t shared sufficiently in the takings. The efforts are complicated by the fact that after several boom years, music industry growth is slowing and that fraud and piracy continue to steal revenue from all of the parties.
Universal Music chief Lucian Grainge and his peers at other labels have floated the idea of adjusting the current model to benefit their artists by, among other things, cutting down on the amount of money and attention siphoned off by formats like white noise or AI-generated tracks.
In a company memo earlier this year, Grainge advocated for a new payout strategy that “values all subscribers and rewards the music they love.” So far, he’s offered few specifics on how this might work.
Possible adjustments to the streaming model could involve rewarding artists who listeners actively seek out, rather than paying the same level of royalties when a performer’s song is consumed more passively via a playlist, according to Mark Mulligan, managing director and music analyst at Midia Research. Universal Music has also looked at creating a bonus pool of money for artists who generate streams from new users.
Under the current model, streaming services pay music rights holders a majority of their sales, placing the money into a pool that’s distributed based on the rights holders’ share of listening. Grainge has railed against “irrelevant” content that can accumulate many hours of listening and account for a substantial share of the royalty revenue, thereby diverting money away from labels and artists.
For years, SoundCloud has been promoting the idea of “Fan-Powered Royalties.” The company divides each customer’s subscription and advertising revenue up among the artists whose music they click on and hear, rather than adding each user’s revenue to an overall pool. The idea is to reward creators with loyal fan bases rather than those who reach many people with less frequency, often from playlists. SoundCloud first announced its FPR model in 2021 and has done deals with Warner Music Group Corp. and Merlin, which represents independent labels.
SoundCloud has differentiated itself from Spotify and Apple Music as a place to find niche communities and genres, typically uploaded by independent artists. A 2022 study from Midia Research, commissioned by SoundCloud, found that those types of artists most benefited from fan-powered royalties.
“Superstars tend to have more passive fanbases, not because they necessarily want to, but because it is what the pro-rata streaming model incentivizes,” the report said. “Regardless of an artist’s size, operating under the FPR model frees artists from this reliance on passive fans, instead rewarding them for focusing on building deeper fandom.”
Universal Music hasn’t endorsed SoundCloud’s model because executives believe that it did little to address fraud and also disadvantaged certain types of musicians, said the people, who asked not to be identified discussing the talks. Universal Music specializes in superstars, including Drake, The Weeknd and Taylor Swift, meaning it might be less inclined to opt all the way into FPR.
But Universal Music has begun advocating for its own version, which it has dubbed an “artist-centric” model. The consultancy Bain & Co. is advising the company, the people said, and helping forecast how the new payouts might work. While music services have been loathe to give Grainge data on his competitors, they have been more willing to engage with and inform the research of a third party like Bain.
Universal has held conversations about a similar model with other streaming services, including Tidal, a Block Inc. subsidiary, and Deezer SA. To date, no deals have been announced.
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