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The New Economics of the Music Industry

How artists really make money in the cloud – or don't

October 25, 2011 4:35 PM ET
adele mtv vma
Adele onstage at the MTV Video Music Awards.
Kevin Mazur/WireImage

In the old days, it was much easier for pop stars to keep up with how much they were getting paid. Somebody would buy a CD at a Tower Records for $15 and a few dollars would appear months later on the star's royalty sheet. Then iTunes took over the record business, and it was even easier (if not more profitable) – every time somebody bought a 99-cent track, a few pennies went into the artist's bank account.

Those were such simple times. Today, music fans play free music videos on YouTube, stream songs for free on Spotify, MOG or Rdio, customize Internet radio stations on Pandora or Slacker and consume music a zillion different ways. The fractions of pennies artists make for each of these services are nearly impossible to track – at least for now. "People like to simplify this and say, 'There's no money in it,'" says Jeff Price, founder of TuneCore, which charges artists to place songs directly into iTunes, Spotify and others. "But it's complex, it's complicated and it's still being worked out."

So you're Adele, the year's biggest pop star. Your songs stream on Spotify – or MOG, Rdio, Pandora or YouTube. You still sell downloads through iTunes and Amazon, and you still sell old-fashioned CDs in old-fashioned record stores. How much do you get paid?

Rolling Stone talked to several sources in the music business and got several different answers.

SUBSCRIPTION SERVICES

Spotify, MOG, Rdio and other subscription services are either free (with ads) or charge users monthly fees for unlimited streaming music. The quick calculation, according to one band manager: If a song gets streamed 60 times, the songwriter receives 9.1 cents in mechanical royalty payments. And the performing artist gets 38 cents (or splits that money, half and half, with a record label, per contract).

(UPDATE: A music-business source contacted us after this article appeared to clarify that these numbers were estimates based on one manager's royalty statements. They are not an actual formula Spotify and music publishers use to calculate their songwriting royalty payments. This manager's royalties could change as Spotify's subscriber numbers change, and they vary depending on the streaming popularity for each artist. This source explained to us, again, the actual formula used for determining artist royalties from streaming services – as Price says, it is too ridiculously complicated to reproduce here.)

Maybe you don't want to know the non-quick formula. "It is beyond complicated. It took me literally three months to understand this thing," says Jeff Price, founder of TuneCore, which charges artists $10 (for a single) and $50 (album) to place music in online stores such as iTunes and Amazon, as well as subscription services like Spotify and MOG.

Generally speaking, songwriters make about 10.5 percent of Spotify or MOG revenue. "However, each service has to run literally five formulas each month -- on calculation number one, they have Subsection Number One and Subsection Number Two," Price says. "They throw out the higher of those and then compare that one against the other three. After that, they have to run this formula five different times."

Because the formulae are so byzantine, and the royalty payments that show up on audit sheets are still so tiny, very few artist lawyers and managers truly understand how much they could make – one day – from Spotify, MOG, Rdio or the other relatively new streaming services.

But Price makes the point that Spotify and the others encourage music fans to explore, listening to songs they might not have purchased. Even if it's not a rock-star payday, it's something. "Is it big money? I think it could be! I really do," says Jim Guerinot, manager of Nine Inch Nails and No Doubt.

NEXT: iTunes

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