How Does Spotify Monetization Work?

How artists get paid and where your money goes every month

Photo by Alexander Shatov on Unsplash

How on Earth does Spotify pay for all of this music? That is a question that commonly goes through my head every time I scroll through the popular music streaming service. Nearly any song you can think of is on Spotify. In my mind, that adds up to a helluva lot of royalties to pay. Too many royalties. At first glance, the money doesn’t seem to add up. How can Spotify afford to host all of these artists?

The answer lies in how Spotify monetizes its content. Spotify does not monetize itself in the same way legacy media did (and largely still does.) It has a different model in which artists are lured onto Spotify for the chance of getting a slice of the overall pie rather than money upfront.

Here is how Spotify’s monetization works in layman’s terms.

One Big Bucket

Spotify rakes in a lot of money. Their annual revenue surpassed $10 billion in recent years. Spotify also boasts over 200 million premium subscribers and nearly 500 million total active users.

All of this money from subscribers and advertisers is dumped into one big bucket. Spotify takes out its expenses for upkeep, infrastructure, advertising, and future endeavors and leaves the rest for the artists.

This bucket is what everyone is vying for. The amount of money in the big money bucket also determines how much Spotify pays out per stream, which isn’t a lot.

Spotify is paying roughly .0003 cents per stream, or one-third of a penny.

That might sound great to some people, but that money has a long way to go before it gets into artists’ actual pockets.

Rights Holders vs. Artists

The vast majority of Spotify’s payouts go to rights holders. Most artists don’t directly own their music. In exchange for being promoted, being able to use a studio, and being managed, many artists sign over their rights to a holding company. These are usually big record labels, but other organizations can own music too.

Spotify negotiates with rights holders to get their portfolios hosted on Spotify. Then they pay out directly to the…