Will Beats Music trump Spotify with its artist charm offensive?

Dr Dre and Trent Reznor are launching a US streaming service – but artists are likely to lose out again due to labels' royalty deals
Trent Reznor
Trent Reznor: Beats Music has signed up the Nine Inch Nails frontman as one of the faces of its music streaming service. Photograph: David Wolff-Patrick/Redferns via Getty Images

The music streaming market is becoming a crowded place, but that hasn't stopped Beats Music getting in on the game. Having just announced it will launch in the US next week, the company is trying to differentiate itself by focusing on curation. It also appears to be trying to dodge the verbal attacks by artists that Spotify has suffered, by appearing more "artist friendly". Not only has it recruited a real-life artist, Trent Reznor, as its "chief creative officer", it also announced over the weekend that "Beats Music is committed to the principle that music has real value and will be acting accordingly by paying the same royalty rate to all content owners, major and indie alike". But will this artist charm offensive work?

Firstly, paying the same royalty rate has no relevance if the bigger labels get paid huge advances and small independents don't. Major-label sources have confirmed that the first round of advances that Spotify paid the majors exceeded the usage during the term of their deals. While some labels passed on the surplus to their artists, others did not – or, according to the music managers I spoke to, only to some of their artists. It's highly unlikely that Beats, which also makes "lifestyle" headphones, has got away with not paying the customary big advances required from "unproven" new services. (It's worth noting that the company's co-founder and chief executive, Jimmy Iovine, is also the chairman of Universal label group Interscope Geffen A&M.)

Secondly, Beats doesn't control how those royalties are split between label and artist. Major labels tend to pay the artists about 15% to 20% depending on the individual deals. Many legacy artists get less than half that, while Martin Mills of Beggars Group has confirmed that the label group currently pays its artists 50% of music streaming royalties.

Spotify payouts per stream to music rightsholders range between $0.006 (£0.0037) and $0.0084, according to the Spotify Artists website. The rates quoted by Spotify do not show how much of it goes to the songwriters, but it's said to be about a fifth to a sixth. Let's say it's 20%. Deduct that share, and that would mean the average artist makes about £0.0004 per stream.

The music industry views on streaming is largely split in two. On the pro side are the majority of labels (in particular the bigger ones) – and on the con side are the artists (and Ministry of Sound). The labels' defence of Spotify is that it may take longer to collect the equivalent of a download in royalties from streaming – but once you have, you continue to earn royalties every time the track is played.

However, if we use the lower Spotify rate, it would take 189 streams to make 70p (about what iTunes pays to rightsholders for a download). If you use iTunes, you can have a quick look at how many of the tracks in your library that you've played that many times. (I'm an avid music fan, and yet my result is: none.)

This may be less of an issue for labels that have big catalogues of many artists. Spotify pays the labels according to how big of a share of the streams all their artists combined have accumulated – they don't have to rely on a sole release, the way artists do, to recoup.

Last year Everything Everything told the NME that their biggest concern about streaming is that they want to earn enough to be allowed to make another album. Some younger artists aren't as concerned. This is often because they're still living off the advance the label has paid them. It's only when that advance runs out, and they realise that they're far from recouping – and so won't see any royalties themselves for a long time, if ever – that they start questioning streaming rates.

The "frontloading" of royalties that CD and download sales provide allow artists a chance to recoup sooner than streams do.

Swedish computer science researcher Daniel Johansson, who specialises in music and culture studies, suggested in an article last October that a solution would be for artists to accept a much lower royalty rate (less than 10%) until the label has managed to recoup its investment and, he said, make a "reasonable" profit. At that point, the royalty split would revert to 50/50 .

His idea suggests he's unaware how labels (and publishers) recoup the money they spend on an artist. Only the artist's share counts towards recoupment. In other words, the lower the artist royalty rate is, the longer it takes for an artist to be recouped. It also means that just because an artist is unrecouped it doesn't mean the label hasn't made a profit.

This is one of the reasons why an artist friend of mine, who received a relatively tiny advance of £12,000 for a record back in the 1990s – once half of the video costs and other recoupable label spend had been added – somehow finds himself £70,000 unrecouped today. If he had to recoup it through streaming, using our calculations above, his tracks would have to be streamed 175m times.

Sony's director of innovation and strategy, Fred Bolsa, recently admitted that royalty rates in the digital age are "difficult".

"It's something we're working on and that we're conscious of. It takes some time for these things to flow through," he told the BBC. "Of course, things are never a problem until they reach a certain scale. Now they're reaching a certain scale – we are hitting a point where we have to address and look at how all that works."

One solution would be to do the opposite of what Johansson suggested. Raise the artist royalty share on streams to 90% until the label has recouped its investment – then lower it to 50%.

With digital track sales falling by 5.7% in the US, the biggest music market in the world, suggesting that streaming is starting to cannibalise download sales, it's understandable that music creators are fretting.

Unfortunately for Beats Music, alleviating artist worries appears to be largely out of its hands.