Business

Under Spotify’s new royalties model, the platform will financially penalize labels or distributors when it finds that more than 90% of streams on a song are fraudulent, charging 10 euros per offending track, according to several music distribution executives.

The service’s current remedies will also remain in effect — removing fake streams from the system so they don’t impact payouts or charts, pulling the track off editorial playlists, and possibly striking them from the platform altogether. The fees racked up by labels or distributors will be charged against future royalties.  

Like the rest of Spotify’s new model, which also affects how the lowest-streaming acts and non-music noise tracks earn royalties, the new fraud rule will impact music’s steadily growing “long tail” of tracks that don’t get played much. In this case, it’s simple math: Big artists trying to boost their numbers are unlikely to hit that 90% threshold for fraudulent streams since they already have an established audience that will listen to them. Any act with a fair number of legitimate streams would need a huge amount of fraud to trigger a penalty. 

This means companies that have built hands-off, high-volume distribution businesses with small margins, charging a small fee per upload — the three biggest are DistroKid, TuneCore and CD Baby — likely have the most to lose under the new rules. They have huge batches of new music uploading daily, and that means it’s hard to know who is doing the uploading.  

Even so, Tunecore welcomed news of Spotify’s change. “In order to effectively prevent bad actors from diluting the royalty pool for real artists with real fans, all companies need to be a part of the solution,” says Andreea Gleeson, the company’s CEO. “We also have been engaged in a deep dialogue with all our DSP partners, including Spotify, to actively deploy anti-fraud measures that encourage content providers to make the proper investments to actually fight fraud. We are fully aligned with the measures that Spotify is implementing.” (Tunecore’s parent company, Believe, has a history of publicly supporting Spotify initiatives, including Discovery Mode, which is unanimously opposed by the major labels.) 

“It’s a positive incremental step to take, but it’s incremental — you could see a service doing something much more drastic,” adds another senior executive. “It sends a good signal to the marketplace about intentions.”

On the other hand, DistroKid founder Philip Kaplan voiced his objection to the penalty system on a recent call with the Music Fraud Alliance, according to two sources who were also on the line. (Both DistroKid and Tunecore are members of the coalition.)  

One of those executives described the gist of Kaplan’s comments: “We can’t determine if a new client is going to hire a marketing service that’s going to bot streams until they’ve done it. It’s like you can’t determine if your neighbor is going to commit a crime.” And the entity best able to monitor for fraudulent activity is Spotify itself. In this line of thinking, then, Spotify would be penalizing distributors for something that they didn’t do, can’t predict, and can’t spot as quickly as the streamer itself.  

Kaplan declined to comment. Spotify also declined to comment.

There is little public data on the prevalence of fraud and where it tends to occur. The most comprehensive study that’s widely available was carried out recently by the Centre national de la musique (CNM), a French government organization, which found that “more than 80% of the fraud” detected by Deezer and Spotify in France in 2021 was “at the long tail level.”  

These acts are unlikely to be associated with a major record company, as the big labels focus primarily on the top releases: Odds are that many of the tracks involved in the fraud are there purely for that purpose — a bad actor uploads white noise or junk audio expressly to pump up plays with bots and attempt to extract royalties from the streaming ecosystem.  

Assuming that the 80% rule — or some semblance of it — holds more broadly across countries and streaming services, Spotify’s new penalty system functions as “a direct shot at distributors that are just way overpopulating platforms with a lot of nonsense,” says another music executive with experience fighting fraud. In this view, Spotify is pushing distributors to look more closely at what it is they are distributing.  

“Being penalized should create an environment where the distributors will invest more to make sure that their business is cleaner,” says Ty Baisden, who manages Brent Faiyaz, among others. 

It remains notoriously hard to determine where streaming manipulation actually comes from.

“Distributors might say it’s the [fault of the] labels,” Ludovic Pouilly, senior vp of institutional and music industry relations at Deezer, told Billboard earlier this year. “The labels might say it’s the management. And artists themselves might tell you it’s the competition who’s trying to negatively impact their reputation.”

On top of that, there are also plenty of third-party marketing companies that artists hire thinking they’re implementing legitimate streaming campaigns, but are actually just paying bot-farms to generate plays instead. This makes any attempt to assign responsibility for streaming fraud on a large scale fraught. “How are you going to hold a label or distributor responsible for something that they can’t control at all?” asks an independent label founder.

To that end, several distribution executives said they would try to shift any fraud-related penalties they incur on to whoever uploaded the music that was tied to fake streams. “Our plan is to pass on the fee to the accounts and the releases where it occurred to the best of our ability,” says one distribution executive.

This offers its own challenges. If a fraudster already has money running through the distributors’ system due to previous streaming activity, or a legitimate bank account on file, the distributor might be able to claw back the penalty money it now owes Spotify when it learns of fraud. But if the fraudster recently signed up to the distributor, that might not be so easy.  

The biggest takeaway from Spotify’s new policy may be that it demonstrates how much the conversation around fraud has shifted in less than a year. In 2022, no one would talk about it; in 2023, everyone is suddenly eager to tackle the problem — and to broadcast their efforts in a public manner.  

“Nobody’s immune” to streaming fraud, Christine Barnum, chief revenue officer at the distributor CD Baby, told Billboard in April. “So people are finally having the realization, ‘Yeah, this is a problem.’”