universal music group

As the music streaming business matures, the way people listen to music could determine how artists get paid. Sitting back and letting a streaming service choose a song will result in a lower royalty than choosing the song yourself, if this week’s news of a new streaming model is any indication.

It’s not a phobia toward algorithms that’s driving the change. Rather, the approach rewards those artists who create the most active engagement. Songs that play in the background are deemed to be less valuable.

On Tuesday, French music streamer Deezer and Universal Music Group announced a partnership to reinvent how Deezer calculates UMG’s streaming royalties. The partnership will “[reduce] the economic influence of algorithmic programming” and reward “engaging content” with greater royalties, according to the companies’ press releases.

When they say, “algorithmic programming,” they mean the streaming service’s personalized recommendations about what song will play next. That’s a more passive, lean-back approach to listening than hunting and pecking on the app’s user interface to choose a song.

At some point between the launch of internet radio platforms and the present battle for better royalties, passive listening got a bad rap. What has the world come to, some people fret, when dreaded algorithms are deciding what music gets heard? What gives an algorithm such an important role in determining how royalties will be paid?

But algorithms are a common way to stream music. When given an on-demand streaming service, people often let an algorithm do the hard work of picking the next song. A 2021 MusicWatch survey found Spotify Premium users spent 25% of their time in “lean-back” listening rather than “lean-in” listening. That figure rose to 31% for Apple Music users and 32% for Amazon Prime Music users. In all, 48% of time spent listening to music was “lean back” listening on streaming services, broadcast radio and satellite radio.

Algorithms also drive helpful products such as Spotify’s Discover Mode, a promotional tool that allows artists and labels to find new listeners in return for a lower royalty rate. It works by increasing the likelihood a song will be recommended to a listener. It’s popular, too. From the first quarter of 2021 to the first quarter of 2022, Discovery Mode had a 98% customer retention rate, Charlie Hellman, Spotify’s vp/global head of music product said during the company’s 2022 investor day presentation.

When a streaming service does personalization well, it adds great value to a listening experience. Pandora was revolutionary when it launched in 2005 because it had a spooky sense of what people wanted to hear. Its Music Genome Project, a proprietary technology that classifies recordings’ various musical traits, gave it the ability to pick the right songs based on a history of giving other songs a “thumb up” or “thumb down” vote. Pandora took away the effort in digging for songs and provided a much broader catalog than broadcast or satellite radio.

Today’s music streaming services are superior to their predecessors — and their own previous iterations — specifically because they have mastered passive listening. Consider how far Spotify has come since it was launched. Spotify used to recommend songs based on a user’s social network — kind of an “if your friend likes it, you’ll like it” approach to song-picking. But it wasn’t a good listening experience. Spotify’s decision to acquire music intelligence startup The Echo Nest in 2014 was the cornerstone for a new approach to providing a personalized listening experience.

The proliferation of smart speakers only adds to the need for algorithmic listening. About two-thirds of U.S. smart speaker owners wanted to own the devices to discover new songs, according to a 2022 Edison Research survey, and their share of time spent listening to audio through a smart speaker increased 400% over the previous five years. The joy of owning a smart speaker is allowing the device and streaming service to do all the work — it’s passive listening at its best.

Most Americans use their favorite streaming service when doing things around the home such as cleaning, relaxing, cooking, eating and entertaining guests, according to the same MusicWatch study. Most people stream music when exercising. More than half of people also use their favorite streaming service when driving, although satellite and broadcast radio were preferred in the car over streaming. Streaming service Songza, acquired by Google in 2014, was built on the premise that people chose music for moods and activities. That approach to curation has since been adopted by most — if not all — streaming services.

The UMG-Deezer partnership is evidence that background listening is on its way to getting a demotion. Deezer will remove tracks of white noise, which account for 2% of its streams, from the royalty pool. That leaves more royalties for professional artists who depend on streaming to earn a living. Throughout the year, UMG has been calling out “functional music” — a term that has come to mean low-cost or generic music built for moods or activities — and drawing a distinction between artists who draw people to streaming services and sounds that people play in the background.

Taylor Swift and Drake may rule the charts, but functional music is mainstream, too. Of U.S. music streamers who listen to playlists, many of them listen to playlists for white noise (36%), rain sounds (45%) and relaxation (61%), according to a 2023 MIDiA Research survey. In recent years, streaming services have broadened their playlists and radio stations to address the fact that consumers want a variety of sounds.

Artists with small followings will get less, too. Deezer will “boost” the royalties of “professional” artists with at least 1,000 streams per month by a minimum of 500 unique listeners. That will relegate hobbyists and artists early in their career development to a different tier. Exactly how many artists will be affected isn’t clear, but Deezer says just 2% of artists on the platform have more than 1,000 monthly unique listeners.

UMG and Deezer aren’t exactly taking an innovative stance, however. The music industry — at least in the United States — has already determined that active, on-demand listening is more valuable than passive, non-interactive listening. The Deezer-UMG partnership merely codifies for an on-demand service what is standard at internet radio. In the United States, non-interactive internet radio streams from the likes of Pandora pay 0.24 cents per ad-supported stream (and 0.3 cents per subscription streams). That’s less than any on-demand stream from a premium streaming service such as Spotify, Apple Music and YouTube Music.

In effect, a streaming service pays less for non-interactive streams because it gives the listener less value than on-demand services. To qualify for the lower royalty rate, a non-interactive streaming service cannot have the same robust features as an interactive one. At Deezer, a listener can stream any song from any artist any number of times. They can listen to playlists and build playlists, too. They can listen to songs shared by friends through SMS or social media. That’s all lean-in listening, and it’s more valuable because people will pay $11 a month to do it.

Until now, on-demand services’ standard pro-rata model hasn’t separated passive from active listening. When labels negotiated licensing deals with streaming services, they have always treated one stream the same as any other stream. A stream from a user-curated playlist is treated the same as a stream from an algorithmically created radio station. Whether the listener actively hits the play button to listen to a particular track isn’t taken into account. Right or wrong, that’s how the pie has been divvied up.

A couple of decades into the life of the pro-rata system, Deezer shows there is a greater willingness to treat active listening differently than passive listening. MIDiA Research’s Mark Mulligan called this demotion “a very welcome and long overdue move” that will “disincentivis[e] the commodification of consumption by rewarding active listening.” There’s certainly a logical argument to be made here: The artists people actively seek out arguably provide the most value — give the streaming service the most foot traffic, so to speak — while less popular artists play the important but less financially valuable role of giving breadth and depth to music catalogs.

Time will tell if and how other streaming services follow Deezer’s lead. An alternative already exists: In 2022, Warner Music Group adopted the user-centric model that SoundCloud rolled out to independent artists the prior year. That system pays royalties based on an individual subscriber’s listening rather than pooling all subscribers’ fees into a larger pool. So, a subscriber who listens to out-of-the-mainstream or independent artists is assured their money is not going to popular artists.

Over the next few years, labels and services are likely to experiment with different approaches to calculating streaming royalties. But regardless of how the dust settles, streaming services and rights holders should respect what passive listening brings to their listeners.