First off, I’m pasting in Helienne’s original Guardian piece about Spotify. I’ll comment in the next post.

Spotify should give indies a fair deal on royalties

Independent labels are considering leaving the music streaming service, claiming it treats them unfairly

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Spotify pays artists on major labels such as Lady Gaga differently from those on independents. Photograph: Daniel Dal Zennaro/EPALast year, major labels Universal and Sony received more revenue from Spotify than any other Swedish music service or digital and physical record store, according to local newspaper reports.

The news came as a surprise to many independent labels and to Swedish songwriters, as their royalty statements tell a very different story. It appears that not only do the majors own shares in Spotify, they – and their artists – also get much better streaming rates than the indies. Some of the indies threatened in early December to withdraw their music from Spotify in response.

The Swedish head of Naxos, one of the world’s biggest classical record labels, told Dagens Nyheterin December that despite Spotify’s number of paying subscribers soaring to 750,000, his label has not seen much of an increase in revenue. Indie music consortium Merlin, which represents a number of independent labels, including Naxos, and negotiated their members’ deal with Spotify, says this was due to a misunderstanding, that it didn’t represent the facts as they now stand and that they wouldn’t accept a substandard deal on behalf of their members.

In response to the Swedish newspaper reports, Spotify said: “Indie label content is a crucial part of Spotify and offering their music on the service allows our users to experience a hugely diverse catalogue spanning every musical genre. In return, we give indie labels a powerful monetisation and promotional platform as well as exposure to an eclectic and passionate audience of music lovers across Europe. Crucially, Spotify has paid many millions of euros to the indie music community since our launch and we enjoy an excellent relationship with the vast majority of our indie label partners.”

Blancomusic Records – a small indie based in Spain – is, however, far from impressed by Spotify royalties: “The rates offered to us as an indie label were so insulting that we’d prefer to forgo the ‘privilege’.” Digital director Simon Wheeler of Beggars Banquet, one of the largest independents (also represented by Merlin), agrees that each licence would have different terms. “As to how different they are I can only guess,” he says. “The majors aren’t as accommodating as they used to be in sharing information.”

Though all deals with Spotify are covered by non-disclosure agreements (NDAs), it is well known in music industry circles that Universal was able to secure a minimum streaming rate for the ad-funded version of the site – something, it is understood, not even the other majors have been able to accomplish.

You can’t blame Universal for securing the best deal possible. After all, it has a lot of leverage, being the world’s biggest music group. Spotify would be a lot less successful without Universal artists such as Lady Gaga, Eminem and Black Eyed Peas.

I do, however, have an issue with a track by Lady Gaga earning more money for 100,000 streams than, for example, one by Adele or the xx, just because Gaga is signed to a major label.

After all, when their songs are played on the radio in the UK, they receive the same royalty rate. This is because radio royalty rates are negotiated by PPL, which collects performance royalties for all the labels and performers (including musicians featured on the recordings), in the same way PRS for Music collects – and negotiates rates – on behalf of songwriters and their publishers.

Traditionally, record labels only collect and distribute the revenue from record sales (so-called “mechanicals”) and synchs (advertising and use in games, for example), while PPL collects radio and live (so-called “performance rights”). So why wouldn’t PPL negotiate the Spotify rates for all the labels? Because the bigger labels don’t want them to. Their argument is that on-demand streaming is not the same as radio.

If you think all this is confusing, you’re not the only one. Many people I’ve talked to inside the music industry do too – and members of the public even more so.

The publishing (songwriters) copyrights system is just as confusing. The local collection society negotiates performance rates for all music played in their country: PRS sets rates for all UK radio and live performances, Stim sets rates for Swedish radio, and so on.

But for mechanicals, publishers and songwriters can choose which European collection society they want to belong to – Universal Music Publishing, for example, belongs to the French society, Sacem. So Sacem negotiated the rates with Spotify for all songs belonging to Universal Music Publishing. To put it in simpler terms: If a song written by Mariah Carey, who’s publishing is signed to Universal, is streamed 1m times on Spotify, and one of my songs is streamed an equal amount of times, Spotify could pay us different amounts, since I belong to Stim.

Granted, when it comes to songwriter royalties we’re talking about very small amounts, even for high levels of streaming. Even the major publishers I spoke to in Sweden said that they earned a pittance from the music service. Judging by other streaming deals, it’s probably less than a fifth of what the major labels earn.

It often seems digital music services only calculate the cost of licensing of major-label recordings into their budget, before launching, with independent labels a mere afterthought (the latest example being Rdio’s deal with Merlin). The fact that they need to get a licence and compensate the songwriters is seen as an unwelcome extra expense – even though, I’d argue, without great songs there would be no point in having a music service at all.

Spotify is a great music service for its users and I’m sure most musicians would prefer to be featured on the site. What they don’t want is to be treated as second class. A popular track is a popular track and should be rewarded equally whether it has had the powerful PR machinery of a major label or not. The internet was supposed to liberate artists, giving unsigned artists the same chance of succeeding by cutting out the middleman.

This is not only a Spotify issue: it is a growing problem for smaller labels and unsigned artists with most new digital music services. In addition, the major labels tend to get upfront payments from new services, which is rarely the case for independent labels.

If in the future, as many predict, almost all royalties will be distributed not on a set rate per stream or download but on a share of subscription revenue – a share divided according to usage reports from the music services – what are the chances that smaller labels and independent artists will be remunerated correctly?

If the bigger labels are shareholders in the service, I must say I’m sceptical. Even major-label artists could be shortchanged, as they’re not allowed to know on what basis or what rate they’re paid due to NDAs. Is this really the price music creators must pay for free enterprise?

• This article was amended on 2 February 2011 to remove references to a Swedish newspaper report and a dispute in Norway