Revenue-Sharing Allocation Strategies for Two-Sided Media Platforms: Pro-Rata vs. User-Centric

Saeed Alaei (), Ali Makhdoumi (), Azarakhsh Malekian () and Saša Pekeč ()
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Saeed Alaei: Google Research, Mountain View, California 94043
Ali Makhdoumi: Fuqua School of Business, Duke University, Durham, North Carolina 27708
Azarakhsh Malekian: Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada
Saša Pekeč: Fuqua School of Business, Duke University, Durham, North Carolina 27708

Management Science, 2022, vol. 68, issue 12, 8699-8721

Abstract: We consider a two-sided streaming service platform that generates revenues by charging users a subscription fee for unlimited access to the content and compensates content providers (artists) through a revenue-sharing allocation rule. Platform users are heterogeneous in both their overall consumption and the distribution of their consumption over different artists. We study two primary revenue allocation rules used by market-leading music streaming platforms— pro-rata and user-centric . With pro-rata, artists are paid proportionally to their share of the overall streaming volume, whereas with user-centric, each user’s subscription fee is divided proportionally among artists based on the consumption of that user. We characterize when these two allocation rules can sustain a set of artists on the platform and compare them from both the platform’s and the artists’ perspectives. In particular, we show that, despite the cross-subsidization between low- and high-streaming-volume users, the pro-rata rule can be preferred by both the platform and the artists. Furthermore, the platform’s problem of selecting an optimal portfolio of artists is NP-complete. However, by establishing connections to the knapsack problem, we develop a polynomial time approximation scheme (PTAS) for the optimal platform’s profit. In addition to determining the platform’s optimal revenue allocation rule in the class of pro-rata and user-centric rules, we consider the optimal revenue allocation rule in the class of arbitrary rules. Building on duality theory, we develop a polynomial time algorithm that outputs a set of artists so that the platform’s profit is within a single artist’s revenue from the optimal profit.

Keywords: two-sided media platforms; subscription pricing; pro-rata and user-centric; digital goods; revenue sharing (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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