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

71 Pages Posted: 4 Aug 2020 Last revised: 11 Jun 2021

See all articles by Saeed Alaei

Saeed Alaei

affiliation not provided to SSRN

Ali Makhdoumi

Fuqua School of Business; Massachusetts Institute of Technology (MIT)

Azarakhsh Malekian

University of Toronto - Rotman School of Management; Massachusetts Institute of Technology (MIT) - Electrical Engineering and Computer Science

Saša Pekeč

Fuqua School of Business, Duke University

Date Written: July 7, 2020

Abstract

We consider a two-sided streaming service platform which 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--- \emph{pro-rata} and \emph{user-centric}. With pro-rata, artists are paid proportionally to their share in the overall streaming volume, while 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 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. Further, 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 which 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

Suggested Citation

Alaei, Saeed and Makhdoumi, Ali and Malekian, Azarakhsh and Pekeč, Saša, Revenue-Sharing Allocation Strategies for Two-Sided Media Platforms: Pro-Rata versus User-Centric (July 7, 2020). Rotman School of Management Working Paper No. 3645521, Available at SSRN: https://ssrn.com/abstract=3645521 or http://dx.doi.org/10.2139/ssrn.3645521

Saeed Alaei

affiliation not provided to SSRN

Ali Makhdoumi (Contact Author)

Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

HOME PAGE: http://https://www.fuqua.duke.edu/faculty/ali-makhdoumi

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Azarakhsh Malekian

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Massachusetts Institute of Technology (MIT) - Electrical Engineering and Computer Science ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States

Saša Pekeč

Fuqua School of Business, Duke University ( email )

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