How Do Royalties Work?

Every songwriter dreams of authoring a hit song and making millions off the royalties and licensing fees. Publishers dream of teaming up with those songwriters and facilitating (and sharing in) that revenue. Record labels and recording artists work hard to produce, record and release these hits, generating sales and royalties as well.

In the modern age of digital music, royalty streams are diversifying at an unprecedented rate. Income used to come primarily from CD sales (and other physical formats), TV shows, advertisements, radio, film and sheet music. Now much of royalty revenue is collected from digital downloads, streaming services, online radio, webcasts, video games, embedded video advertisements and other such digital media.

This is great, right? Yes, absolutely, but copyright law (which governs song and recording ownership as well as royalties) is immensely complex. And with media and technology development, it is ever-changing. To address this integral, yet often misunderstood, aspect of music industry revenue, the Frost School of Music’s online Master of Music in Music Business and Entertainment Industries (MBEI) aims to help degree candidates gain a thorough understanding of copyright law and royalties.

Why Is Understanding Copyright Law so Important?

Royalties can account for a good portion of a songwriter’s income, as well as revenue for publishers, recording artists, labels, managers and anyone else invested (and benefiting financially from) a song or recording. But, as the average (non-lawyer) music industry professional can tell you, copyright law, royalty distribution, and the development of new technologies and the corresponding copyright regulations are not necessarily easy to understand. The legalese-ridden contractual agreements in the industry fairly well ensure the longevity of music lawyers’ careers, as opposed to the protection of copyright owners’ earnings.

This imbalance can lead to the party with the most money and bargaining power (like major labels or publishers) getting a better deal than the songwriter or performing artist. Many budding artists elect to represent themselves at first and have already signed exclusive lifelong contracts, giving up their copyright for songs or records. If those songs or records become financially successful, the artist is still held to their initial contractual agreements. As David Byrne of The Talking Heads wrote about in an article for the New York Times, details of such contracts, especially those between record labels and streaming services, can be almost impossible for someone without a legal degree to understand, leaving the artist out of the loop. Music history is riddled with stories of pop stars going broke from not reading the small print in their contracts.

Yet, as the success of the music is mutually beneficial to the songwriter, performer, label and publisher, these labels and publishers also go to bat for the artist. Supportive indie labels and publishers can also fall into the trap of legal quagmire when striking deals with high-powered distributors, film music supervisors, streaming services and new media in general.

Obviously, educating oneself (and/or pursuing an advanced music business degree through programs like Frost’s MBEI) in these concepts can help anyone working in the music industry. As a start, the following is a very basic description of copyright law and royalty breakdowns:

Copyright Law

The Copyright Act of 1790 and every subsequent amendment or related regulation ensures the right of ownership to the author (songwriter) of the music and lyrics of a musical work (song), from which they (or the entities they assign copyright ownership to, such as the publisher) can receive royalties. This copyright ownership is assumed at the moment the song is written down or recorded (but, for legal purposes, filing the work with the copyright office is important).

In the traditional publishing industry, a songwriter will assign all (or a substantial portion) of their copyright ownership of their song(s) to a publishing company. The publisher then pursues licensing opportunities for the songwriter and conducts all contractual negotiations, creating royalty income which is split between the songwriter and publisher according to percentages stipulated by their publishing contract. Currently, though, many DIY songwriters elect to retain their full copyright ownership and be their own publishers.

And a note on publishers: They often only represent a certain area of the world, or “territory.” The publishing contract may reflect representation only in that territory, or it may assign global copyright ownership and representation to the publisher, in which case they often license songs to sub-publishers in other territories. All of these percentage breakdowns are also written out in the initial publishing contract.

Record labels and/or recording artists are also granted copyright ownership of “sound recordings” (a song recorded to physical media, or now digital media as well), from which they are entitled to royalties.

Public Performance Royalties

These royalties are attributed to the public performance of a song — over the radio, on a TV show, by any musician on a recording or in live performance (physical or digital transmission), and even on a restaurant or bar’s playlist. These royalties are collected through intermediary agencies called Performing Rights Organizations, or PRO, (in the United States, primarily BMI, ASCAP, and SESAC). The PRO generally grants blanket licenses to licensees for the use of their music catalog, delegating the money out to the appropriate songwriters and the publishers (based on absurdly complex data from licensees, using type, rate and “weight” algorithms).

Interestingly, recording artists and recorded works copyright owners do not garner royalties from the play of their recordings on radio, TV and other such “public performances.” (The assumption here is that they earn their revenue through sales, and public performance drives those sales, so it is primarily a promotional tool). Although, with new legislation introduced in Congress, that may soon change. And the Digital Performance Right in Sound Recordings Act of 1995 already made provisions for recording artists being due royalties from the performance of their recorded works on digital, non-interactive, subscription-based media (think satellite radio).

Much of this legislation is also currently changing as streaming is starting to dominate music consumption. Interactive services are those where users can choose which music they want to listen to (like Spotify’s Premium service). Performance royalties from these services are beginning to be regulated, though at an extremely low rate (a small fraction of a cent per stream of the song). Songs that earn the songwriter and publisher substantial amounts of money only do so if their songs are streamed hundreds of thousands of times, and even then, the revenue can be astoundingly low. Many artists have therefore opted out of contracting with these streaming companies. And the rates negotiated are beginning to change for both performance royalties and master-use licensing fees.

Mechanical Royalties

Mechanical royalties are due songwriters, publishers and recording artists when a song is recorded and reproduced mechanically on some form of media (CD, vinyl, digital download, etc.). In the U.S. the record label (or artist, if self-releasing) generally licenses a song from that song’s copyright owner and then pays the songwriter/publisher a compulsory rate of 9.1 cents for a song up to five minutes, with 1.75 cents added on per minute for longer songs (for each physical item made or download sold).

If the songwriter is also the recording artist, the contracts will sometimes include a controlled composition clause, with the label negotiating a lower mechanical royalty rate than the compulsory one (often 75 percent). This rate is not law, just the standard if no lower (or higher) rates are negotiated and agreed upon in the licensing contract.

Recording artists who sign a contract with a record label usually receive between 8 percent and 25 percent of record sales in royalties (depending on the artist’s clout and their publisher’s negotiating skills). But, importantly, this percentage was traditionally taken out after packaging costs (generally 25 percent) and assumptions that 10 percent of albums may break in shipment. These concepts do not apply to modern digital downloads, though they are sometimes still included in antiquated contracts. In addition, lower percentages are paid out for unsold physical albums returned from the record store.

Further, the record label will often pay for the songs or albums to be produced and recorded, after which they recoup these costs from the back end (out of sales revenue) before the recording artists get their cut. But many recording artists record on their own these days, granting record companies a master use license through assigning overall or a portion of copyright ownership and/or sales revenue. Everything can be negotiated.

And, again, streaming has brought to light a new aspect of mechanical royalties. Rights holders to songs and recordings maintain that when paid subscription-based streaming service users download songs to their digital devices, this is some form of digital ownership akin to purchasing the song through a digital retailer. Hence, streaming service contracts with songwriters, publishers, recording artists and labels are starting to reflect this revenue payout through mechanical royalties.

Mechanical royalties are collected and distributed by mechanical rights societies, the largest in the U.S. being the Harry Fox Agency.

Synchronization Royalties

When a song gets used, or synchronized, in a visual work (film, TV show, commercial, etc.), the creator or producer of that visual work has to negotiate a licensing contract with the song’s copyright owner, to be split between the songwriter and their publisher according to their publishing contract. These licensing fees can be any amount, from hundreds of dollars to hundreds of thousands of dollars for mainstream, famous artists.

Often, the music directors of a film or TV show will put out an open call or reach out to publishers they regularly work with for a song that sounds like a popular song or style of song (one that will be more expensive to license). Independent songwriters and publishers capitalize on this, creating music libraries of material to fit many such situations, and sometimes just giving production companies blanket-use licenses for those song catalogs.

In addition, songwriters and publishers make performance royalties from broadcast of these visual works. So do recording artists, if the broadcast is of certain digital performance media types. And, if soundtracks are produced, everyone also receives appropriate mechanical royalties.

Other Royalties

There are a couple other forms of royalties, both old and new. Before the era of physically (and digitally) rendered sound recordings, copyright law stipulated that songwriters and composers (and publishers if applicable) receive print royalties from the reproduction of their music in the form of sheet music. This is not so common today, but still holds true for popular songbooks and educational materials for young musicians.

As stated above, the digital world is changing things. Sound Exchange is an organization that has been formed to collect digital performance royalties for music broadcast digitally all over the world. These royalties are distributed mainly to a recording’s copyright owner and featured performer, with a small portion also going to the non-featured musicians. Sound Exchange is also heavily involved in lobbying Congress for more or improved regulation concerning digital rights in the music industry. Other companies and organizations collect royalties based on neighboring rights, very similar to digital performance royalties.

In any business, seeking out and taking advantage of every opportunity and revenue stream is necessary for current and future financial health. Royalties are one such revenue opportunity for anyone involved in the professional songwriting, publishing and recording industry. A basic understanding of copyright law, royalties and the development of new regulations regarding royalties from modern technology and media is an essential part of success in music. And, given the possibility of residual income, taking this understanding a step further by gaining a thorough education in how copyrights and royalties work through programs like Frost’s MBEI can be extremely important for long-term stability in a rewarding career in music.

Learn more about Frost’s online Master of Music in MBEI program.


Sources:

HowStuffWorks: How Music Royalties Work

HFA: Mechanical Royalty Calculator

Sonicbids: Music Royalties 101: What They Are and How to Collect

Royalty Exchange: Music Royalties Guide

The Economist: The Dry Stream of Musicians’ Royalties

The New York Times: Open the Music Industry’s Black Box

Congress.gov: H.R. 1836 — Fair Play Fair Pay Act of 2017

Information Is Beautiful: Money Too Tight to Mention? Unsigned Artists

Fortune: Music Royalties Adjusted: Did Taylor Get Her Way?

Copyright Royalty Board

Future of Music: How the Money Flows Back to Songwriters, Artists, Publishers & Labels

SoundExchange: About Digital Royalties

Symphonic: What Is Neighboring Rights?


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