Explaining music royalties and other confusing revenues

Music dollar and royaltiesBefore the digital age, music presented an already complicated business for artists to understand. But the fragmentation created by the Internet has created a baffling array of rights, royalties, and revenue streams, along with innumerable organizations authorized to collect these revenues. I’ve been in the music business for a couple of decades now, releasing albums. I’m still surprised to learn things I didn’t know. This post attempts to break down the various royalties and rights, and how they are collected. If you don’t already know this—or if you think you know it (like I did) but can’t explain it in detail to someone else—you’re probably losing out on revenue.

Overview: Songwriter Revenue vs. Recording Artist Revenue

If you understand nothing else, understand that the songwriter receives revenue streams (via the publisher if there is one) and the recording artist receives revenue streams (via whoever owns the original master recording, which is often the label). Both the songwriter/publisher and the recording artist earn money when someone buys a song. Distributors collect this money and distribute it to each party. For signed artists, the record label essentially acts as the distributor. Independent artists can sign up with independent distributors (sometimes called digital music aggregators) like CD Baby or Tunecore.

That’s straightforward, but that’s where the simplicity ends. Music depends on being played, so special rights evolved to reflect this. The songwriter receives compensation for the underlying musical composition primarily in two ways: performance rights/royalties when the song is performed, and mechanical rights/royalties when the song is reproduced or recorded. For each copy of a song that is manufactured or distributed, the mechanical rights provide the songwriter with revenue. Both of these rights accrue to the songwriter as well as the publisher, with the split apportioned any number of ways by prior agreement. The publisher can be owned by the songwriter or owned by a third party such as a record label, but either way the publisher administers the publishing rights for the music catalog. Publishing rights include the performance rights, mechanical rights, and assorted non-mechanical rights like sheet music and printed lyrics. Technically, you do not have to have a publisher to retain the publisher’s share of the rights or administer your catalog. But in the long run it will be beneficial if you set up your own publishing entity with a business name, even though this entails some additional expenses like a business license.

Distributors can also collect some of the performance and mechanical royalties, which is convenient but leads to some confusion. Independent distributors offer options so you can customize what they do and do not handle on your behalf. Whatever you don’t sign up for, though, just make sure you have another way to collect those revenue streams.

The owner of the master recording, whether it’s the performer or a record label, also receives compensation. Normally this comes through sales and master use licenses (with one exception explained below under Sound Exchange). Master use licenses cover permission for companies to sell digital downloads; permission for streaming services to stream the recording; sampling; sync licenses for combining music and video; and permission to reissue a recording on a compilation—any situation that requires using or reproducing the original recording.

Performance Rights

Performance rights cover any situation when a work is performed publicly. The songwriter/publisher receives royalties whether the composition is played live or via recording, and whether the vehicle is radio (terrestrial, Internet, satellite), television (network, cable), Internet (streaming), concerts, or programmed music services such as background music. Performance Rights Organizations (PROs) collect these royalties on behalf of songwriters and publishers. For the U.S., the PROs are BMI and ASCAP. Each has reciprocal agreements with international PROs to collect fees from foreign performances. (There is also SESAC, but it’s invitation-only). To collect performance royalties through a PRO, you as the songwriter/publisher must affiliate with one or the other. Remember, the performer does not receive performance royalties, only the songwriter/publisher. If you’re both the performer and the songwriter, you only collect these royalties as the songwriter. You also collect these royalties if someone else performs your song.

Sound Exchange

Remember when I said that the performer does not receive performance royalties? Well, that’s not completely accurate. There is a small exception, naturally! Congress established Sound Exchange to collect performance royalties on behalf of the owner of the sound recording (usually the record label, unless you’re independent) and any featured performers when the source is non-interactive streaming. “Non-interactive” streaming more closely resembles traditional radio, and applies to services such as Pandora Radio, Pandora Plus (ad-free), and SiriusXM. Unlike songwriters, featured performers and sound recording owners do not receive performance royalties for radio and other situations where recorded music is played or streamed. Only for non-interactive streaming. If this sounds like a mess, we’re just getting started. Anyway, if you own the master sound recording or are a featured performer, you should register with Sound Exchange. To further complicate the matter, CD Baby can register your sound recording rights with Sound Exchange and collect that portion if you wish, but they cannot collect your featured performer share.

Confused yet?

Mechanical Rights

Mechanical rights cover the right to record, manufacture, and distribute a song. Traditionally this applied to physical media like vinyl, tapes, and CDs. In the digital age, mechanical rights have expanded to include digital downloads and streaming. Note that this is separate from the performance rights for streaming mentioned earlier.

Collecting mechanical royalties on your own is very difficult. A variety of services have evolved to administer mechanical rights. The Harry Fox Agency (HFA) operates the most prominent service for the U.S., licensing not only basic mechanical rights but sync fees when music is combined with video. If you’ve established your own publishing entity, you can sign up for HFA’s “free” account to collect mechanical royalties on your behalf (less an administrative charge). This is not the full array of services provided to publishers through their more costly affiliate program, but registering is worthwhile because they act as the licensing agent for major players such as Spotify.

Music Reports, Inc. (MRI) also administers mechanical rights but does not require you to have a publishing entity to register. Major players such as Amazon use MRI for mechanical licensing. To cover your bases, you’ll want to register with both MRI and HFA, especially since MRI only helps songwriters collect U.S. mechanical royalties, while HFA has reciprocal agreements with 90 countries to collect international mechanical royalties as well. Alternatively, an independent distributor like CD Baby or Tunecore can collect U.S. and international mechanical royalties for a modest share of the revenue. Which brings us to streaming revenues.

Streaming Royalties and Digital Downloads

Streaming presents an especially convoluted conundrum. In contrast to non-interactive streaming mentioned above, interactive streaming describes services where the listener gets to choose what song to play, such as Spotify, Apple Music, Pandora Premium, and Tidal. In this case, we’ll ignore curated playlists, where clearly the listener does not choose the songs themselves. Both types of streaming services, however—as well as digital download services—must license the master recording (which pays the performer) plus performance and mechanical rights (which pays the songwriter/publisher). Manatt, Phelps & Phillips LLC has created an easy-to-understand graphic that explains streaming royalties. How this plays out in the real world, however, may leave you scratching your head.

For starters, the performance royalties that PROs collect for independent musicians can appear minuscule or nonexistent. Streaming services pay a ridiculously reduced royalty rate. On the other hand, they must pay for the right to use the master recording and a mechanical license for each time the song is streamed, things that traditional radio does not have to bother with. Still, we’re not talking impressive revenue amounts here. For example, the performance royalties for one of my albums in 2018 yielded three pennies from Spotify and a little over $7 from Pandora—nothing from Tidal or other streaming services. But for the right to use the master recording during the same period, CD Baby paid me $1.32 from Spotify, $46 from Pandora, and $3.50 from Tidal, in addition to small amounts from other streaming services. I won’t even try to make sense of these amounts. In any event, I don’t know what the mechanical royalties would have yielded since no one was administering that portion at the time. But I’d guess an amount somewhere within the range of what I get for performance royalties and master use.

The U.S. Copyright Board ruled that, starting in 2018, streaming services must put aside 10.5% of monthly gross income to pay for the use of a composition—that is, the performance and mechanical licenses. (The percentage will increase incrementally to 15.1% by 2022; and keep in mind that the publishing entities for major labels are free to negotiate higher amounts.) Streaming services must pay half of this amount to the PROs and half to designated agencies which collect mechanical rights on behalf of songwriters/publishers. The Office of Copyright is in the process of creating a Mechanical Licensing Collective to provide a comprehensive database for facilitating mechanical rights licensing, which will be a huge benefit for everyone.

Independent distributors collect streaming royalties on behalf of the performer/owner of the master sound recording: in essence, they provide a master use license. But they do not collect songwriter royalties (performance and mechanical rights) unless you opt in for additional coverage. In CD Baby’s case, this is their Pro Publishing package. But they take a commission for providing this service, because the distributor then needs to administer your performance rights in conjunction with your PRO (BMI or ASCAP).

Whether the additional songwriter royalties from streaming outweigh the commission the distributor deducts from your PRO revenue depends on how a particular song/album fares in the market. For a song that receives millions of streams internationally, the additional royalties may be worth it. For a song that streams at much more modest levels but generates decent performance royalties from radio and Pandora, perhaps not. I just started an experiment with Pro Publishing for one of my albums to see how much it benefits me. More on that in the future.

Streaming has largely replaced digital downloads, which means a lower revenue stream. All the more reason to make sure you are tapping into all of the income legally owed you. Remember: If you have not arranged for an agency or independent distributor to collect mechanical rights on your behalf, you’re losing out on that portion of your income.

Cover Tunes and Sampling

If you want to record a cover tune, you need to obtain a mechanical license. But a mechanical license does not authorize you to use the song in a video, display or print lyrics, or use the original recording (such as a sample). For each of these instances you must obtain permission and pay fees to whoever owns the copyright for the underlying composition (usually the publisher). And if you’re using someone else’s recording, you must also obtain permission and pay fees to whoever owns the copyright for the master sound recording (usually the label).

You obtain a mechanical license through HFA or another administrator, depending on who administers the song on behalf of the songwriter/publisher. Alternatively, under U.S. copyright law, anyone wishing to record someone else’s song may obtain a compulsory mechanical license by filing a Notice of Intent (NOI) with the copyright holder (the songwriter/publisher). The NOI basically promises that the third party agrees to pay the minimum statutory rate set by Congress, currently 9.1 cents per copy for songs of five minutes or less (with a lower rate for streaming). If the third party is unable to contact the copyright holder or mechanical rights administrator, they can file the NOI with the copyright office, but only for physical reproduction like CD and vinyl. NOIs for digital streaming and downloads are no longer accepted. For those you’ll need to contact the publisher or mechanical license administrator. Once established, the Mechanical License Collective will facilitate compulsory licenses and will make it easier for songwriters to ensure they are getting paid.

Sound Exchange sponsors a searchable database for NOIs filed with the copyright office so copyright holders can track down uses of their songs that haven’t been coordinated through a mechanical rights administrator such as HFA, Music Reports, or an independent distributor. I recently found hundreds of such notices for my songs, which means I was missing out on this revenue stream since I didn’t have an administrator.

If you want to use a sample in a song, you need a mechanical license from the songwriter/publisher for the underlying composition PLUS a master use license from the owner of the master sound recording (usually the label). Both of them can pretty much dictate the terms of the licenses, or even deny permission. If you are a songwriter and independent artist, someone wishing to sample one of your songs must come to you for both licenses.

Sync Licenses

A synchronization license grants permission to sync a composition and recording with visual media such as film, television, videos, video games, and advertisements. Sync licenses must be obtained for the mechanical rights (compensating the songwriter/publisher) and, if an existing recording is being used, the master use rights (compensating the owner of the master recording). Major publishers sometimes negotiate and license the mechanical portion directly, but HFA handles the mechanical licensing for many songs. The label or owner of the master recording licenses the master use portion.

Independent distributors can administer both the master use and the mechanical sync licenses, making it easier for your song to be used in film and television. This includes monetizing the use of your music on sites such as YouTube and Facebook. In essence, independent distributors can act a bit like your record label and publisher. But with distributors administering different aspects of master use, mechanical, and performance rights in various combinations, it’s easy to miss out on a slice of the revenue stream if you don’t understand the details.

Non-Mechanical Rights

Once a major revenue source for publishers, sheet music no longer commands that lofty throne. At a minimum, though, it can provide a way to promote your music, whether you give it away on sites such as FreeScores or sell it through sites such as SMP Press. Publishers also license the reprinting of lyrics. You can hire companies to handle these and other traditional publishing rights for you if you’re willing to pay their fees.

Thoroughly Confused? Here’s a Real World Example

Let’s say Jane Doe writes and records a song titled “Jane’s Lament.” Jane signs up with CD Baby to distribute the song online to entities like iTunes and Spotify. CD Baby licenses the master use rights to iTunes and Spotify, and collects payment for Jane. Jane also opts in for You-Tube monetization and other sync licenses, so CD Baby administers the associated master use and mechanical rights as well.

Jane decides not to have CD Baby manage her performance rights and non-sync mechanical rights, so she registers directly with ASCAP both as a songwriter and as Jane Doe Publishing. She also registers with Music Reports so she can collect mechanical royalties from streaming in the U.S. Since she did not sign up for CD Baby’s all inclusive Pro Publishing package, however, she will not receive any international mechanical royalties. She presumes these revenue streams will be too small to justify the cost since streaming royalties pay fractions of pennies per stream, but it’s a gamble. If “Jane’s Lament” becomes a global hit, she could miss earning thousands of dollars. She may decide in the future to opt in for Pro Publishing for the convenience of working with just one entity to administer all of her rights (all except Sound Exchange and non-mechanical).

As the owner of the sound recording and a featured performer, she registers with Sound Exchange, because she wants to collect performance royalties from Pandora and other non-interactive streaming services. She creates a piano transcription of “Jane’s Lament” and sells it on SMP Press.

Jane promotes the song, and it is played on the radio, Pandora, and SiriusXM. ASCAP collects a performance royalty and pays that to Jane. NBC decides the song is perfect for a sitcom episode. They request a sync license through CD Baby, and Jane receives a royalty. When the episode is broadcast, ASCAP also collects a performance royalty from NBC and pays that to Jane. Rumblefish monitors YouTube content and discovers that someone used “Jane’s Lament” in a YouTube video. They monetize the usage and share the revenue with CD Baby, which in turn sends revenue to Jane. Although all of these payments tend to be modest, Jane is pleased because she understood her rights as a songwriter and recording artist. She knows the song will continue to generate revenue from multiple sources for many years to come.

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