The Music Industry - Part 2: Royalties
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In the last post I went over the general structure of the music industry and the types of copyright involved. In this post I’m focusing on royalties and I figure the best way to do that is to follow a piece of music all the way from creation to paycheck.
Before we get to that it’s important to understand the types of music royalties generated under copyright law for both sound recordings and compositions, as well as the uses that generate them and organizations involved in their licensing and collection.
One quick note — copyright law, royalty rates, and their collection organizations vary by territory. To simplify things this guide is structured around royalties in the United States, but i’ll try to add context around Europe which is the second largest music market after the USA. Alright, let’s get to it.
Sound Recordings
Reproduction Royalties
Reproduction royalties are generated each time a sound recording of a song is sold (physically or digitally) or streamed. The reproduction royalty rate is negotiated directly between sound recording rights-holders and service providers. For example, record labels or distributors will negotiate directly with digital streaming platforms such as Spotify, Apple Music, YouTube, and Amazon to determine royalty rates.
Who collects?
Owners of sound recordings are entitled to reproduction royalties. These royalties are typically collected via record labels and distributors.
Performance Royalties
Performance royalties are generated when a sound recordings is broadcast via digital or satellite radio services. In the United States, artists and labels are not entitled to collect performance royalties when sound recordings are broadcast on terrestrial radio or performed in public.
Outside of the United States, and specifically in Europe, artists do generate and collect performance royalties for terrestrial radio and public performance — under what’s called “neighboring rights”. This is due to the Rome convention treaty of 1961, which the United States decided to skip. 😑
Who collects?
In the United States, SoundExchange is responsible for collecting and distributing performance rights royalties. In Europe, local performing rights societies or collective management organizations collect and distribute performing rights/neighboring rights royalties.
Note that SoundExchange also has reciprocal agreements with many international collective management organizations and can collect public performance and neighboring rights royalties for eligible artists.
Synchronization Rights
Every time a song is synchronized with audio-visual media such as in television, film, advertisements, and video games a synchronization license must be obtained from both the sound recording and composition rights-holder. The license for the sound recording is also referred to as the “master use” license.
Synchronization license fees are negotiated directly between right-holder and licensee — they are mandatory under copyright law and a significant source of revenue for the industry.
Who collects?
Synchronization licenses are typically administered by record labels for the sound recording rights.
Compositions
Mechanical Royalties
Mechanical royalties are generated whenever a composition is reproduced physically or digitally — streaming, physical sales, and downloads all generate mechanical royalties for the composition owner. The royalty rates differ by format:
Physical Sales/Digital Downloads: 9.1 cents per song/unit sold.
Streaming: Determined by the Copyright Royalty Board. The chart below shows the all-in royalty rate calculation structure by year — it’s a “greater of” calculation between percentage of total service revenue and total cost of content (TCC). This all-in rate is inclusive of both mechanical and public performance royalties which are generally split 50/50. Unfortunately because the streaming services including Spotify, Google, Amazon, and Pandora have appealed the below rate decision (referred to as CRB III in the industry), the current rate is still at the 2017 rate of 10.5% of service revenue... 😑.
Read the full CRB III rate decision here for more context.
It’s important to note that while mechanical royalties for compositions are similar to reproduction royalties for sound recordings, the mechanical royalty rate is determined by the CRB rather than free market negotiations. The result is that mechanical royalty rates are significantly lower than reproduction royalty rates. Sound recordings therefore generate far more revenue per stream than compositions.
For example:
Average sound recording reproduction per stream rate: $.0035
or $3500 per million streams.
Average composition mechanical per stream rate: $.0006
or $600 per million streams
Source1
This royalty calculator is a great resource for estimating streaming royalties for songwriters, and is actually pretty accurate.
Who collects?
Mechanical Rights Organizations (MROs) are responsible for the licensing, collection, and payment of mechanical royalties to music publishers and songwriters. In the United States, the Mechanical Licensing Collective (MLC) is the primary licensing and collection organization. It’s worth mentioning that you can be a self-administered songwriter and collect via the MLC as well.
It’s also possible for music publishers to license directly with streaming services and be paid mechanical royalties directly. There are also other organizations such as Music Reports Inc. that collect and administer mechanical royalty payments for uses not covered by the MLC.
Performance Royalties
Performance royalties are generated when a song is "publicly performed". This includes when a song is streamed, broadcast on radio or television, performed live, and played in restaurants, bars, or nightclubs.
Who collects?
Performing Rights Organizations (PROs) are responsible for licensing, collection, and payment of public performance royalties to publishers and songwriters.
In the United States the dominant PRO’s are the American Society of Composers, Authors, and Publishers (ASCAP), Broadcast Music Inc. (BMI), The Society of European Stage Authors and Composers (SESAC), and Global Music Rights (GMR).
Synchronization Rights
As with sound recordings, every time a song is synchronized with audio-visual media such as in television, film, advertisements, or video games a synchronization license must be obtained from the composition rights-holder.
There may be multiple songwriters on a single song, so a sync license may need to be obtained from multiple publishers. For example, if there’s 3 songwriters who each have a 33.33% share of the song, and are represented by different publishers, you will need a sync license from each one — whereas if there’s one sound recording owner, you only need a sync or master use license from one record label.
Who collects?
Synchronization licenses are typically administered by music publishers for the composition rights.
Bringing It All Together
Creating a guide of all of the various ways music is used and their royalty streams would take too long for a single Substack post, but I wanted to provide a rough guide for the most significant source of revenue in the music industry, streaming. Behold!
*Note that in territories outside of the United States, it’s common for Collective Management Organizations (CMOs) to license, collect, and distribute both mechanical and performance royalties, rather than a separate PRO and MRO.
Streaming - Royalty Calculation Example
Let’s walk through a few examples for a typical music streaming royalty payment. There’s a seemingly infinite number of factors within the music industry that effect royalty payments but hopefully these examples provide a decent introduction and some ballpark figures. For each of the scenarios we’ll use the same per stream royalty figures below:
Average sound recording reproduction royalty per stream rate: $.0035
or $3500 per million streams.
Average composition mechanical royalty per stream rate: $.0006
or $600 per million streams.
Average composition performance royalty per stream rate: .0006
or $600 per million streams.
I also won’t include advances, recoupment, or full/co-publishing deals, or other ownership and financing arrangements which drastically complicate the royalty picture.
Scenario 1:
Streams: 1,000,000
Total Royalties Generated: $4,700
To keep things simple lets assume that the songwriter wrote 100% of the song, has an administration deal with their publisher (no ownership given to the publisher and no advances) who takes a 20% fee, and that the artist has an independent record label deal that is fully recouped (any advances have been repaid) and splits net revenue 50/50 (aka net 50 deal).
In this scenario the artist would earn $1,417.50 and the songwriter would earn $955.20. Although this example is simplified, it’s a good representation of a common royalty structure within the industry (in the USA).
Scenario 2:
Streams: 1,000,000
Total Royalties Generated: $4,700
Let’s work with the same assumptions as in scenario 1, but this time the artist isn’t signed to a record label and instead works directly with a distributor to release their music.
In this scenario the artist earns significantly more, but without the marketing and expertise of a record label it’s possible that they’re earning a larger percentage of a smaller royalty pie than they otherwise would have. For example, if they generated 1,000,000 streams completely independently, but would have generated 10,000,000 streams with the support of a record label — the calculation changes.
Scenario 3:
Streams: 10,000,000
Total Royalties Generated: $47,000
Picking up where the scenario 2 left off, in this example the artist has a major label record deal and receives a 25% artist royalty — and because they heavily market and promote your music, you generate 10,000,000 streams. (Major record label deals can be exceedingly complicated with and warrant an entire post on their own - this is a very rough example).
Working with a major label provides the opportunity to generate significantly more revenue given their large marketing and promotion networks and industry access, but it’s important to understand the terms of the deal and weigh the pro’s and cons. All contracts are negotiable and artists and songwriters have significantly more options and bargaining power than ever before.
Scenario 4:
Streams: 1,000,000
Total Royalties Generated: $4,700
One last example to show a slightly different but common collection structure outside of the United States as it relates to composition royalty collections. It’s common that a single collection society/organization will license, collect, and distribute both mechanical and performance royalties.
*Local performing rights organizations typically have reciprocal agreements with sub publishers and foreign PRO’s/MRO’s — so in the above example you would have your local performing rights organization ahead of the foreign CMO in the chain (taking a fee as well).
Coming Soon - Record Label and Publishing Deals
In the next post in this series I’ll dive into the common structures of record label and publishing deals including fee structures and deal terms — which will hopefully add more context to the above examples.
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Years of looking at royalty statements and licenses.