The Changing World of Music Royalties
A century ago, piano rolls were the largest source of revenue in popular music. Today, the music industry generates over $160 billion in worldwide revenue, less than ten percent of which is from the sale of recorded music. As the industry evolves, new revenue sources continue to be created.
The pecuniary value of music lies in two distinct copyrights: one for the song, and one for each recorded version of that song. The song is initially owned by the songwriter(s), who may then transfer the copyright to a music publisher for licensing and the collection of royalties. A recording is originally owned by all the musicians, engineers and producers who contribute to its creation, but copyright ownership is usually consolidated in a record company by written agreements.
The song and the recording generate separate revenues. A song generates mechanical royalties, print royalties, performance royalties, home recording royalties and synchronization royalties. In contrast, recording artists received only royalties from the record company’s sales, until the digital age brought about statutory performance and home recording royalties. Artists also share master use license fees with the record company. Understanding each revenue stream is essential to properly advising a client involved in the creation of music.
A mechanical royalty is paid for the right to record a song. Once a song has been recorded and released, federal law grants a compulsory mechanical license for all subsequent “cover” recordings produced and sold domestically at a rate determined by three Copyright Royalty Judges (“CRJ”). This rate is currently 9.1 cents per copy for songs under five minutes. Record companies typically negotiate a lower rate rather than rely on the compulsory license. The Harry Fox Agency acts as a central clearing house in administering mechanical licenses. Other countries have similar organizations. In 1998, the compulsory mechanical license was extended to digital downloads (at the same rate as physical copies), on-demand streaming and ringtones, also at rates set by the CRJ.
Print royalties are paid for sheet music and other printed reproductions of a song. Rates are individually negotiated.
Performance royalties are payable for live and recorded performances, radio and television broadcasts and non-interactive internet streaming. The writer and publisher typically join a performing rights organization (“PRO”) such as ASCAP, BMI or SESAC to collect license fees from any business that plays music. There are also a number of foreign PROs. Each PRO determines the fee it charges and the manner in which it allocates those fees. Unlike other royalties, which are paid to the publisher then shared with the writer, each PRO pays their writers and publishers separately. If a writer has no publisher, half the royalty will be lost. Consequently, a writer who retains ownership of a song must form their own publishing company to receive the entire royalty.
Performers and record companies do not receive performance royalties for broadcasts in the United States, but do receive them for broadcasts in most other countries. Consequently, it is important to obtain assistance in administering sound recordings in each country where the recording is broadcast. Performers and record companies were granted a statutory performance royalty in 1995 for the use of their recordings by cable and satellite subscription services (e.g., the music channels on DirecTV), non-interactive internet streaming, and satellite radio. The CRJ also set these rates, and SoundExchange collects and distributes these royalties, which are divided 50% to the record companies, 45% to the featured artists, 2½ % to non-featured musicians and 2½% to non-featured vocalists.
Since 1992, part of the price for audio recording devices and blank recording media is paid to the Copyright Office to offset losses for the copying of music. Two-thirds of this money is divided among featured recording artists, record companies, non-featured musicians and vocalists. The remainder is divided between publishers and writers. Claims must be filed with the Copyright Office each year, and the CRJ determine how the funds are distributed.
A synchronization license fee is paid to reproduce a song in a film, television program or commercial. A master use license fee must also be paid to use a particular recording of the song. Both fees are typically one-time payments. However, each repeat on television also generates additional performance royalties.
As technology changes, both the sources of music revenue and the players involved in collecting it will continue to evolve.