American musicians have been collecting royalties on their music since the 1800s. According to Merriam-Webster, royalties are defined as “a payment to an author or composer for each copy of a work sold”. Regarding royalties for musical artists, the work doesn’t need to be sold for a royalty to be owed. The system for collecting and distributing royalties to artists has remained relatively consistent throughout history. 25 years ago, the system typically functioned as follows:
Record labels paid artists for the right to reproduce the album into a physical CD.
Music fans bought physical CDs of their favorite artists’ albums.
Record labels kept the retail album sales.
Today, the system is rather complex. The reason for the complexity is technological change, mostly attributed to streaming.
The simplification to the complexity is, also, technological change, but I don’t believe that has fully developed yet. I would like to share my thoughts on the future of royalties, but first it’s important to understand how the current system works.
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For artists, it’s important to note that although it’s highly recommended to register a copyright with the US Copyright Office, it is not required. In either case, artists are covered by copyright law, assuming the music is original. By registering with the Copyright Office, artists are simply making potential future legal issues easier to resolve and less costly.
There are two copyrights to every song:
Musical Work/Composition: The song’s underlying composition created by a songwriter or a composer along with any accompanying lyrics. It is often referred to as “writer/pub”.
Sound Recording: Series of musical sounds fixed in a recording medium, such as a CD or digital file. It is known in the industry as the “masters”.
Each copyright holder has various rights and each are due specific royalties.
The writer/pub copyright holder may or may not be the same person as the masters copyright holder. On the writer/pub side, the copyright holder is typically a composer, songwriter, or lyricist. If the composer utilizes a publisher, the publisher typically becomes the copyright holder.
On the masters side, the work is typically originated by a performer, producer, or sound engineer. However, the copyright holder is most often, a record label.
Sometimes there are multiple songwriters or producers and ownership percentages are defined in a contract.
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Whether music is played on radio, streamed on Spotify, played at a concert, used in a commercial, copyright law defines which party gets paid a royalty. There are three types of royalties. They are defined as:
Performance Royalties: Earned when a musical work is performed publicly. Also earned through streaming. These are paid almost entirely to the writer/pub side, rather than the masters copyright holder. Examples of public performance includes jukebox plays, concert plays, & radio plays.
Mechanical Royalties: Earned when a musical work is reproduced physically (CDs, DVD, records, tapes) or digitally (iTunes digital download). Earned through streaming as well.
Sync Royalties: Earned when TV shows, films, or ad agencies use musical works
Notice that streaming music falls under both the Performance and Mechanical Royalty groups. This is because the song is technically reproduced but can be considered a public play as well. The classification has caused confusion for much of the music industry for the last 10-15 years. The government, through the Music Modernization Act (MMA) in 2018, has put its best foot forward to reduce confusion, streamline the flow of money, and encourage accurate payment to artists. The most impactful part of the MMA was the creation of the Mechanical Licensing Collective (MLC), which did not begin operations until 2021. This non-profit organization will collect and distribute mechanical royalties to copyright holders.
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Given the many intricacies of each royalty type, it would be hard for one organization to handle all of them. Different organizations have formed over time, specializing in one of the three types of royalties. Currently, here are the different groups that facilitate payments for each group (& streaming):
Performance Royalties: handled mostly by Performance Rights Organizations (PRO). The biggest PROs are BMI & ASCAP, followed by SESAC and GMR. Some aspects handled by SoundExchange. Some streaming handled by PROs.
Mechanical Royalties: handled by Mechanical Rights Societies (MRS). The biggest MRS in the United States is HFA. Most streaming, digital downloads, and ringtones are handled by the MLC.
Sync Royalties: handled by dozens of various sync agencies
ASCAP & BMI were both founded more than 80 years ago and control most of the performance royalty market. Because of that, they operate under a consent decree by the US government, which prevents anti-competitive behavior. These organizations collect licensing fees, mostly on an annual basis, from television stations, hotels, bars, restaurants, and other businesses that use music. Then, PROs re-distribute that money as royalties to copyright owners in their database. Artists cannot register their song with multiple PROs.
SoundExchange was founded in 2003 and designated by the US government to collect licensing fees from non-interactive streaming services and re-distribute those dollars as royalties. These services include SiriusXM and Pandora. The reason this is separate from streaming and terrestrial (AM/FM) radio plays is the non-interactive part. In other words, listeners don’t pick the exact song. It’s a passive listening experience and because of that, the licensing is different. However, we won’t get into the specifics of licensing from the provider side.
As it stands today, terrestrial (AM/FM) radio stations do not pay royalties to masters owners. They only pay royalties to the writer/pub side. Artists continue to argue that it is not fair to performers and producers. Companies like SiriusXM & Pandora argue that this gives AM/FM stations an unfair advantage. A bill was introduced in September 2022 to address this inequality.
Mechanical Rights Societies like Harry Fox Agency were incredibly important pre-MMA. HFA not only facilitated physical reproductions, but also digital reproductions and streaming. Today, HFA only works with physical reproductions. The MLC took over HFA’s digital/streaming operations and paid HFA a pretty penny for doing so.
As for digital downloads/streaming, digital service providers (DSPs) originate the process. Spotify and Apple Music are the two most common DSPs. DSPs pay licensing fees to PROs and the MLC. However, the bulk of the royalty dollars coming out of DSPs are to masters owners. The masters royalty payments are typically direct and don’t funnel through an intermediary organization.
Lastly, sync agencies exist far and wide with similar offerings. They originate deals with music users all over the map including ad agencies and move producers. Sometimes, these interested parties come to the agency rather than the other way around. The interested party pays a licensing fee to the sync agency which is generally passed onto both the masters and writer/pub copyright holders.
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So… how and when does the actual dollars flow?
At this point, royalty webs can get complicated. It all depends on which parties are involved (songwriter A, songwriter B, lyricist A, producer A, producer B, sound engineer A, record label, distribution service, publisher, publishing admin, etc…)
I’ve created graphics to replicate two common scenarios. But first, here is some brief context.
Some of the percentages used in the graphics are guidance markers. These are case-by-case! Every artist makes their own deals.
This is focused on royalties in the United States. Worldwide royalties are still owed, but harder to collect. Artists work with publishing admins to procure their worldwide royalties.
Most publishing admin deals occur on the writer/pub side with songwriters and composers
If you’re looking for additional resources, please check these out below:
If you’re an artist, make sure you’re signed up with all the various organizations mentioned including the MLC, HFA, ASCAP or BMI, Sound Exchange. If you’re a fan, we hope this helped your understanding. Stay tuned for thoughts on the future of royalties, as you might be able to play a part..
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