Music Industry Essentials: Royalties

Welcome back to our guide on the economics of the music industry! In the first part, we learned about "Copyright": what it means, the difference between a Song and a Recording, as well as how both entities own a share of the same copyright.

For reminder, a Song is the written version of a Release. A Song can be written without being recorded; whereas a Recording is the recorded version of the Song. For example, when you think of the release "Hey Jude" by the Beatles, you're thinking of the the Recording (the original version of the release recorded by the Beatles). However, when you sing it to yourself in the shower, you are singing the Song version of the Release (you are singing the notes and melody of "Hey Jude" and making your own version of it).

So when it comes to collecting the royalties of an Original Release it becomes very complex because you need to pay attention to both elements: the Recording and the Song. Each entity has a specific bundle of rights, a specific bundle of Royalties!

Royalties structure by song and by recording - Overview by WARM
Overview of how royalties work in the music industry


Public Performance Royalties & Broadcast Royalties

Public performance royalties are the most common type of royalties, and a substantial part of the earnings that come from the exploitation of a song. To simplify the idea: every time someone broadcasts your song on the radio, tv, in cinemas, restaurants or clubs, they have to pay a fee. This situation also applies when your song is performed live by anyone, including yourself.

As you can imagine, the more artists, authors or owners you work with, the more complicated it is to handle, split and organize royalties. That is why royalties are often collected by external parties called Performance Rights Organizations (PRO) and Collective Management Organizations (CMO). To make things easier, these societies issue a so-called blanket license: this is a flat fee any radio station, club, or restaurant, for instance, will pay to be allowed to play any songs of the members represented by the collection society. The appointed society then takes care of redistributing the money to the owners based on each song’s utilization.

Song Royalties: Public Performance & Broadcast - Overview by WARM
How public performance and broadcast royalties work

There are several collection societies around the world and each society represents a particular list of rights holders. If they represent publishers and writers, the society collects the royalties linked to the public performances of their songs. However, if they are record labels and performers, then the society collects the royalties linked to the public performances of their recordings.

Sidenote: it’s important to mention that the USA is one of the few countries in the world that doesn’t pay public performance royalties on recordings. This means that if a radio in Los Angeles broadcasts a release, they have to pay only the owner of the song, while a radio in London has to pay for both the owners of the recording and the owners of the song.


Mechanical Royalties

Copyright is the right to make a copy of your work. So if you are an author you receive royalties whenever someone copies one of your songs, in a physical or digital format. These types of royalties are called mechanicals and are paid by the owner of the recording (usually a record label) based on a statutory rate. 


Song Royalties: Mechanical Royalties - Overview by WARM
How mechanical royalties work

These rates vary a lot from country to country, and the money is collected by either mechanical-royalty-collection agencies or PROs. These societies then transfer the money to the publishers, who pay the musicians.


Streaming Royalties - Overview by WARM

Streaming

Streaming is a tricky one when it comes to royalties. Why so? Well, by nature, streaming is neither a public performance (since with interactive streaming you’re choosing what to listen to) nor does it generate mechanical royalties (you’re not downloading any file). After long discussions, all parties agreed to consider a stream as a hybrid: you’re making a temporary copy, so you have to pay mechanical royalties. But when you’re listening to a song on a playlist or hitting shuffle, it’s very similar to radio consumption, so you have to pay for the public performance as well.

So how much does a music creator get from a stream? It varies from DSP to DSP, but as a rule of thumb, roughly 58% of the revenue goes to the owners of the recording and 13% goes to the owners of the song in the form of mechanical and public performance royalties.

Recording royalties

Now that we have covered song royalties, it’s time to look at recording royalties. Recording royalties work quite differently because they depend on the type of deal you have with the record label as well as if you - as an artist - have any rights on the master’s recording. If you own the recording, you are entitled to the full revenue that the recording generates, both, from a stream, CD sale, or digital download. On the other hand, if you’re a performer and don’t own the recording, you’ll get a royalty share instead. Compared to song royalties, recording royalties are paid directly to the artists and performers by the record label and don’t need to go through collection societies. The percentage you get from this type of royalties fluctuates based on the type of deal you have with the record label, ranging from 10% of the wholesale unit price (PPD) to a 50/50 revenue split between the artist and the label.


Given the strategic role that record producers have in the making of the record, they are also entitled to collect recording royalties. They are usually taken from the artist’s royalties, and the percentage is different from contract to contract.

Recording Royalties - Overview by WARM
How recording royalties work

Another important thing to consider is that you’re probably not going to perceive your recording royalties immediately. What happens here is very similar to a bank, in the sense that every artist has an account. Whenever the label spends money for the artist, it debits the artist’s account. For example, the recording costs or other expenses. On the other end, whenever the label earns money from the record, it’s going to credit the artist’s account. This means that the royalties you earn are used to pay off the expenses that the label incurred so far, so you’re not going to see any revenue  until the record has fully recouped its costs. That’s why advances are so important: it’s recommendable to get a big advance upfront on your future recording royalties from the record label, since you’re likely to see your royalty income after several months, or even years. Let’s see a practical example.


Let’s say your album generated a million dollars. Based on your contract with the record label, you’re entitled to 18% of the cut, so 180,000 $. Still not bad right? However, you received $100,000 as an advance from the record label, and it also cost the label $80,000 for the recording of your album. That leaves you with … zero royalties? 

Example of how recording royalties work - Overview by WARM
Example of how work recording royalties work

This is not as bad as it looks. In fact, this means that your album has fully recouped its costs, and any further revenue coming from it is pure profit for you.

Synch

If someone wants to synchronize a piece of music with any visual media - like a commercial, movie or video game - they have to pay a synchronization fee. We’re talking about a fee and not a royalty because of the nature of the deal: a sync license is set in perpetuity, which means that whoever pays this fee is allowed to use that specific piece of music with that specific visual media forever. And as always, we need to take into consideration both the song and the recording, and pay the same fee to both owners. However, there’s a form of micro-synch royalties for short videos or user-generated content - which applies to platforms like Youtube, TikTok or Triller. Each platform has a different way of monetizing this type of content. Overall the split works exactly as we saw before, with a share going to the recording owner and a share going to the song owner in the form of public performance and mechanical royalties.

Stay tuned! In our next article about the economics of the music industry, we’ll dive into the world of music publishers, collection societies and the long journey that royalties make before landing into your bank account!

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