What are Mechanical Royalties?
There are dozens of royalty streams associated with music copyrights, but few are as confusing as mechanical royalties.
What are mechanical royalties? The simple answer is that mechanical royalties are payments to the writer of a song whenever that song is reproduced in some form.
But to really understand mechanical royalties, let’s take a step back to understand how mechanical royalties first came about, how they’ve changed over the years, and the different ways they can generate income.
First, a quick refresher. Music royalties are generated for the use of a copyright. And every song has two copyrights attached to it—one for the song as written down (the composition) and one for the song as recorded (the recording). Songwriters earn royalties on the composition copyright, and performers earn royalties on the recording copyright.
Mechanical royalties come from the composition copyright. Whenever an artist/record company releases the musical composition through their unique performance and sound recording (making it available to the public for profit), a mechanical license requiring payment of a mechanical royalty is owed to the music publisher and songwriter.
The reason this is called “mechanical” is because it originates to the time when songs were “mechanically” reproduced in piano rolls and vinyl records. Using the term in the digital age can cause confusion, but the same “reproduction” standard applies.
Unlike sound recording royalties, most composition royalties rates are not set by the free market. Instead mechanical royalty rates are set by government regulation through various updates to the U.S. Copyright Act.
Back in 1909 when mechanical royalties were first created, music publishers controlled the music industry. Congress stepped in to regulate them via the 1909 Copyright Act and created the government regulation of a “mechanical” royalty owed to songwriters and music publishers for the reproduction and distribution of their songs.
Traditionally, the artist/record company pays this royalty to the songwriter and music publisher for any audio reproduction and distribution of their song that they make. Think of the countless recordings and versions of classic holiday songs like “White Christmas” or “Let It Snow.” That’s big money for the songwriter and music publisher.
For most of the 20th century, this mechanical royalty applied to physical formats like vinyl, cassettes, and CD’s. Today, the mechanical royalty comes in new flavors: streaming and digital downloads. And the result has dramatically altered how mechanical royalties are paid and distributed (not to mention their earning potential for songwriters).
Mechanical Royalties for Streaming
On-demand (or interactive) streaming is unique because it is primarily licensed and paid by the streaming services. These interactive streams pay fractions of a penny per stream to the songwriters and music publishers for two different royalties: public performance and mechanical. Depending on how you do the math (there are several options) the payments for streaming mechanicals land in the ballpark of about $0.06 per 100 on-demand streams.
To understand this figure: The average per-stream royalty for both the composition and recording on Spotify is around half a penny. The sound recording average is about $0.0038 per stream. That leaves $0.0012 to the composition, which is then split 50/50 between performance and mechanical royalties.
Using this figure, it would require approximately 1.6 million on-demand streams to earn $1,000 in streaming mechanical royalties.
The mechanical streaming rate is about $0.06 per 100 streams, or $0.0006 per stream.
Physical and Download Mechanical Royalties
Physical and permanent downloads fall under the traditional mechanical royalty payment structure. When the artist/record company records a songwriter/music publisher’s song, and makes it available for sale as a download or part of a physical album, a mechanical royalty of 9.1 cents per song is due.
To earn $1,000 in mechanical royalties here, you would need approximately 11,000 downloads or physical albums sold.
Although mechanical royalty rates were supposed to be regularly updated to reflect things like inflation and other realities over the years, the rates remained at 9.1 cents for over 12 years and are not expected to rise in the era of streaming.
How Mechanical Royalty Rates Are Set
As mentioned, the mechanical royalty is not free market. It is regulated by via the U.S. Copyright Act by a panel of three judges called the Copyright Royalty Board (CRB). These judges are charged with the duty to set royalty rates and re-evaluate them every five years. To establish a non-bias, the CRB hears from all interested parties during the proceedings, which include:
- Songwriters: represented by Nashville Songwriters Association International (NSAI)
- Music publishers: represented by the National Music Publishers’ Association (NMPA) and the Association of Independent Music Publishers (AIMP)
- Record labels: represented by the Recording Industry Association of America (RIAA)
- Digital media and streaming companies: represented by the Digital Media Association (DiMA)
During these proceedings, the CRB will hear multiple arguments and counter-arguments from each group. Eventually, the CRB will rule on the rates after everyone has a chance to present their case.
The new mechanical royalty rates for on-demand streaming recently established by the CRB increase from 11.2% of streaming revenue in 2018, to 15.1% of streaming revenue by 2022. That’s a 44% increase over five years.
As for the physical and download mechanical royalty of 9.1 cents, the CRB left this untouched in the most recent proceedings. The physical and download royalty rates remains the same as it was when the CRB raised it from 8.5 cents, to 9.1 cents in 2006.
Mechanical Royalties in Publishing and Record Company Agreements
Mechanicals in Publishing Agreements and Advances
When a songwriter signs with a music publisher, the music publisher is assigned 100% copyright and 100% royalty collection rights (excluding the writer share of public performance income). The publisher collects the royalties and generally splits the money 50/50 with the songwriter.
If the publisher paid the songwriter an advance of royalties, the writer’s 50% collected will be put toward the advance recoupment. Until that balances out, the writer will only receive royalty statements with recoupment status updates. The songwriter will not see any mechanical royalty payments until their advance is recouped, and each statement will give the current balance.
Mechanicals in Co-publishing Agreements
There are exceptions to the 50/50 split, such as the co-publishing deal (called a “co-pub”). Under this scenario, the songwriter owns half the song copyright and the publisher the other half. This means the writer receives 75% of income rather than the usual 50%.
Why? Because the songwriter receives the usual writer share (50%) as outlined above, AND half of the publisher share (25%),
However, mechanical royalties are often reduced for artist/songwriters who sign a traditional record label deal. A common record contract provision that reduces the amount of mechanical royalties paid to the artist/songwriter is referred to as the “Controlled Composition Clause.”
Controlled Composition Clause
The controlled composition clause essentially gives the record label a 25% discount on the mechanical royalties owed the songwriter. So any song the artist writes or “controls” under the record contract is subject to a payment that is 75% of the usual 9.1 cents. This comes out to $0.06825.
On a multi-platinum record, this 25% reduction can easily make a six-figure difference. Some record contracts may also say that the advance paid to the artist by the record company includes an advance of reduced mechanical royalties via Controlled Composition.
It all depends on the deal and the parties involved. Many publishing agreements will also require the music publisher to obtain the songwriter’s approval for any mechanical licenses paying less than 75% of the 9.1 cents.
It’s important to note that this particular royalty reduction is virtually unenforceable for streaming royalties, because the record company isn’t paying those to the artist (the streaming services are).
The best an artist can do with the controlled composition clause is to negotiate royalty bumps into the contract, usually tied to agreement extensions, streaming/sales numbers or recoupment status. Some record companies try to apply this royalty reduction to the artist’s co-writers as well. If the co-writer was not a signatory to the artist’s recording agreement, they should not be subject to the Controlled Composition Clause.
If you co-wrote a hit with a major label artist, you’ll want to check if you’re being paid the reduced mechanical rate. The record company will often try to apply the reduced mechanical rate to all writers on the song, not just the artist.
Even without the Controlled Composition Clause, many record labels pay a reduced mechanical payment on physical product. That’s because record companies typically hold back a “reserve” on mechanical payments – usually in the range of 25% to 35%.
This means the label has the mechanical payments in the bank, ready to pay based on units shipped, but they’re holding back a “reserve against returns.” This means that if some merchant ships back an album that didn’t sell in their establishment, the label will adjust the loss and not pay out mechanical royalties for returned product.
How are Mechanical Royalties Paid?
To understand mechanical royalty payments, it’s important to introduce you to the Harry Fox Agency (HFA) and Music Reports Inc. (MRI).
Harry Fox and Music Reports represent the lion’s share of the U.S. mechanical royalty market, on both buyer and seller sides. This is because HFA represents the mechanical royalty for all the major music publishers: Sony/ATV, Universal and Warner/Chappell (who represent about 70% of the market), while Music Reports handles statutory licensing notices for buyers such as Apple, Pandora, Amazon, SiriusXM, Microsoft, etc.
However, a new mechanical licensing collective (MLC) is being created as we speak to license and match payments for digital mechanical royalties, both streaming and downloads. This “MLC” is being created through recently passed Music Modernization Act (MMA). No one is absolutely certain how the MLC will operate in conjunction with Harry Fox and Music Reports, so stay tuned for updates as this develops in the coming years.
Mechanical Royalties can take a long time to work their way from point of purchase to the songwriter.
Download mechanical royalty from major label to major publisher
Mechanical royalty flow for digital downloads
Mechanical royalty payment time is shorter for independent artists
Mechanical royalties flow for independent artists.
Physical mechanical royalties
Mechanical royalty flow for physical sales
If an independent music publisher doesn’t use HFA for mechanical royalty collections, then the record company will pay those directly to the music publisher. This will cut out anywhere from 4 to 8 months of delayed payment, in addition to the 11.5% HFA commission.
Existing streaming mechanical payments licensed through Music Reports
Mechanical royalty flow for streaming
For the independent artist without representation, this is usually paid directly through their digital distributor (Stem, Distrokid, etc.).
Future streaming mechanical payments under the Mechanical Licensing Collective (MLC)
Future mechanical royalty flow
For independent artists that control their copyrights and sign up with the MLC
International Mechanical Royalties
How do mechanical royalties work outside of the U.S.?
Most developed nations that the U.S. does business with have mechanical collection societies: either separate or bundled with a public performance rights society. For example, in a major royalty producing territory such as France, both mechanical and performance royalties will be collected and paid through the same entity, SACEM. If you have royalties in The Netherlands, it’s a bundled society called BUMA/STEMRA.
For physical and downloads, the U.S. and Canada work on a “penny rate” mechanical royalty – meaning a fixed rate per unit (9.1 cents per copy). In Europe, the mechanical royalty is based on percentage of what is known as “PPD” or “published price to dealer” (the record company sales price to retailers). The effective rate currently is 8.712% of PPD. For interactive streaming, the rates are different from territory to territory but are almost always paid in the form of a “blanket” license. This means the international streaming services pay a fee based on a percentage of their annual revenue to the mechanical collection society. The society is then responsible for matching payments. This is what MMA’s new MLC is modeled after.
This international collection aspect is crucial for anyone with songwriting and publishing credit for songs with international recognition. It’s impossible for anyone to collect this foreign income without either a “sub-publisher” or affiliating directly in a foreign territory (if they allow it). Sub-publisher’s do not take ownership of copyrights, but provide publishing services in their home territories for a commission of usually 10% to 20% of the gross. This doesn’t include creative licensing services, which may earn higher income shares.
For example, if you had a foreign hit song, all of the mechanical/performance collection societies will require registration of song shares to claim the royalties. If a song is only half registered, half of the money goes into what is called the “black box”— a term used to describe the accrued-but-unclaimed royalties that have been placed in escrow. Time is limited to claim the unclaimed royalty funds, usually around 3 years for mechanical royalties, depending on the country.
The Music Modernization Act & Mechanical Royalties
How does the MMA affect mechanical royalties?
The Music Modernization Act of 2018 helped update various aspects of the music publishing sector, especially for the mechanical streaming royalty rate. As previously mentioned, the MMA creates a mechanical licensing collective similar to how Europe handles its interactive streaming royalties. Like Europe, the MMA creates a blanket license and a Music Licensing Collective (MLC) to administer streaming mechanical royalties.
This blanket license system is designed to make it easier for streaming services to license songs without fear of copyright infringement for not correctly matching payments. They pay into the MLC coffers and the MLC figures out who to pay from there. This removal of legal liability was a big reason the major streaming services supported the MMA.
Under this law, virtually all U.S. mechanical streaming income will flow through the MLC. The MLC will also create a centralized copyright database, making it easier to track down rights owners, as well as for interested parties to claim their “black box” royalties. Many of the woes that brought MMA to law were due to sloppy record keeping and incomplete registration data from rights holders and creators. The aim of the MLC’s centralized database is to clear up this confusion and ensure accurate/timely payments.
Additionally, the MMA has changed the rate setting proceedings for how the CRB can consider future mechanical royalty rates. In the past, the judges were barred from considering other free market rates (such as what a song could earn in a TV show or movie). Under the new MMA law, judges will be able to consider rates under a willing-buyer, willing-seller standard. This means a fair-market value will be considered in future mechanical royalty rate proceedings, which has never been done before. The hope is that this will cause mechanical royalty rates to rise.