The flow of royalty payments between music service providers, labels, artists, publishers, and songwriters has many avenues. At first blush, this can cause some confusion among the uninitiated.
So we've created this guide to help you more easily follow the path between the different types of royalties and the entities distributing the payments due.
Composition royalties mainly include Public Performance royalties, Mechanical royalties, and Sync royalties. Here’s how they are collected/distributed:
Songwriters typically sign publishing deals that grant the publisher ownership of the composition copyright in return for the task of exploiting it and collecting the royalties it earns (splitting the proceeds with the songwriter, usually 50/50).
The three major publishers are
- Universal Music Publishing
There are also hundreds of independent music publishers. Increasingly, many songwriters are also self-published and pay publishing administration services to track and collect their royalties.
How this money flows differs slightly depending on the royalty.
Mechanical royalties are collected in different ways depending on the format. For physical and digital sales, the mechanical royalty is typically passed on to the publisher through the record label after it collects payment from retailers.
For digital downloads and streaming mechanicals, there’s a new organization called the Mechanical Licensing Collective, launched in early 2021. Streaming music services pay a blanket license to the MLC, who then finds and pays the songwriters and publishers owed. (Read more about the MLC in the article “What is the Music Licensing Collective And How Will It Affect Music Royalties?”
If the songwriter has a publishing deal, the publisher will collect the mechanical royalties and pay the songwriter his/her share based on their agreement (typically 50/50).
Performance royalties are licensed and collected by Performance Rights Organizations (PROs). Songwriters and publishers register with these organizations to collect performance royalties due them whenever a song is played in public. This includes the playing of a song on radio (AM/FM, streaming, or satellite), in a concert hall or in a restaurant, and on television shows and commercials.
These PROs pay both the publisher and the songwriter for their respective share of the performance royalty that they collect. There are three main PROs in the U.S.:
SESAC is a private, invite-only organization, while BMI and ASCAP are quasi-governmental organizations operating under legal frameworks known as “consent decrees.”
Established by the Department of Justice nearly 80 years ago, the consent decrees state that ASCAP and BMI must offer licenses to everyone on equivalent terms under a blanket license.
Internationally, each country typically has just one PRO. Examples include:
- PRS For Music (UK)
- GEMA (Germany)
- STIM (Sweden)
- SOCAN (Canada)
- SACEM (France)
Since synch fees are negotiated between publishers and those who wish to use their music, publishers typically collect the licensing fee and pass along a share to the songwriter.
In some cases, songwriters without publishers may receive synch payments directly from music licensing platforms as well
Sound Recording royalties include those owed for distribution, performance, and sync.
Just as songwriters sign deals with publishers to exploit their copyrights, recording artists often sign deals with record labels. And like publishing deals, recording contracts typically award the recording copyright to the label in return for their funding, distributing, and promoting any resulting albums or singles. The label then pays the artist a percentage of any royalties earned, after repayment of any advance the artist may have received.
There are both major and independent record labels. Major labels are global in reach and own both publishing and distribution arms. They aggregate multiple “imprint” labels that do the work of finding, signing, and promoting artists while utilizing the parent company’s marketing, distribution, and funding capabilities.
The three major record labels are:
- Universal Music Group
- Sony Music
- Warner Music Group
Independent (or “indie) labels are smaller companies that focus on signing artists (often within a specific genre) and partner with other companies to assist with distribution and other services. There are literally hundreds of independent record labels.
Here are the different ways sound recording royalties are collected and paid.
Reproduction (or sometimes “distribution”) royalties are owed when music is sold or streamed. Unlike composition copyrights, these royalties are determined through a negotiation between rightsholders and service providers and retailers.
There are two ways artists can collect these royalties
- Sign a record label contract, under which the label negotiates and collects licenses on behalf of the artist.
- Remain unsigned, and rely instead on so-called “DIY” distribution services to place their music with retailers and streaming services to collect royalties.
With the shift from physical distribution to digital, specifically streaming, many digital distribution services have emerged that allow artists to place their music on any music service for a small fee. Examples include:
- CD Baby
… among many others.
In the U.S., recording artists only collect performance royalties from digital and satellite radio. These digital royalties are collected in two different ways.
One is through SoundExchange, a PRO-like organization charged with issuing blanket licenses to digital music services and collecting the sound recording performance royalty in return. SoundExchange then pays artists directly rather than through their record label.
But some digital music services choose to negotiate performance licenses with record labels directly rather than using the SoundExchange license. In these cases, the music service pays the record label and the record label then pays the artist per their contract.
Synchronization (or “Synch) royalties are paid to recording artists if the song they recorded is licensed for use in a film, TV show, advertisement, and so on. These royalties are collected by either an artist’s record label or, if unsigned, using any of the available online music licensing services.