Welcome back to part two of this comprehansive look at music royalties and music publishing.
In part one we looked at copyright, music publishers, what music royalties actually are, and most importantly, the different types of royalties.
Here, in part two, we will be taking a deep (and sometimes complex!) dive into how music royalties are actually generated and paid to you, the artist.
Music Royalty Rates
In the music industry, artist royalties are an essential component of the compensation an artist receives for their work. The widely accepted calculation of these royalties is based on various factors, including an artist’s level of clout. Clout refers to an artist’s popularity and their ability to generate income from their fanbase.
For emerging artists, it is understood that their clout level is typically low as they are just starting out in the industry. However, if an artist generates a buzz and gains a substantial following, their clout level can quickly increase to that of mid-level artists. Finally, there are the superstars, who have already achieved significant success, amassing millions of streams and generating substantial income for their managers and labels.
At IQ Management, we believe that transparency and fairness are essential values when it comes to artist royalties.
So, how are Artist Royalties calculated?
Artist royalties are calculated as a percentage of the monies generated from the usage of their music. The actual percentages set for royalty rates can vary quite significantly depending on the terms of the contractual agreement between the musician, record label, distributor, or other rights holder.
In the United Kingdom, the most common formula for calculating artist royalties is based on the “Net Sales” of the music. Net Sales are the total revenue generated from the sale or licensing of the music, minus certain deductions such as distribution costs, promotional costs, packaging costs, and returns. The artist’s royalty rate is then applied to the Net Sales to calculate the amount of royalties owed to the artist.
For example, if a musician has a royalty rate agreed at 15% and their music generates Net Sales of £100,000, their royalties would be calculated as follows:
Royalties = Net Sales x Royalty Rate
Royalties = £100,000 x 0.15
Royalties = £15,000
So the musician would be owed £15,000 in artist royalties for the usage of their music.
Note: The specific terms of the contractual agreement between the musician and their rights holder can have a significant impact on the calculation of artist royalties. For example, some agreements may include “advance payments” (very common with major record label deals) that are deducted from future royalties. Others may have different royalty rates for different types of ‘exploitation’, such as physical sales, digital downloads, or streaming.
How are Mechanical Royalties calculated?
Mechanical royalties are calculated based on a percentage of the revenue generated by the sale or use of a sound recording. The current mechanical royalty rate, set by the Mechanical Copyright Protection Society (MCPS), in the UK is 8.5% of the dealer price of a physical product or the equivalent of 8.5% of the published retail price for digital downloads and streams.
The dealer price is defined as the price at which the record company sells the physical product to retailers, less any trade discounts. For digital downloads and streams, the royalty rate is based on the published retail price of the recording, less any taxes, transaction fees, or other deductions.
Note: There are different mechanical royalty rates for different types of uses, such as commercial releases, compilations, and ringtones.
Mechanical Royalties from physical media
Mechanical royalties for physical media sales in the United Kingdom are calculated and set upon agreement between the music industry and Mechanical Copyright Protection Society (MCPS). The rate or percentage is based on the number of copies of the song that are manufactured and sold on vinyl, cd, or cassette.
For the purpose of this section, and to try to keep things as straight forward as possibe, we will focus on vinyl sales as the physical media.
The current agreed standard mechanical royalty rate for physical sales in the UK is 8.5% of the published price to dealers (PPD) for each copy of the song that is sold. This means that for each copy of a vinyl record sold, the songwriter and/or publisher are entitled to 8.5% of the PPD.
The PPD is the price that the record label sells the vinyl record to the retailer for. This will normally be lower than the retail price that the consumer pays allowing for commercial mark up. So, if the PPD for a vinyl record is £10 and the retail price is £20, the mechanical royalty would be 8.5% of £10, which is £0.85 per unit sold.
The basic concept for this calculation is as follows:
- Determine the published price to dealers (PPD) for each vinyl record sold. (The agreed price that the record label sells the vinyl record to the retailer).
- Determine the mechanical royalty rate for vinyl sales. (Currently, 8.5% in the United Kingdom).
- Calculate the mechanical royalty due for each vinyl record sold. To do this, multiply the PPD by the mechanical royalty rate. For example, if the PPD for a vinyl record is £10, and the mechanical royalty rate is 8.5%, the mechanical royalty due would be £0.85 per unit sold (i.e., £10 x 0.085).
- Determine the number of copies of the song that are manufactured and sold on vinyl. (This will give you the total number of units for which mechanical royalties are due).
- Lastly, multiply the mechanical royalty due per unit by the total number of units sold. This will give you the total mechanical royalties payable. For example, if 1,000 units of a vinyl record are sold, and the mechanical royalty due per unit is £0.85, the total mechanical royalty payable would be £850 (i.e., £0.85 x 1,000).
So, in real terms this is how the industry works it all out:
Mechanical Royalty = PPD x Mechanical Royalty Rate
PPD = the published price to dealers for each vinyl record sold
Mechanical Royalty Rate = 8.5% in the UK
To calculate the total mechanical royalties payable, you would then multiply the mechanical royalty due per unit by the total number of units sold:
Total Mechanical Royalty = Mechanical Royalty x Total Units Sold
Total Units Sold = the total number of copies of the song that are manufactured and sold on vinyl.
As an example, if the published price to dealers for a vinyl record is £10, and the mechanical royalty rate is 8.5%, the mechanical royalty due per unit would be £0.85 (i.e., £10 x 0.085). If 1,000 units of the vinyl record are sold, the total mechanical royalty payable would be £850 (i.e., £0.85 x 1,000).
Note: If you are an independent musician, you will most likely be reliant on a digital distribution service. These services typically charge a flat fee or a percentage (normally 15%) of the revenue earned from the music, in exchange for handling the distribution process and ensuring that royalties are accurately paid out directly to the artist.
Royalties generated from streaming
This is where things tend to become hugely complicated. The music royalties that are generated from streaming music are generated in two main categories, performance royalties and mechanical royalties. These accrued royalty payments that have been generated are to be made to songwriters, composers, and music publishers for the use of their music on digital streaming platforms.
As discussed in part 1: Mechanical royalties are generated from the reproduction and distribution of music on streaming services. These royalties are paid by the streaming services to the songwriter, composer, or music publisher for each individual stream of their music. In the UK, the current mechanical royalty rate for streaming services is set by the Copyright Tribunal and is currently a fraction of a penny per stream. As you will probably already be aware, the exact rate set can vary depending on the streaming platform, whether the song was streamed or downloaded, and the terms of the licensing agreement.
Performance royalties are generated and accrued when a song is publicly performed or played on a streaming service. This happens automatically when an end user of a service, such as Spotify, Apple Music, or Deezer, streams a song or album, and creates the required data for the royalty to be generated. The royalties are collected and paid out to by organisations known throughout the industry as PROs (Performing Rights Organisations). The main PRO in the UK is PRS for Music which in conjunction with ICE (International Copyright Enterprise) collects royalties on behalf of its members.
1. Mechanical Royalties from streaming
Mechanical royalties from streaming are calculated by multiplying the number of streams of a particular song by a set mechanical royalty rate. The mechanical royalty rate is a fraction of a penny per stream and is set by the relevant music licensing bodies and in conjunction with/or the streaming service itself.
An example of this would be, if a song is streamed 100,000 times on a particular service and, the mechanical royalty rate for that service is £0.002 per stream. The mechanical royalty owed for that song would be calculated as follows:
Mechanical Royalty = (100,000 streams x £0.002 per stream) = £200
So, in this example, the songwriter and/or publisher would be owed £200 in mechanical royalties for that song’s streams on that streaming service.
Note: Mechanical royalty rates can vary greatly depending on a number of factors. These variables include the specific streaming service, the size and popularity of the platform, and the terms of the licensing agreement between the streaming service and the relevant music licensing bodies. Additionally, some streaming services may have different mechanical royalty rates for different tiers of service or for different territories (global locations), which can further complicate the calculation of mechanical royalties.
Mechanical streaming royalties in the United Kingdom are collected and distributed by the Mechanical-Copyright Protection Society (MCPS), which is a division of the UK music industry’s main royalty collection organisation, PRS for Music.
2. Performance Royalties from streaming
Performance royalties accrued from streaming are calculated based on the number of streams a particular song generates on a streaming service. The specific royalty rate is set by the relevant performing rights organisations (PROs) and/or collection societies.
In the UK, the main PRO for collecting performance royalties for streamed music is PRS for Music. When a song is streamed on a streaming service, PRS for Music will receive data on the number of plays or streams of that song. They will then use this information to calculate the amount of performance royalties owed to the songwriters and publishers.
The exact calculation of performance royalties can be quite complex. It involves taking into account a number of variable factors, such as the territory of the stream (e.g. UK, US, AUS etc.), the type of streaming service (e.g. free or paid), and the number of subscribers or users of the service. The PRO will then apply a royalty rate to this data, which is a percentage of the revenue generated by the streaming service.
An example of this would be, if a streaming service generates £1,000,000 in revenue during a calendar quarter and, the PRO has set a royalty rate of 10% for that quarter. The performance royalties owed for all streams of all songs during that quarter would be calculated as:
Performance Royalties = £1,000,000 x 10% = £100,000
The PRO would then distribute this £100,000 to the songwriters and publishers based on the number of streams of their songs during that quarter.
Note: The specific calculation of performance royalties can vary greatly depending on the country and the PRO or collection society involved. Each organisation may have their own methods for calculating royalties. Additionally, the royalty rates themselves can vary depending on the specific terms of the licensing agreement between the streaming service and the PRO.
Performing Rights Organisations (PRO)
There are multiple PROs (Performing Rights Organisations) located around the world. They represent songwriters, composers, and music publishers. Their primary business function is to collect and distribute royalties that have been generated and accrued for the use of its member’s music. Here are some of the major PROs to be considered:
BMI (Broadcast Music, Inc.) – BMI is the major PRO in the United States representing over 1.1 million songwriters, composers, and music publishers. They collect royalties for the public performance of musical works on behalf of their members, which include many notable songwriters and composers.
- ASCAP (American Society of Composers, Authors, and Publishers) – ASCAP is one of the largest PROs in the world and collects royalties for the public performance of musical works in the United States. They represent over 775,000 members and license the use of their music to a wide range of businesses and organisations.
PRS for Music (Performing Right Society for Music) – PRS for Music is the main PRO for music in the United Kingdom and represents over 155,000 members. They license the use of music for public performance, broadcast, and digital uses, and collect and distribute royalties to their members.
GEMA (Gesellschaft für musikalische Aufführungs- und mechanische Vervielfältigungsrechte) – is the largest PRO for music in Germany. They represent over 80,000 members and collect and distribute royalties for the use of music in a wide range of contexts These include live performances, broadcasting, and digital distribution.
SACEM (Société des auteurs, compositeurs et éditeurs de musique) – SACEM is the largest PRO for music in France representing over 177,000 members. They collect and distribute royalties for the public performance of music, as well as mechanical royalties for the reproduction of music.
These PROs primarily work by licensing the use of music to businesses, organisations, and individuals. They collect and distribute royalties for the public performance or reproduction of that music to their members based on the usage data they receive. PROs use highly complex algorithms and databases to track music usage and calculate royalty payments. They also engage in advocacy and education efforts to support the rights of music creators.
When you register a song with PRS in the UK, the performance royalty generated by your song is split into two sub-royalties: songwriting and publishing.
The songwriting royalty represents the share of the performance royalty that goes to the songwriter or songwriters of the song. This means that if you wrote a song and registered it with a PRO, you would receive a portion of the performance royalties generated whenever your song is played or performed in public.
The publishing royalty represents the share of the performance royalty that goes to the publisher of the song. This would be any entity that owns the rights to the song which could be a record label or music publisher. The publishing sub-royalty is usually split between the publisher and the songwriter(s). This will be based on the particular terms of their publishing agreement.
Note: The publisher may not necessarily be a separate entity from the songwriter(s) which often causes confusion. In many cases, the songwriter(s) will also own the publishing rights to a song. In these cases, they would receive both the songwriting and publishing royalties. This is particularly relevant to artists such as DJs and music producers.
When you register a song with PRS in the UK, you also have the option to register your publishing information. This allows PRS to collect and distribute publishing royalties on your behalf.
Publishing royalties are generated when your song is used or played in public, such as on radio, TV, or in live performances. And, unlike songwriting royalties these can be temporarily owned, or licensed, to outside music publishing companies. When this happens, the entity that controls the publishing rights to the song is entitled to a share of the royalties. This is typically a music publisher or the songwriter(s) if they own their own publishing rights.
If you have a publishing agreement in place, the publishing royalties generated by your song will be split according to the terms of that agreement. For example, if you have a 50/50 publishing deal with a music publisher, they would receive 50% of the publishing royalties and you would receive the remaining 50%
If you own your own publishing rights, you would receive the full share of the publishing royalties generated by your song. In this case, PRS would distribute the royalties directly to you.
Overall, registering your publishing information with PRS allows them to collect and distribute your publishing royalties on your behalf, ensuring that you receive the full share of the royalties that you are entitled to.
Mechanical Rights Organisations (MRO)
There are several MROs (Mechanical Rights Organisations) around the world that collect and distribute mechanical royalties on behalf of songwriters, composers, and music publishers. Here are some of the major MROs to be considered:
Harry Fox Agency (HFA) – are one of the largest MROs in the United States and represents over 48,000 music publishers. They license the mechanical rights for the reproduction and distribution of members musical works in the United States. They then collect and distribute royalties to their members.
Mechanical-Copyright Protection Society (MCPS) – is the MRO for music in the United Kingdom and represents over 30,000 members. They license the mechanical rights for the reproduction and distribution of musical works in the UK and collect and distribute royalties to their members.
JASRAC (Japanese Society for Rights of Authors, Composers, and Publishers) – is the MRO for music in Japan. They represent over 100,000 members and license the mechanical rights for the reproduction and distribution of members musical works in Japan.
CMRRA (Canadian Musical Reproduction Rights Agency) – is the MRO for music in Canada and represents over 7,000 music publishers. They license the mechanical rights for the reproduction and distribution of musical works in Canada and collect and distribute royalties to their members.
PRS for Music (Performing Right Society for Music) – While primarily a PRO, PRS for Music also collects mechanical royalties for its members in the United Kingdom. They license the mechanical rights for the reproduction and distribution of musical works in the UK and collect and distribute royalties to their members.
MROs work by issuing licenses to businesses and organisations that want to reproduce and distribute musical works. They collect royalties from these licensees and distribute them to the appropriate rights holders based on usage data. MROs also engage in advocacy and education efforts to support the rights of music creators and ensure that they are fairly compensated for their work.
As every industry professional will know, there is a lot more to the success of a song or an album than solely the artist. And, most artists would probably agree that they couldn’t do it all on their own, they need industry professionals they can rely upon in key areas. Some of the finest records ever released were produced by people you’ve probably never heard of or written by big industry names you would be surprised to hear.
There are a multitude of expertise taking place behind the scenes which contribute greatly to the success of any song or album. For every aspect of professional involvement in the creation of music, a fair share of royalties may be due.
Music producers oversee the production and recording of a song or album. They also often contribute significantly to the creative process. As such, for their work on a project, they may be entitled to receive producer royalties.
In the UK, the specific terms of producer royalties can vary depending on the individual agreements between the artist and the producer. As a general working rule, producer royalties are normally calculated as a percentage of the revenues generated by a song or album.
As an example, a producer may typically negotiate an agreement entitling them to receive 3% of the wholesale price of each album sold. Or, a percentage of the recurring revenues generated from streaming services. Alternatively, and in some cases additionally, they may also negotiate a fee for their professional services.
Note: Producer royalties are totally separate from songwriting and publishing royalties earned by the songwriter(s) and the publishing company respectively.
A producer may also be entitled to receive additional royalties for their contributions as a songwriter or co-writer on a project. This arrangement would be contractually established before any agreement was made and would outline the specific terms of any agreement between the producer and the artist.
Session Musician Royalties
The specific terms of session musician royalties can vary depending on the individual agreements between the musician and the artist or producer. As a general working rule in the music industry, session musician royalties are typically calculated as a flat fee for their services. They can also negotiate a percentage of the future revenues generated by the song or album for their contributions.
For example, a session musician might negotiate a flat fee for their session work on a recording, or they might be entitled to a percentage of the revenue generated from streaming services.
Note: Session musician royalties are totally separate from the songwriting and publishing royalties earned by the songwriter(s) and the publishing company.
In some cases, session musicians may also be entitled to receive additional royalties for their contributions as a songwriter or co-writer on a project. This would depend on the prior arrangement and contractual agreement between the musician and the artist.
Record Label Royalties
Record labels typically take on a significant financial risk by investing in an artist’s career, and as such, they are entitled to receive record label royalties for their investment. For these reasons, it is not uncommon for a record label to keep a cut of all royalties ranging anywhere from 50 – 90%. It is an industry standard for new artists to only receive 10-16% of all sales when signed to a record deal.
In the UK, the specific terms of record label royalties can vary depending on the individual agreements between the artist and the label. As a working guideline, record label royalties are normally calculated as a percentage of the future revenues that will be generated by the sale or streaming of an artist’s recordings.
As an example, a record label may typically negotiate to be contractually entitled to receive 15-20% of the wholesale price of each album sold, or a set percentage of the revenues generated from streaming services. This revenue is used to recoup the label’s initial investment in the artist. This includes cost outlays such as recording and production expenses, marketing and promotion, and tour support.
So, how does the money generated find it's way to you, the artist?
So far, in the mechanical royalties sections, we have looked at how the money finds its way through all the channels of record labels and digital distributors to you the artist. However, there is a lot more money for you to collect. This is where the music industry becomes incredibly complex and being signed to a reputable and transparent company, even as an independent artist, is worth its weight in gold to you. The complex nature of recouping royalty streams from on demand services such as Spotify, Apple Music, Beatport will differ greatly depending on your status as an artist.
This means, if you are signed to a major record deal, independent record label or independent artists yourself, the flow or routing of the royalties generated changes quite dramatically. Let’s explain.
1. Major Record Labels
If we look at the graphic below and start above the dotted line in red, we are dealing with the Songwriting Copyright flow of royalties. The streaming music royalties collected are divided into two categories: Performance Royalty for the PROs and Mechanical Royalty for the publishers. Firstly the publishers take a cut of the money for collecting the royalties. Then, the appropriate portions are distributed by the PROs to the songwriter and the publisher of the song, in accordance with the applicable splits for each PRO.
The Sound Recording Copyright, is represented below the horizontal dashed line in the graphic above in orange. The royalty payments are made directly to the record label. As per the details of the record contract, the artists are entitled to receive a percentage of the royalty, ranging from 10-50%, as discussed in the Record Label Royalties section.
2. Indie Record Labels
When it comes to independent labels, the performance royalties are split exactly the same as before for the Songwriting Copyright. Mechanical Royalties are normally managed by a mechanical licensing or publishing administrator. This process involves the publisher taking a percentage of the royalty, which can vary depending on the service agreement, but typically ranges from 15-20%. After this, the Publisher takes an additional 50% before the remaining funds are paid to the songwriter.
For the Sound Recording Copyright, there is an additional player involved in the flow of money. Aggregators act as a conduit to help distribute your music globally through various digital stores and streaming platforms. They operate on a percentage-based model, where they take a cut of every sale before the funds are distributed to the record label. In many ways, this process is similar to what some Digital Distribution Services offer, but with a much wider scope and far greater reach. Finally, the artist is then paid their share of the royalties. This is often a higher percentage when compared to Major Record Labels.
3. Independent Musicians
This section is most likely where everyone who makes and releases music will start off and will be most familiar.
When it comes to Songwriter Royalties, independent artists follow a similar process to independent record labels. However, the one main difference is that they will need to seek out their own mechanical licensing agent or publishing administrator. This can be a monumental task as securing a publishing administration deal often requires a significant level of industry experience. It is primarily based on your clout as an artist, so you need to be able to prove you have a significant audience which will earn you royalties over a given time period.
Fortunately, there are many alternative options available to artists, such as publishing administration services like Songtrust, CD Baby Pro, or Tunecore. These services offer a convenient solution for independent musicians, as they collect publishing royalties on behalf of the artist for a small fee of the revenues due. Although these services do retain a percentage of everything they collect, they provide an excellent option for independent artists who need to outsource their publishing.
When it comes to Sound Recording Royalties, independent musicians follow a process similar to that of independent record labels. The key difference is that independent musicians are limited to digital distribution aggregators, which can distribute their music to a variety of streaming sites and music retailers. For a small fee, digital distributors like CD Baby, Distrokid, or Tunecore will release your music across various digital platforms.
Although digital distributors may take a percentage of every sale before the funds reach you, this percentage is generally under 15%. This is a stark contrast to the large cuts that record labels would usually take at this point. Being an independent musician means that you get to keep everything you earn, giving you more control over your career and finances. The trade off at this stage is, for every artist, is being financially responsible for your own promotion to generate the purchasing of physical media and/or streaming royalties in the very first place.
That brings us to the end of our 2 part look at the complex nature of music royalties for artists. We hope we have shed some light for you on this most misunderstood area of the music industry.
At IQ Management, we believe in empowering musicians by providing them with the resources and support they need to succeed. We understand that transparency and fairness are essential when it comes to managing your music. IQ fundamentally believes that our artists and clients receive the most specific, up-to-date, and, highest-quality information available, based on well-researched data. This is absolutely imperative for anyone wishing to make informed decisions about financial endeavors. IQ Management is always available to help our clients navigate the complex world of publishing, digital distribution, and artist management. We are constantly striving to provide a clear and straightforward process that benefits everyone involved, from the artist to the digital distributor, publisher, and record label.