Everything to know about music royalties

Music royalties are notoriously complicated: if you were hoping for a cut-and-dry “a song got this many plays on Spotify, so the artist gets this much $” type situation, then you’re in for a rude surprise. There are a ton of different players, some of whom have partial ownership of copyrights, and some who are just middlemen collecting royalties and taking a cut.

For example, if you’re a singer/songwriter with music on Spotify: Spotify will pay out several types of royalties for each play, and between you and Spotify, there will likely be a record label, publisher, distributor, and a collective management organization. To complicate things even further, between all these players, there are multiple layers of deals and calculations that determine exactly what you end up with.

What are music royalties?

Music royalties are compensatory payments received by rights holders (songwriters, composers, recording artists, and their respective representatives) in exchange for the licensed use of their music. These royalties are paid out by institutions that use the music (from TV channels, radio stations and venues to streaming platforms and beyond), and collected on behalf of rights holders by intermediary bodies — most of the time. Sometimes, the user will pay out the royalties directly to rights holders — if we’re talking the major label collecting it’s streaming payouts, for example. But let’s not get ahead of ourselves. Before we really get into different types of music royalties, we need to lay out the two subsets of music rights.

Two types of music rights: Master vs. Composition

For each piece of music ever recorded, there are two distinct sets of music rights attached to it:

1. Composition: songwriters and their music publishers own the copyright for the harmony, melody, and lyrics. Composition copyright is obtained whenever an authentic and unique musical work is committed to a tangible medium — whether its a notepad, sheet music, or even a single tweet.
2. Master: the copyright for the particular expression of a composition, created when the composition is turned into a sound recording, and owned by recording artists and their record labels.

Accordingly, there are two general types of music royalties: royalties paid out for the licensed use of the sound recording, and royalties paid out for the authorized use of the composition. Unfortunately, from there, the waters get even murkier.

The 6 different types of royalties

So, there are quite a few different types of royalties — but what makes this whole topic extremely complicated, is that even the same type of royalty can be paid out in different ways, depending on the context of use. Public performance royalties, for example, are paid out by both your local cafe and global streaming heavyweights — but, as you might’ve guessed already, the processes there are very different. Then, to complicate things even further, the rates and payout processes also vary greatly depending on the country. There are even some royalty types that are present in one country, and not in the other (for example, in the US, master rights holders don’t get royalties for radio airplay, while in much of the rest of the world they do).

It’s nearly impossible to cover every country in one go, so in this article, we will focus primarily on the US. First, let’s start with royalties on the master side:

Streaming Royalties

The rise of streaming services has made royalties more important than ever for recording artists: where once music was primarily monetized by selling records (which isn’t exactly a royalty), these days recordings are licensed to streaming platforms, and payouts for digital streams are therefore royalties. Labels and recording artists work with distributors (or aggregators) to put the recording on streaming platforms and get back royalties due.

Here’s a quick 3-step rundown of how streaming payouts are calculated:

1. Digital streaming platforms negotiate global payout rates with content owners (this rate on the master side is typically around 50% of the platform’s revenue).
2. The revenue pool is split between all artists with music on the platforms.
3. The split is determined by “share of content” or the number of streams a given

artist has on the platform divided by all streams on the platform.

Neighbouring Rights (and Royalties)

Remember, there are two types of copyright in music, one for the composition and one for the sound recording. Public Performance royalties are paid out to copyright holders who own the musical composition (see: #5 on this list) for, you’ve guessed it, public performance of their compositions. Now, neighboring rights are very similar, except that neighbouring royalties are paid out to the copyright holders of the sound recording performing artists and/or recording labels. So, from a legislative perspective, they sit next to performance rights — hence the term “neighboring rights”. Ye, we know, the logic behind the term is a bit confusing.

In any case, just like performance rights, neighboring rights are collected by PROs in their respective markets, and then distributed to sound recording owners. That is, if a combination of the recording artist’s nationality, public performance type, and country, where the recording has been created, makes the public performance eligible for neighbouring royalties collection. The neighbouring rights remuneration depends greatly on the local legislation. To give you a single (and the most common) example, terrestrial radio in the US doesn’t compensate sound recording owners — whereas airplay in other countries does generate neighbouring royalties.

Digital performance royalties

Here’s where it gets trickier: the US rule of not having to pay sound recording owners for radio airplay applies ONLY to AM/FM terrestrial radio. That means that digital internet radio, satellite radio stations and cable radio DO pay the master owners. That means that the digital performance royalties can be considered neighbouring rights payments — but since the use is very specific, it’s easier to use a separate term and keep up the idea that the US doesn’t recognize neighbouring rights. For the purposes of digital performance royalties collection, the US government has established a designated collection society: SoundExchange

Digital radio platforms must get a statutory license from SoundExchange to use licensed music, and recording artists, labels, and session musicians must register with SoundExchange to collect digital performance royalties. SoundExchange allocates royalties to rights holders based on how often each song was played, with the following breakdown:

● 45% to featured artists

● 5% to non-featured artists

● 50% to the rights owner of the master recording

Sync Licensing Fees

Sync licensing fees are paid out when music is synchronized to any other type of content, including video content for ads, TV shows, movies, video games, and — though this is pretty rare — audio-only sync. Anytime a song is used memorably as a component of any other type of content sync fees are paid out.

In order to sync a song, music users need to get a license from both sound recording and composition owners — accordingly, the owners of both subsets of music copyrights earn money on sync licensing (which makes sync licensing different from other types of royalties). The picture is further complicated because sometimes the use of the composition is referred to as sync licensing, while the master side of the deal is dubbed “master use licensing” — but that’s not always the case. As usual, the music industry likes to play loose with its terms.

Unlike other forms of royalties, where music users pay for the blanket right to use nearly all music in the world (see: Public Performance royalties below), sync is a 1:1 deal, which turns sync licensing into a sub-industry of its own.

Now, let’s talk about royalties paid out to songwriters through CMOs and publishers

Public Performance Royalties

Performance royalties are royalties that are collected when a song, featuring a specific composition, is played in a commercial environment. Essentially, the entire landscape of public performance royalties can be divided into two parts: the royalties paid out by streaming services and royalties generated by more conventional public broadcasters — radio, TV channels, venues, clubs, restaurants, and everything in between.

Public performance royalties will be managed, collected, and distributed by performance rights organizations, or simply PROs: ASCAP, BMI, and SESAC in the US, PRS in the UK, and so forth. First, broadcasters will have to get a blanket license from their local PRO, giving them the right to publicly perform almost all music in the world. Then, the users will report the music they’ve broadcasted to PROs, which will then use that data to distribute the blanket license money to the corresponding songwriters.

For example — and any touring artist will know this — performing artists report their setlists to venues. That is exactly for purposes of public performance royalties calculation. The venue will then “forward” the setlist to the PRO, and the PRO will allocate the public performance royalties back to songwriters — which are often the same performers who played the song in the first place.

Then, there are public performance royalties on the streaming side. Those are tightly linked to the mechanical royalties (see next section) that the streaming services pay out, creating a so-called “all-in royalty pool”. All-in royalty pool is set by the CRB (Copyright Royalty Board) and it establishes the sum that a given streaming service has to pay out to songwriters and publishers in both mechanical and public performance royalties. The exact mechanics of how this all-in royalty pool is calculated (which are quite complex and country-specific) are beyond the scope of this article. But the important thing is that the streaming service will pass the public performance portion of the all-in royalty pool down to PROs, which will then allocate it to songwriters and their publishers. Much like the streaming royalties on the master side, public performance royalties are distributed on a per-rata basis. Share of content and all that.

Mechanical Royalties

Mechanical royalties are due every time a copyrighted composition is reproduced or distributed in either physical or digital form. Historically, that meant mechanically producing a physical media — cassette, vinyl, CD and so forth — hence the name. Today, though, the bulk of mechanical royalties are generated by digital streaming platforms. Any time a user CHOOSES to play a specific song on-demand — forcing a reproduction of the underlying composition — the streaming service pays out the mechanicals. That also means that the non-interactive streaming of Pandora, for example, doesn’t generate mechanicals.

In the case of interactive streaming, streaming platforms pay mechanical royalties to the publisher through the local PRO. On-demand downloads and physical sales, on the other hand, are paid by the master’s owner (label) to the publishers. But in the US, in both scenarios, the middleman between the streaming platforms/record labels and the copyright holders is Harry Fox Agency (HFA), who collect all mechanicals and distribute them according to the rates set by the Copyright Royalty Board.

Who gets paid when royalty is dealt?

There are many different parties with fingers in the pot: some rights holders who are the final destination of the royalties, and some middlemen who collect royalties on behalf of rights holders and take a cut. Here’s the breakdown of who gets paid.

Recording Artists

Recording artists are partial owners of a master recording, so they get a share of all royalties on the master side (this includes the featured artists, who get the lion’s share of the royalties, as well as non-featured artists). The exact percentage of the royalties that recording artists receive is stipulated in the deal they signed with the record labels and distributors.

Record labels

Royalties on the master side are typically split between the recording artists and the record labels, given there’s a recording deal in place. Typically, record labels finance release marketing and/or production, taking a sizable stake in the future master royalties. Accordingly, record labels earn a share of all different types of royalties due to recording artists.

Distributors

Put simply, the distributor’s job is to get an artist’s music onto the digital streaming platforms and collect streaming royalties on behalf of the artists. In exchange — just like the PROs on the composition side — distributors take a percentage of the royalties or a flat fee for each payout. However, since distributors (most of the time) work exclusively on the streaming side of things, they won’t partake in sync fees or neighbouring royalties. Together distributors, labels, and recording artists make up the pipeline of the recording royalties.

Licensing Companies and Sync Agencies

Working with both the master and composition sides of the music industry (remember, syncs have to be cleared with both artists and songwriters), sync agencies build connections between right owners and music users. Helping the artist find a sync placement in the latest blockbuster, or, inversely, helping the movie producers find the song to fit the scene, licensing companies usually take a cut on all sync fees passing through them.

Songwriters

In the same way that recording artists are part-owners of the master recording and get a share of the master royalties, songwriters are owners of the composition and receive a percentage of all composition royalties.

For any music work created, two equal shares of copyright are assigned: the writer’s share and the publisher’s share (each worth 50%, though this is US-specific). The writer’s share is paid out by PROs directly to the authors, but only publishers can collect the publisher’s share. So, a songwriter who doesn’t have a publishing company behind them, even if it’s a self-established publisher, will miss out on this share.

Publishers

As stated above, the songwriter receives 50% of the performance and mechanical royalties. The other 50% is the publisher’s share. Now, this doesn’t mean that the publisher keeps 50% of the royalties — it just means that it’s the publisher’s duty to collect this share. Typically, the publishers take a cut from this share in exchange for the administrative and/or promotion services, involved in collecting and maximizing the composition royalties on behalf of the songwriter.

The exact cut that the publisher takes depends on the specific terms of the publishing deal they have with the songwriters. Then, sometimes there’s a sub-publisher (usually, a vast, international company) in the mix, providing administration services to smaller publishers in exchange for a small stake in royalties.

PROs (and other collective management organizations)

PROs are the organizations that collect performance royalties and neighboring rights on behalf of songwriters and publishers. They are the distributors on the composition, issuing licenses to music users and allocating the money generated to proper songwriters and their publishers. Depending on the country, there might be a single PRO processing all of the royalties, a couple of organizations each taking care of a specific royalty type (MCO for mechanical royalty collection, PRO for public performance) or even a number of competing PROs (which is a case of the US, where ASCAP, BMI, and SESAC provide the same service).

Furthermore, local PROs usually have partnership agreements with PROs in other countries, creating a network of organizations covering the entire globe. Usually, PROs take a small percentage of royalties they collect to cover their administrative costs. Together PROs, publishers, and songwriters make up the pipeline of composition royalties.

How do royalties work?

Disclaimer: this is a HUGELY complicated subject, and the way royalties are paid out depends entirely on the context: the type of royalty, country, platform, and a thousand other factors. In this section, we give you a boilerplate, generalized view of how royalties are paid out.

Artists create

The first step in the process is creation: an artist records a song, a songwriter writes a composition. Two sets of the music copyright, composition and master, are therefore created. Then, usually, artists enter some kind of deal with a dedicated partner (label for recording artists and publishers for songwriters) to promote and monetize their work.

Artists and their representatives contact the intermediaries

Next, the work has to be distributed and/or registered to unlock the potential royalties. On the master side, that means the recording artists and their labels working with distributors to license their music to streaming platforms. On the composition side, songwriters and publishers register the work with the PRO, so that the PRO can track and collect royalties on their behalf.

Music is played

The next step is the music consumption itself — although it can take about 100% different shapes and forms. Local radio stations put the song on the air, generating public performance and (maybe) neighbouring royalties. A user on the streaming service presses play, simultaneously triggering public performance, mechanical, and streaming royalties. You get the idea.

The intermediary collects and distributes royalties

Depending on the type of royalty and music use, this step can take very different forms. The gist of it, however, is that the intermediary collects payments from music users alongside the data on how, when and what music was used. Then, the intermediary will use that data to distribute the money collected to proper right owners.

Sometimes (if we’re talking streaming royalties, for example), this role of defining how gets what can be internalized by music users themselves. For instance, Spotify will track the music played on the platform and assign it to right holders itself — in that case, PROs and distributors will simply pass the cash along.

Rights holders get paid

Then, finally the artists and songwriters get paid, sharing the revenues with their partners — record labels and publishers. The artists and record labels receive a share of the streaming royalties, neighboring royalties, digital performance royalties, and sync fees. At the same time, the publisher and songwriters receive the performance royalties, mechanical royalties, and sync fees (with the PROs and distributors also taking their cut).

Closing thoughts

Phew, still with us? As you can see, earning royalties depends on the synchronized efforts of a whole bunch of different players: PROs, publishers, record labels, distributors, mechanical rights organizations, you name it. The bottom line is: due to the nature of how artists make money in the post-streaming era, all players in the music industry have to rely on the network of partners to succeed. Those partners won’t always be aligned, but they have to work together to reach the common end goal — building music careers and allowing music talent to find appreciation (and pay) that they deserve. The music business is built on collaboration.

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