The music industry relies on royalties generated by the licensing of copyrighted songs and recordings as a primary form of payment for musicians. Intellectual property law and licensing systems have gone through significant adjustments over recent years as a result of the rise of digital music, but much of the industry's historic legal framework remains.
To start thinking about music in legal terms, it's important to realize that there are two types of musicians: songwriters and performing artists. These hold two distinct copyrights: songwriters hold the rights to the lyrics and melody of a piece of music while performing artists hold the rights to a particular recording of a song, which is called a master recording. Songwriters may only seek copyright for a full song, and cannot divide lyrics and melody into separate rights.
Both songwriters and recording artists typically assign their rights to a third party for management, instead of attempting to track a song’s use and seek payment independently. Song copyrights are typically assigned to music publishers, while master recording copyrights are typically assigned to a record label.
The fees music users pay when music is performed publicly. The use of music over the radio, in a restaurant or bar, or over a service like Spotify or Pandora is considered a public performance.
Performance Rights Organizations or PROs (in the US that’s BMI, ASCAP, and SESAC) collect songwriting performance royalties from music users and then pay songwriters and rights holders (publishers).
Like BMI and ASCAP, SoundExchange collects recording performance royalties for recording artists and labels whenever a piece of music is performed publicly — but only for digital performances.
That’s because of copyright regulation as it stands means terrestrial broadcasters (AM/FM radio) pay performance royalties to songwriters, but not the recording artists.
Digital performances (for example, Pandora) pay a recording digital performance royalty to SoundExchange and a songwriting digital performance royalty to the PROs.
But on the flip-side, BMI and ASCAP are governed by consent decrees, which means an arm of the US Judicial Branch (called a “rate-court”) can set the rates (per radio play, per stream, etc.). BMI and ASCAP collect for songwriting performance royalties. In exchange for the right to collect on behalf of songwriters across America, they are limited in their ability to negotiate by this rate court.
SoundExchange isn’t governed by a consent decree, which means they can negotiate on the free market. This is where things get complicated. Recording artists get paid nothing when their music is played on AM/FM radio (because there’s no performance right for recordings on terrestrial radio), but they are typically paid at least 5 times more than songwriters when music is performed digitally, like on Pandora. That’s because of SoundExchange’s negotiation power, and BMI/ASCAP’s limitations. AM/FM broadcasters do pay songwriters, but it’s at a royalty rate ultimately set by the courts.
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 that it originates from 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 CDs. 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, 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 remain the same as it was when the CRB raised it from 8.5 cents to 9.1 cents in 2006.
International Mechanical Royalties
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 a 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 the 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.
With a master recording copyright, a record label seeks to collect royalties from the use of a specific recording of a song. Master royalties are paid to a label when the label’s recording is used in an advertisement, film, television program, streaming service, or other media. Master royalties are typically paid in addition to synchronization or public performance royalties, as royalties paid to the publisher only grant the rights to the use of a song, not a specific recording of a song. Terrestrial radio stations do not typically pay master royalties, as radio play has traditionally been viewed as a free advertisement for a recording.
1. What copyright law helps to protect
The area of law that most impacts music is copyright. While most musicians have surely heard the term copyright before, what is it exactly?
Copyright protects various forms of creative expression that are fixed in a tangible form. However, when it comes to music there are two types of creative works that are most frequently involved: musical works and sound recordings (17 U.S. C. §102).
Musical works refer to the underlying song itself. So, for example, a musical work is what you would see on sheet music. This includes both the music and the lyrics.
Sound recordings, on the other hand, refer to the specific recording of a musical work. So, if you were to write a song, you would own the copyright in that musical work, and if you were to record a version of that song, you would own the second copyright in that sound recording as well.
2. How long your copyright lasts
For purposes of this article, we are going to assume that your work was created on or after January 1, 1978, which is when the current Copyright Act went into effect. Assuming that, copyright protection lasts for the life of the author plus an additional seventy years (17 U.S. C. §302).
If you created the work with additional authors, such as a songwriting partner, the copyright lasts seventy years after the death of the last surviving author (17 U.S. C. §302). Once the copyright term ends, the work enters the public domain and anyone is free to use it.
3. What rights you have once you own a copyright in your work
As the owner of a copyright, you are granted certain exclusive rights. These include the right to reproduce the copyrighted work, to prepare derivative works based upon the copyrighted work, to distribute copies of the copyrighted work to the public, to perform the copyrighted work publicly (note that this does not apply to sound recordings), to display the copyrighted work publicly, and in the case of sound recordings, to perform the copyrighted work publicly by means of digital audio transmission. (17 U.S. C. §102).
More specifically, your copyright gives you the right to record your music, sell or otherwise distribute copies of your music in various formats (i.e., vinyl, CD, digital download, etc.), make new works from your original work such as sampling your music to create a new song, perform your music in public, post your music online, and stream your music. Not only does copyright give you the right to do these things with your music, but it allows you to stop others from doing these things with your music without your permission.
4. How to enforce your rights
As mentioned above, owning copyright in a work not only allows you to do certain things with your music, but it allows you to stop others from doing those things with your music. When someone exploits one of your exclusive rights in your music, it is known as copyright infringement (17 U.S. C. §501). This is generally when lawyers get involved.
Now, while copyright rights exist the moment the work is fixed in a tangible form, in order to enforce your rights (or in other words, sue someone), you must first register your work with the U.S. Copyright Office (17 U.S. C. §412). Additionally, if you register your work with the U.S. Copyright Office within three months of publishing your work, you could be entitled to additional benefits such as the potential to be awarded statutory damages even if you suffered no actual damages and the other side cannot prove that it lost profits, and the potential to recover your attorney’s fees should you prevail (17 U.S. C. §412).
Copyright registration is a simple and inexpensive process, and therefore it is in your best interest to register your work as soon as you create it. You can find more information about copyrights and copyright registration at the U.S. Copyright Office’s website.
5. How to record and perform cover songs
It is a very common practice in music for artists to record and perform the musical works of other musicians. As detailed above, recording, distributing, and performing a copyrighted work is the exclusive right of the copyright owner. However, there are mechanisms in the law to facilitate the recording, distribution, and performance of cover songs.
In order to record and distribute a cover song, you need what is called a mechanical license, which grants you the right to record and distribute the musical composition of another. The easiest way to get a mechanical license is through one of the various companies that provide licenses on songwriters’ and music publishers’ behalf, such as HFA (Harry Fox Agency), TuneLicensing or Easy Song Licensing.
More information on the process of getting a mechanical license can be found at each company’s respective website.
If you want to perform cover songs publicly, a license to do so is required. Generally, the venue where you are performing will have such licenses; however, it is always a good idea to confirm this before performing a cover. For the most part, songwriters and publishers affiliated with Performance Rights Organizations (“PROs”) to act as intermediaries on their behalf to license the right to perform the musical work publicly.
In the United States, the three main PROs are ASCAP, BMI, and SESAC, each of which grant licenses known as blanket licenses that permit the performance of all of the songs in the particular PRO’s repertoire. More information on the PROs and public performances can be found at each of the PROs’ websites.