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News / Inês Ferreira / 09 Aug 2023

SHOW ME THE MONEY: A Complete Guide on Royalties

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Maximise your revenue by gaining a clear understanding of the mechanics behind the royalty structure of a song.

It is the responsibility of an artist to handle the creative and (sometimes) technical aspects of creating a track. However, figuring out all the potential income streams from a sound recording can be challenging. Let’s start with the basics.

What Is the Structure of a Song?

To understand the various payment sources associated with a song, we must first recognise that each finished song consists of two components: composition and recording.

Sources: Songtrust

Each part of the song represents different copyrights – rights granted to holders, usually the author or creator of the original works, that earn royalties from their creations’ use.

The composition refers to the song’s original idea in tangible form. The elements that constitute the original idea of the song are, for example, its lyrics written on a piece of paper, its melody on a smartphone sound recording, among others. These different elements are protected by copyrights. This means that if another sound recording uses the same chord sequence or lyrics, their rightsholders are entitled to rightful remuneration in the form of royalties.

The composition side of the song can be divided into two different types of rights: performance and mechanical rights. The mechanical rights generate royalties whenever a song is reproduced, such as when its CD is purchased, the song is downloaded on iTunes, or when the song is streamed on a streaming platform.

Mechanical royalties are collected by mechanical royalty collection agencies. In the United States is The MLC, or The Mechanical Licensing Collective, collects mechanical royalties from eligible streaming and download DSPs (Digital Service Providers). Their goal is to ensure that music rightsholders are paid their mechanical royalties when their musical work is used.

Source: Songtrust

Regarding performance royalties, they are collected whenever the song is performed publicly such as in restaurants, retail stores, events, conferences, and shows. It is critical to note that composition royalties are collected whenever any of the original elements of a song, such as lyrics or chords, are played in any of these situations, not just when the official recording of the song is played.

These types of royalties are not mutually exclusive and can often be generated simultaneously. For example, when a song is streamed, both mechanical royalties and performance royalties are paid to the rights owners. In this case, the song’s original composition is being played, which enables mechanical royalties to be paid. Simultaneously, the song is also being played publicly (when the listener does not own the track, all streams are considered public performances), enabling performance royalty payments.

You may be wondering who collects these rights. The answer is performing rights organisations (PROs). PROs are entities that collect performance royalties and distribute them to their rightsholders according to a schedule that varies by company. In the US, some of the top organisations are BMI, ASCAP and SESAC

To facilitate the royalty collection process, there are certain organisations that collect both performance and mechanical royalties. These are called Collective Management Organisations (CMOs). However, not every collecting organisation can be one, as they need to fulfil specific requirements. For example, SACEM is a CMO with more than 196K members, and with 14K new members every year.

As we’ve said, performance royalties are paid whenever a track is played publicly, meaning they depend on venues and other services to provide them with information. However, this information can sometimes be omitted or not disclosed creating an information gap, leading to a lack of accuracy in the value paid out to rightsholders. 

Additionally, the industry has a metadata problem, meaning, there is a systemic lack of accuracy in the data held by these organisations. This is due to several factors, such as a song having multiple (often a high number of) music rightsholders, royalty distribution being highly dependent on regional practices and laws, and other variables that add complexity to the problem.

Recording Copyrights

On the recording side of a song, there are two types of rights: digital performance rights and recording rights. Oftentimes, these two rights are known as neighbouring rights. Neighbouring rights are generated whenever a song is publicly performed or played on interactive and non-interactive streaming platforms or radio stations. 

If you’re unfamiliar with interactive and non-interactive streaming platforms, here’s a quick explanation. Interactive streaming platforms allow listeners to select whatever they want to listen to, while non-interactive streaming does not allow for this possibility. Examples of interactive streaming platforms include Spotify, Tidal or Apple Music while platforms like Pandora and SiriusXM are non-interactive streaming platforms. Other terms that can mean the same are “on-demand streaming” for interactive streaming platforms and “internet radio” for non-interactive streaming platforms.

The importance of neighbouring rights has grown alongside the popularity of streaming platforms. They have also been the central topic of recent conversations on the change of the current streaming revenue model.

Similar to performance royalties, neighbouring royalties are distributed whenever a specific sound recording is broadcast. This is the reasoning behind the word “neighbouring”, as this right is always adjacent to performance rights for compositions. The beneficiaries of these rights are typically sound recording owners (typically a record label), recording artists, and musicians. Songwriters are not eligible to earn neighbouring royalties unless they are performers on the sound recording.

The collectors of the money generated by these rights are neighbouring rights administrators. In the UK, for example, the main administrator is PPL International. In the US, SoundExchange collects and distributes the income from digital performance rights. 

As we previously mentioned, music rightsholders collect royalties based on regional practices and laws. In the table below you can see these differences in royalties collected by each country, but check this list for the full scope.

If you’re an artist, figuring out all this by yourself is not easy. To help you get an idea of how much you can make in royalties from your music, Songtrust created this royalty estimator, which can be a useful guiding tool.

Micro Sync Royalties

Micro-syncs online, particularly in user-generated content on TikTok and YouTube, generate performance and mechanical royalties if they use licensed music. Therefore, self-releasing artists should also licence their music for micro-syncs. The most significant advantage of these royalties is that they represent income opportunities for lesser known artists that are not making much from more traditional channels like radio and streaming. However, the biggest disadvantage is that these royalties are priced lower than other royalty types. 

Additionally, YouTube faces some challenges with user-generated content identification. Most of the time, YouTube relies on its Content ID system. The Content ID is a code generated when a video is uploaded, and then the system matches this same code with other videos that use the same sound recording. Nevertheless, this match is only possible when tracks are correctly identified by the video uploader. Moreover, only a few entities are eligible to use the Content ID system and receive royalties from it. You can read more about this system and the Manual Claiming alternative in our article “How Can Rightsholders Claim Undiscovered Royalties In User-Generated Content On YouTube?”. 

Overall, music royalties are a complex topic full of twists and turns, regional specificities, and exceptions. We hope this guide can be useful for artists, performers, and other music rightsholders.

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