The Many Hands In Your Money

August 3, 2011

By Jeff Price

In the last newsletter I posted an article about how back-end distributors use a copyright “slight of hand” to actually take a higher % of an artists money then they state.

One comment on the TuneCore blog made by someone named Matt stated: “It would be good to have some pie charts showing the different scenarios regarding music copyright and royalties U.S. / non U.S. etc…”

Good idea, Matt.  So here you are, a whole bunch of flow charts that show how money is paid out.

Some important preamble:

First, there are a number entities being paid:

–      An artist signed to a record label

–      A record label

–      An artist that is his/her own record label

–      A songwriter

–      A songwriter who has transferred some of his/her rights to another entity – usually called a “Publishing Company”

Second, there are the entities that generate, collect and distribute the money.  All of these entities have an impact on your bottom line as each take a cut. These entities are:

–      A digital music service

–      A Performing Rights Organization (like BMI/ASCAP)

–      A Mechanical Royalty Collection Organization (these exist outside of the United States)

–      And if you transferred your rights, a “Music Publisher”

Third, there are two types of ways the music is sold that are represented in these flow charts:

–      Digital Download – like buying a song from iTunes

–      Interactive Stream – streaming a song on-demand from Spotify, MOG, Rhapsody etc…  This does not include a stream from Pandora or other internet type “radio.”

Fourth, the way money is paid out, and to whom, is different in the United States than it is everywhere else. So you have two categories to distinguish how the money is paid out:

–      In the United States

–      Outside of the United States

Fifth, there are three possible income streams:

–      One goes to the entity that owns the “master” (the recording of the song)

–      The second is for the “mechanical royalty.”  This goes to the songwriter.  If the songwriter transferred his/her rights then it goes to an entity called a “Music Publisher”

–     The third is for the public performance royalty.  This money goes to the     songwriter.  If the songwriter transferred his/her rights to a third party Music Publisher, then it goes to the songwriter AND the Music Publisher.

There are some industry terms being used here: Public Performance, Mechanical Royalty, Master, Performing Rights Organization, and others.  You can about each one here.

But suffice it to say, if you wrote the song (the lyrics and the melody) you get paid money owed to the songwriter and/or publisher.

If you own the recording of the song, you get paid the money owed to the “record label.”

And if you are the songwriter, and have not transferred any of your rights and own the “masters” (meaning you are the record label), you get all three.

Just note all the hands that get pieces of your money before it gets to you–quite the exorbitant service fee!

Let’s start with what might be the easiest ones.

An artist/band gets signed to a record label.  Each time the recording of the song(s) sell, the artist/band gets paid.  In most cases, the artist/band received an “advance” of their royalties, therefore the money they get paid gets “recouped” until the artist/band has paid the label back after which point the money begins to pass through again.

For a $17.98 full length CD, the artist/band traditionally got paid $1.40 – $1.70 for each CD sold.

Important note – this royalty is for the artist/band that recorded and performed the song(s), it is NOT for the person that actually wrote the song (lyrics and melody)

This first chart is for an artist signed to a record label.

This chart represents an artist that uses TuneCore – in effect, the artist is the record label.

Now we turn to the royalties owed to the songwriter.

There are TWO royalties owed to the songwriter – these are:

-Mechanical Royalties for the “Reproduction” of the song
-Public Performance royalties for the “Public Performance” of the song.

Who gets this money varies based on if it happens inside the U.S. or outside of the U.S.

First up is the easiest one – the songwriter controls all of his/her rights and a song of his or hers is bought via download from a U.S. based service.  Note how the store pays the label and the label has to pay the songwriter.

Next up, assume the exact same scenario with one change;  the songwriter transfers his/her rights to a publisher OR enters into an administration deal with an entity to work for him/her (called a Publishing Administration deal).

Now let’s go with the exact same scenario only the song is bought via download from a music service outside of the United States.  Note how when this happens, the mechanical royalty is paid to a copyright organization that collects mechanical royalties.  There your money sits unless you hire someone to get it for you.  If you don’t, they give your money to Warner, Sony, Universal, EMI and others.  (TuneCore’s new songwriter service can get this money for you before they give it away).

Also note, outside of the U.S., the mechanical royalty rate is not $0.091, it is now a % of the sale price. Also, outside of the U.S., mechanical royalties are paid to these organizations for both streams AND downloads (it’s slightly different in the U.S.).

Finally, and this is really important, note that in this scenario, you would need to be affiliated with the organization that has your mechanical royalties.  If you are not, the money does not make it to you.  As there are many of these organizations around the world, and many will not let you register with them for one reason or another, the money sits and then is given to Warner, EMI, Sony and Universal unless you hire someone to get it for you.

Next up, assume the exact same scenario with one change:  the songwriter transfers his/her rights to a publisher OR enters into an administration deal with an entity to work for him/her (called a Publishing Administration deal).

Now here is where it gets even more confusing.  Publishers can find themselves in the exact same scenario as the songwriter.  That is, there are some copyright collection organizations that will not allow a publisher to become a member to get the money.  Therefore, the publisher does one of two things: either hires another middle-man in that country to get the money from the local collection agency OR starts their own separate company in that country to be the middleman to get the money (in which case the publisher “double-dips”).

This scenario shows what happens when a publisher collects the money but then has to hire a “sub-publisher” to get it for downloads or streams outside of the U.S.

From here we now move to how the mechanical royalty is calculated and paid on an “interactive stream” in the United States.  Note how in the rest of the world BOTH the download and streaming mechanical royalty are paid to the copyright organization.  In the U.S., the mechanical royalty from a download is paid to the record label to pay the songwriter.  However, the mechanical royalty from a STREAM must be paid directly to the entity that controls the copyright to reproduction (either the songwriter or publisher).  Note also that the mechanical royalty rate on streams in the U.S. is based on a ridiculous formula as opposed to a flat rate of $0.091.

Now we move onto the last of the royalties: Public Performances.

First, in the United States, the law states that an “interactive stream” is a public performance, therefore the songwriter and publisher must get paid.    Note that in the U.S., a download is NOT considered to be a public performance, so no royalty is owed on that.

Second, when a public performance organization collects the money, it takes a % off the top for itself and then splits whatever is leftover 50/50 between the songwriter and the publisher.

If the songwriter has NOT done a deal to transfer his/her rights to another entity (the “publisher”) then the songwriter would get both payments from the Performing Rights Organization.

Here is the exact same scenario, only this time, the songwriter has done a deal to transfer his/her rights to a publisher.

And finally, we end with the grandaddy of them all.  This scenario shows what happens if there is a public performance generated by a non-U.S. based music service.  Unlike in the U.S., in many countries BOTH a download AND a stream are considered public performance (in the U.S., a download does NOT generate a public performance royalty).

Note how the foreign performing rights organization collects the money and takes a %.  Then, due to something called the “Berne Convention,” an international agreement governing copyright, the foreign performing rights organization passes the money back to another performing rights organization.  This second performing rights organization takes another % of your money.

If the songwriter transfers his/her rights to another entity (the publisher) then the publisher would take a % of the 50% it gets paid after the two performing rights organizations take their cut.

If the songwriter has not transferred his/her rights, then there would be no % taken by a publisher and the remaining money would go to him/her.

I am certain there are more permutations to come up with beyond what you see here.  And to be blunt, this is more representative of the “legacy” industry, as opposed to the new emerging digital music industry.  The new industry allows for more money to make it back to more artists and songwriters more quickly, and with more–and here is the key word–TRANSPARENCY.

In the new digital industry, there is no need for all of the middlemen, all of the mystery, all of the inefficiency.  Digital services track in a way the old school industry never could.  The efficiency is already there, it’s the business model that is out of date.  It’s what all of you are changing.  And it’s the focus for us at TuneCore moving forward: more money more quickly to artists and songwriters with more transparency.

And it’s the reason we launched the new TuneCore songwriter service.  More information will be rolling out on it in the next month…