Part II of explaining royalties in the music business involves defining what royalties are available to musicians and how those royalties are assigned and collected. When analyzing royalties, it is crucial to understand that copyright law is the deciding factor in who owns the royalty rights and who is paid according to those rights. If you do not have a firm grasp on copyrights, please review the prior article on that subject.
Copyright law is all about who controls the exclusive rights to a piece of art (i.e. music in this case) and exercising those rights to exclude other people from using that piece of art. Importantly, individuals can give the copyrights away to other people and companies or they can grant permission to another person to use the copyrighted piece of art – a license. A license is a contract between the copyright owner and another person or company, which allows that other person to use the art for a particular purpose. While I understand this can be a lot to understand at first, it will all make sense in the end.
Remember, copyrights can be bought, sold, and given away just like any other piece of property. As we work through each individual royalty, I will refer to the copyright holder. This is the person who actually owns the copyright, and it is not necessarily the songwriter. In fact, the copyright holder is rarely the songwriter (except for independent musicians) because the songwriter has probably sold the copyright in the musical composition to a publisher (either in part or completely), a performer, or a record company.
PART II – The Royalties
Print Royalties – Though not used very often in recent years, the copyright holder of a musical composition is a due a royalty every time his music or lyrics are printed on paper. This includes printed sheet music and lyrics in album notes. The lesson here – if you are not the copyright holder of the lyrics, you have to pay the copyright holder if you want to print the lyrics in your album or on your website.
Performance Royalties – A performance royalty is paid to the copyright holder of a musical composition any time the composition is (wait for it ….) performed. This includes play on the radio and live performances. For instance, if a cover band played your song at the local bar, you should get paid a performance royalty. A performance rights organization (PRO) collects performance royalties, based on a blanket license. Normally, venues and radio stations pay a flat fee every year to a PRO so that they can play any song that is registered with that PRO. The copyright holder is paid a portion of this license fee, based upon how many times his musical composition was played.
Mechanical Royalties – A mechanical royalty is paid to the copyright holder of a musical composition any time that composition any time that composition is reproduced on some type of physical media. Basically, this means that anytime a song is put down on a CD, cassette, record, or DVD, the copyright holder gets paid. The person reproducing the song must get a mechanical license from the copyright holder of the musical composition and a mechanical license from the copyright holder of the sound recording. Remember any particular record song has three distinct copyrights (the music, the lyrics, and the actual recording of a performing playing those music and lyrics). This mechanical license is available from one of the mechanical rights agencies, and the license fee is set by the United States Library of Congress’ Copyright Office.
Currently (as of October 2009), the rate is 9.1 cents per unit reproduced (i.e. 9.1 per CD that the musical composition appears on). Mechanical royalties are paid directly to the copyright holder(s) or their publishers. Notably, a copyright holder can agree to be paid less than the statutory rate set by the Copyright Office – this is common in record deals. There are also certain uses of a musical composition to which a copyright holder cannot refuse. In those cases a compulsory license is used and the copyright holder is paid according to the rate set by the Copyright Office.
Synchronization Royalties – In order to reproduce or play a musical composition in a film, television program, commercial or any other visual presentation, the person displaying the images must obtain a synchronization license (a “sync license”) from the copyright holder of the musical composition and a master use license from the copyright holder of the sound recording. More often than not, the copyright holder requires the film or television program to pay a synchronization royalty, based on the number of times the program is shown. There is no statutory or set rate for synchronization royalties, and each use is individually negotiated.
Digital Royalties – Digital royalties are very similar to performance royalties. These cover simulcasting, webcasting, streaming, downloading, and other on-line music services that PROs do not or cannot monitor. These royalties are normally assigned with a blanket license, but this is a very new area for music royalties and is not completely defined yet. SoundExchange, a type of PRO, was formed to track the music played on the Internet and distribute royalties to copyright holders.
AHRA Royalties – In 1992, Congress passed the Audio Home Recording Act, which requires the manufacturers of digital audio recording devices (DVD and CD burners) and blank recording media (CDRs, DVD-Rs, and cassette tapes) to pay a percentage of all money made from selling these devices and media to the Register of Copyrights. The Register then distributes that money to the Sound Recording Fund and the Musical Works Fund to make up for performers, songwriters, and record companies lost sales from people burning illegal copies of the copyrighted material. The two Funds distribute the money to songwriters and record companies through the PROs.
In Part III, we will put all of this information together and demonstrate how all of the players and royalties work with a song and how everyone enjoys the final payoff.
Matthew T. Nagel is an entertainment attorney at Wuestling & James in St. Louis, Missouri and an adjunct professor at Fontbonne University and Washington University School of Law. If you have questions, you can reach him at Nagel@wuestlingandjames.com.
* Articles are primarily educational and do not purport to constitute legal advice. No attorney-client relationship is created between the author and any reader of this article. If you have legal concerns or questions be sure to consult with an attorney licensed to practice in your jurisdiction.
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