Music industry income sources have multiplied in recent years. Both the number of artist entrants and platforms where artist’s works can be accessed have been democratized in the digital era. The access model basing income on track plays has replaced past models where customers paid higher prices to own copies of artists’ works. It behooves artists to collect income from as many different additional income streams as they are entitled to since the price per play model pays much less per transaction than the ownership model does.
Both the song composition copyright owner (“Songwriter”) and the sound recording copyright owner (“Master Owner”) have four exclusive rights that are commonly exploited when monetizing musical works. These include the right to reproduce, distribute, publically perform, or publically perform sound recordings during digital transmission. Income streams are created when third parties enter into contractual arrangements with copyright owners to monetize their exclusive rights. Artists without a record contract can collect from all available income streams, however, they will need to work with a digital aggregator to get their music on digital retail sites like ITunes and digital streaming sites like Spotify and Pandora. In addition, unsigned artists need to partner with recognized publishers in order to collect certain royalties available to them. There are at least five regularly occurring royalty streams for artists who, at the very least, have signed with a digital aggregator and a publisher.
A mechanical royalty (9.1 cents per song) gets paid to Songwriters directly or the Songwriter’s publisher, every time an underlying musical composition is reproduced by rendering said composition on objects such as CDs, vinyl records, or cassettes. Mechanical royalties are also paid to Songwriters or their publishers when recordings with protected compositions are downloaded from digital download retail services such as ITunes or streamed from interactive streaming sites like Spotify. Record companies pay mechanical royalties to Songwriters or their publishers. Digital retail stores pay mechanical royalties to digital aggregators like Tunecore and CD Baby who pass on the proceeds to record labels, if applicable, or directly to Songwriters or their publishers if that artist is unsigned. Interactive streaming services like Spotify pay mechanical royalties to Harry Fox (a mechanical licensing agent), who then remits this income to the Songwriter’s publisher. Spotify only pays mechanical license income to Harry Fox. Harry Fox only works directly with certain publishers. It’s for this reason that unsigned artists must, at least, have a publisher to collect mechanical royalties generated from interactive streams.
A public performance royalty is paid to the Songwriter and the songwriter’s publisher whenever a sound recording containing an underlying composition is played in a public forum. Public forums can exist on terrestrial radio (AM and FM stations), establishments open to the public (bars and restaurants), non-interactive digital webcasters (Pandora), and interactive digital streaming sites (Spotify). Songwriters and publishers sign up with one and only one of the performing rights organizations (“PROs”). The three main PROs are ASCAP, BMI, and SESAC. The PROs identify potential licensees, which are entities responsible for performing sound recordings in a public forum. Once potential licensees are identified, they are asked to obtain blanket licenses. These licenses allow them to play any song controlled by an artist who has signed up for that particular PRO. Each PRO pays public performance royalties to a Songwriter and a Songwriter’s publisher out of the proceeds of all the blanket license fees obtained from licensees. Each PRO conducts surveys with licensees and collects data from Songwriters to determine each Songwriter and publisher’s share of public performance royalties.
Royalties from permanent downloads are paid to the Master Owner when customers purchase songs from digital retail outlets like ITunes. Master Owners are most often record labels but can also be artists who have either not signed with a record label or have signed with a record label but retained their ownership interest in the sound recording copyright. Master Owners, whether they are record labels or artists, must go through a digital aggregator in order to place music on a digital retailer’s site. When a song is sold on a platform like ITunes, the digital retailer takes their cut and passes the remainder of the proceeds to the digital aggregator, who takes their cut and passes the difference to the record label, who then pays the artist according to the conditions laid out in the label’s record contract with the artist (assuming that the artist’s advance has been recouped, meaning that the label’s expenses have been paid back from artist royalties). Artists will receive proceeds from digital download sales directly from their digital aggregator if the artist is self-releasing their content.
Royalties from interactive streams work in the same way as royalties from permanent downloads even though the goal of these transactions differ. Customers that pay on sites providing interactive streams obtain the right to access music from a vast catalog of artists at any time as long as they keep their subscription current. Customers that pay for digital downloads obtain copies of sound recordings that they own and can access in the future whether or not they continue to use the service from which they downloaded the recording. Master Owners have to work with digital aggregators to get their content on a service like Spotify. Interactive streaming services pay out royalties (derived from subscription fees and ad revenue) to digital aggregators, who take their cut and pass the rest onto record labels, who then pay artists their share of the streaming income according to the terms of the label’s record contract with the artist (assuming that the artist’s advance has been recouped). Artists who self-release receive their interactive streaming income directly from digital aggregators.
Royalties from the non-interactive streaming of sound recordings are paid to Master Owners when their master recordings are broadcast digitally on webcaster services such as Pandora, iHeart Radio, and Sirius XM. Master Owners were never given (and still don’t have) a public performance right for terrestrial radio transmissions (AM and FM radio). In 1998, as digital webcasting became more prevalent, Congress decided to confer public performance rights to Master Owners with respect to this emerging type of media. SoundExchange, a public performance agent for Master Owners, was created to collect these royalties and pay them out to rights holders. In addition to paying Master Owners (who could be either record labels or self-releasing artists), SoundExchange also pays out royalties to featured performers and session musicians affiliated with SAG-AFTRA and AFM. SoundExchange pays out 50% of the royalties to Master’s Owners, 45% of the royalties to featured performers, and 5% of the royalties to session musicians for each public performance of a sound recording. Self-releasing artists must register with SoundExchange as the Master Owner to receive that share of the applicable public performance royalty.
These five primary income streams are the foundation of revenues that indie artists can regularly rely on in the current music business marketplace. Physical distribution and sales at brick and mortar retail outlets continue to be reliable for some legacy artists, but by and large, most of the income indie artists generate comes from the digital marketplace. These income streams can be supplemented further by revenue from synchronization licenses derived from film and TV placements. It will be important for all artists to structure their music business partnerships to maximize the royalties available to them as the digital marketplace expands and more customers subscribe to an increasing number of platforms.