HOW THE MONEY FLOWS IN THE MUSIC BUSINESS
Ivan Hoffman, B.A., J.D.
But for the sake of as much simplicity as is possible, let’s posit a singer-musician-performer signs a traditional agreement with a record company whereby the record company is granted ownership of the recordings (called “masters”) in exchange for which the company promises to pay the artist royalties. This is by no means the only form of arrangement that can be made and indeed may today be not the norm at all but it can serve the purposes of this article.
The artist will usually get a royalty of anywhere from 5% at the low end to 15-25% at the high end of the Manufacturer’s Suggest Retail List Price (the retail price) as a gross royalty but that royalty is almost always illusory. The company will generally deduct for “packaging” (remember “packaging?” that is, when albums came with covers and liner notes?). The artist should of course negotiate not to have such a deduction for digital downloads since there is no “packaging” in such formats. The company will also deduct an amount, currently somewhere around 15% for pretty much nothing at all but which historically was an amount allocated to “breakage” (remember when there were actual records that could break?). Now the 85% basis for royalty calculations has simply become part of the royalty structure and there is no rhyme or reason to explain it. In fact, it used to be 90% as the standard but could, in the right instance, be negotiated to 100%. Needless to say, this is negotiable as well. There are often many other deductions and reductions in the above royalty rate for foreign, mid-price, budget price as well as different rates for foreign sales. Additionally, the artist gets a share of the licensing income (read “Is It A Sale or A License?” ).
If the recording is used in a commercial, movie, television show or the like, the company negotiates a “master use” license with the user and collects the money and pays the artist’s share to the artist, which if properly negotiated, should not less than 50% of the gross and sometime much higher than that. And it is not just the rate that is important; it is the basis upon which the rate is calculated which is even more important.
When the records are sold outside of the United States, this is called “foreign” and as indicated above, the artist gets a royalty based upon the contractually negotiated terms for such sales.
Although the performance of recordings (as opposed to the musical compositions so performed) on land-based radio and television stations does not currently generate a royalty to the company and thus not to the performer, when those recordings are used online and digitally (web sites, Internet radio and television stations and the like) those users pay a royalty for such use. This royalty is divided between the rights owner (i.e. label) and the Featured Artist and is paid directly to each party. The artist should get the entirety of the Featured Artist share and, depending on the agreement the artist has with the label, may be able to negotiate a share of the label’s share. The parties must register with Sound Exchange to be paid but the artist must also have appropriate provisions in the artist’s agreement with the label.
Additionally, if the recordings are “monetized,” meaning that they are part of videos shown on YouTube or elsewhere and the service sells ads as part of the viewing experience, the service pays a share of that monetization to the label (as well as the publisher—see below) so the artist would need to have a provision in the artist agreement with the label for a share thereof. The label must register with the service to be entitled to be paid.
The above is merely a very general outline of how the money flows. There are many, many other complexities in a recording agreement and you should definitely not seek to negotiate such an agreement without the services of an experienced music/recording attorney. Read, as but two examples, “The All Around 360 Deal,” “The Six Potential Traps in a Recording Agreement” along with the other articles on my site.
Let’s further posit a songwriter (could be the same as the performer but does not have to be) writes songs and then enters into an agreement with a music publisher (either an exclusive agreement for a term of years or single, song-by-song agreements). The job of the publisher is to administer the rights in the compositions such as by issuing licenses, making sub-publishing deals such as in foreign countries or for sub-rights such as folios etc. as well as to get other people to use the compositions. Generally speaking, the deal is that the writer and the publisher split the income 50/50. This of course can vary as well.
So when a record company or other user of music records or otherwise uses the composition, it pays the music publishers of the compositions which are recorded by the record company’s artist a royalty for each record “sold” (including downloads). This is called a “mechanical royalty” because historical it referred to, in copyright statute-ese, a royalty for the reproduction of the composition on devices that mechanically reproduce the composition (commonly known as a “record”).
In the songwriter/publisher relationship (this assumes that the songwriter has entered into an agreement with a publisher as opposed to remaining his or her own publisher), the publisher receives this mechanical income and pays half to the songwriter.
When the musical compositions are performed (radio, television, concerts, clubs, on the Internet etc.) the user of such compositions (i.e. the radio station etc.) pays to have a license to do so and usually this license is issued by a performing rights society such as Broadcast Music Inc. (BMI) or American Society of Composers, Authors and Publishers (ASCAP) or other performing right societies throughout the world. Those societies collect the money and run all the receipts through a complex computer program that uses a distribution formula and then the society distributes the writers’ shares directly to the writers and the publishers’ shares directly to the publisher. In other words, in the songwriter/publisher relationship, the publisher does not pay any part of its performance monies to the writer.
If the composition is used in a commercial or in a movie or on television, this is called a “synch” license (for “synchronization”) and generally the user pays the publisher and the publisher pays the writer the writer’s share, generally not less than 50% of the amounts so received.
If the publisher enters into one or more foreign publishing agreements to have those foreign companies represent the compositions in other countries, the publisher will get a royalty (anywhere from 50% to maybe 85%) of the gross and will then remit the writer’s share to the writer according to the provisions of the writer/publisher agreement.
Just to add a little complexity, if the songwriter is the same as the recording artist, the songwriter has to be aware of the issues related to “cross-collateralization” between the 2 agreements. And in such an instance, the issue of the “controlled compositions” clause becomes relevant. Read “Controlled Composition Provisions in a Recording Agreement”.
As indicated, this is a very, very general outline of how the money flows. There are many other issues to consider and many other forms of money flows including name and likeness rights, concert income and so on.
Consult an attorney with experience in these matters.
Copyright © 2011, 2018 Ivan Hoffman. All Rights Reserved.
This article is not legal advice and is not intended as legal advice. This article is intended to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic discussed. You should not rely on this article in any manner whatsoever and you should not draw any conclusions of any sort from this article. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. This article is based on United States laws but the laws of other countries may be different. You should consult with an attorney familiar with the issues and the laws of your country. This article does not create any attorney client relationship and is not a solicitation.