OT -- Music Royalties

[*Laura]

Maybe some of you are interested to know how royalties work in the music biz,so I thought of bringing these infos here.

It's an interesting read that might shed some light on what's happening behind the music.

I'll paste them,to save you the trouble of clicking multiple links.



Recording-artist mechanical royalties

Recording-artist royalties (and contracts) are extremely complex and a hotbed of debate in the music world. From the outside, the calculation appears fairly simple. Artists are paid royalties usually somewhere between 8% and 25% of the suggested retail price of the recording. Exactly where it falls depends on the clout of the artist (a brand new artist might receive less than a well-known artist). From this percentage, a 25% deduction for packaging is taken out (even though packaging rarely costs 25% of the total price of the CD or cassette).

That sounds simple enough, but there are many more issues that affect what a recording artist actually makes in royalties.

Free goods - Recording artists only earn royalties on the actual number of recordings sold -- not those that are given away free as promotions. Rather than discounting the price to distributors, many record companies give a certain number away for free (about 5% to 10% depending on the artist). Recording companies also give away many copies to radio stations as "promo" copies. There is also a reduction in royalties made for copies of the recording sold through record clubs.

Return privilege - Recordings in the form of CDs or cassettes have a 100% return privilege. This means that record stores don't have to worry about being stuck with records they can't sell. Most other businesses don't work this way, but the music industry has to be more flexible and timed to demand. What's hot today may be forgotten tomorrow... This leads us to reserves. The recording company may hold back a portion of the artist's royalties for reserves that are returned from record stores. (Usually about 35% is held back.)

90% - Back in the days of vinyl records, there was a lot of breakage when record albums were shipped out for distribution. Because of this, recording companies only paid artists based on 90% of the shipment, assuming that 10% would be broken. Even as vinyl was phased out, this practice continued. Today it is gone for the most part, but there are still a few holdouts.
So, here is how it looks so far. Let's say a CD sells for $15. Right away we deduct 25% from that for packaging, which makes the royalty base $11.25. Now let's say our artist has a 10% royalty rate and that his CD sells one million copies. That sounds great! The artist would earn $1,125,000! Except 10% of those were actually freebies, so we really have to calculate that royalty based on 900,000, which makes the royalty $1,012,500.

Advances and recoupment

They're BROKE?
Multiplatinum artists like TLC and Toni Braxton have been forced to declare bankruptcy because their recording contracts didn't pay them enough to survive.
Florence Ballard from The Supremes was on welfare when she died.

Collective Soul earned almost no money from "Shine," one of the biggest alternative rock hits of the '90s, when Atlantic Records paid almost all of their royalties to an outside production company.

Country music legend Merle Haggard, with 37 top-10 country singles (including 23 #1 hits), never received a record royalty check until he released an album on the indie punk-rock label Epitaph.


Typically, when recording artists sign a recording contract or record a song (or album), the record company pays them an advance that must be paid back out of their royalties. This is called recoupment. In addition to paying back their advance, however, recording artists are usually required under their contract to pay for many other expenses. These recoupable expenses usually include recording costs, promotional and marketing costs, tour costs and music video production costs, as well as other expenses. The record company is making the upfront investment and taking the risk, but the artist eventually ends up paying for most of the costs. While all of this can be negotiated up front, it tends to be the norm that the artists pay for the bulk of expenses out of their royalties.

Let's see what these recoupable expenses do to our artist's $1,012,500 royalty we calculated earlier. Suppose the recording costs were $300,000 (100% recoupable), promotion costs were $200,000 (100% recoupable), tour costs were $200,000 (50% recoupable), and a music video cost $400,000 (50% recoupable). That comes out to:

$300,000 + $200,000 + $100,000 + $200,000 = $800,000
Suddenly our artist isn't making a million plus, he's making $212,500. But don't forget there is also a manager to be paid (usually 20%), as well as a producer and possibly several band members. The artist won't see any royalty money until all of these expenses are paid.


Controlled-composition clause

A controlled composition is a song that has been written and/or is owned by the recording artist. Because mechanical royalties paid to songwriters and publishers are not recoupable by the record company, meaning the record company can't deduct any expenses from them, record companies usually negotiate into the singer/songwriter's contract that the mechanical royalty rate he will receive as the songwriter/publisher will be 75% of the usual amount. In other words, as the writer of a song you record yourself, you get 25% less royalty money than you would get for writing a song that someone else records. But you'll get performance royalties when the song is played on the radio, TV, etc.



Royalty Pie

Let's look at an overly simplified example of how the major players work together to produce the music you hear on the radio, buy on CDs, or download (legally) from the Internet.

A songwriter writes the lyrics and melody for a song. The songwriter records that song in his basement and sends the tape to the Library of Congress to register the copyright. Even though he knows it is automatically copyrighted when he set it in a fixed form (put it on paper and/or recorded it), he is registering it because he's sure this song has the makings of a hit, and he wants to head off any infringement problems up front.

Now, although this songwriter has recorded his own vocal version of the song, he's humble enough to know that it probably won't go very far with his voice croaking it out. In walks the publisher. Our songwriter signs a single-song agreement with a publisher who will pitch the song to the record labels. Publishers are in the business of finding and exploiting new music by issuing mechanical licenses to recording companies or others who want to use the song in some fashion. In exchange for this "administration," the publisher gets 50% of the mechanical royalties for each recording sold (minus several things they have to pay for first, which we'll talk about in the next section).

Let's say that a major record label likes the song and has the perfect recording artist to sing it. They fill out a mechanical license agreement through the Harry Fox Agency and obtain rights to record the song. The song is recorded and is promoted heavily. It becomes a hit. Now, who is making money? The songwriter and publisher split mechanical royalties 50/50 for each recording sold, and the recording artist also gets a mechanical royalty for each recording sold (although that deal is set up differently).

In addition to the mechanical royalties, however, our songwriter and publisher are also paid performance royalties, which means they make money based on how often the song is played on the radio, in restaurants or bars, or in other types of broadcasts.
These royalties are monitored, collected, and paid out by a performing rights organization like ASCAP, BMI, or SESAC; our artist is paid by the organization with which he registered the song. For subscription digital "performances," the recording artist now gets paid royalties as well.

Now, let's say that a movie producer is working on a new movie and wants to use the song in a scene. Now the song is moving into the realm of synchronization royalties (where music is used in conjunction with video). When a songwriter's work is synched with a scene in a movie, played over the credits at the end of a movie, or used in a television show or commercial, the songwriter and publisher are paid a negotiated fee to use the song in the movie as well as performance royalties when the movie is shown on TV or in theaters in foreign countries. If the movie uses the specific recording of your song (known as a "master") made by the artist who made the song famous, then that artist will receive a regular royalty percentage from the fee the movie company negotiates with the record company as well as mechanical royalties if there is a movie soundtrack produced. The songwriter and publisher will also receive mechanical royalties from sales of a soundtrack.



Performance Royalties


The royalty trail begins when the song is registered.
Once a song is registered, it becomes part of that PRO's collection and is available to all of its users. Most of those users have a "blanket license" to use any or all of the PRO's music, however some users license on a per program basis and only pay for the music they actually use. (This is good for users who don't use that much music.) The PROs deduct money for their operating expenses and the rest goes to the songwriters and publishers.


PRO customers include just about anyone who plays music in a public place -- even those who play "hold" music for their business. These include television networks, cable television stations, radio stations, background music services like MUZAK, colleges and universities, concert presenters, symphony orchestras, Web sites, bars, restaurants, hotels, theme parks, skating rinks, bowling alleys, circuses, you name it -- if they play music, they have to have a license and pay royalties.

Tracking the playlists

The difficult thing to imagine in all of this is how these organizations track all of that music to get an accurate record of how much royalty money needs to be paid to which songwriters and publishers. Each of the PROs use a slightly different system for calculations; we'll use the ASCAP system as an example. ASCAP uses two methods for determining performances: it either counts them or does a sample survey.

For television performances, ASCAP depends on cue sheets that program producers provide them, as well as program schedules, network and station logs, and even tapes of the broadcasts. ASCAP developed its own computer program to help studios and program producers report performances.

For radio performances, ASCAP does a sample survey of all radio stations, including college stations and public radio. To do this, it uses a digital tracking system, station logs provided by the radio stations, and recordings of the actual broadcasts.

For live performances, ASCAP reviews set lists provided by concert promoters, performing artists, and others. In the case of symphony performance information, the printed programs are submitted.

Licensed Internet sites, circuses, theme parks, etc. provide ASCAP with their own music use data.

Others that use music, like restaurants and bars, are not surveyed and simply pay a flat rate that is distributed based on trends in local radio stations (based on the type of music).

ASCAP's royalty calculations are based on a system of credits. Here is an example of how the money is calculated based on the ASCAP system.

First, some general information: ASCAP weights different factors in order to come up with a song's total "credits" and a fair royalty calculation. For example, the song is weighted based on the type of performance (theme, underscore, or promotional); this is known as the use weight. A song that is featured and sung by a recording artist on TV or radio gets more weight than one that was played as background music during a radio commercial. The licensee (radio station, TV station, etc.) is weighted based on its licensing fee, which in turn is based on the licensee's markets and number of stations carrying its broadcast signal. There is a weight applied to the time of day the music is performed (particularly in television). Music played during peak view/listener times receives more weight.

ASCAP also uses a follow the dollar factor, which means that songwriters and publishers are paid based on the medium from which the money came. For example, money paid out from radio stations is paid for radio performances. A general licensing allocation is figured for fees that ASCAP collects from bars, hotels and other non-broadcast licensees. These fees are distributed to songwriters and publishers based on similar radio and TV broadcasts of the individual songs. In other words, they estimate that restaurants and bars are playing the songs at a similar rate as the local radio and TV stations.


The total number of credits is multiplied by the shares for the song (how the royalties are split between writers and publishers). This number is multiplied by the credit value for the song. The value of one credit (credit value) is arrived at by dividing the total number of credits for all writers and publishers by the total amount of money available for distribution for that quarter. For example, if there are a total of 10 million credits for a quarter, and there have been 35 million dollars collected for distribution that quarter, then the value of one credit for that quarter is $3.50.

The final number is the royalty payment. Here is how it works:

4,000 Credits
X
50% (.5) Share
X
$3.50 Credit Value
=
$7,000 Royalty payment



Internet royalties

With the explosion of the Internet and the ease of downloading music onto your computer, a whole new royalty arena has opened up in recent years. Record companies usually treat downloads as "new media/technology," which means they can reduce the royalty by 20% to 50%. This means that rather than paying artists a 10% royalty on recording sales, they can pay them a 5% to 8% rate when their song is downloaded from the Internet. In the case of downloaded music, although there is no packaging expense, many record company contracts still state that the 25% packaging fee will be deducted.

An alternative to this royalty payment method also exists for Internet music sales. While it is most often used by Internet record labels, it may still catch on as recording artists begin to push harder for it in their contracts. This other method creates an equal split of the net dollars made on music downloads between the record label and the artist. This net figure is arrived at after the costs have been deducted, including costs of the sale, digital rights management costs, bandwidth fees, transaction fees, mechanical royalties to songwriters/publishers, marketing costs, etc.

[whocares]

This is an interesting breakdown for the "average" person who doesn't really know the info, but may want to know it.

I think many people also understand that the only side to be on in the music biz, if you want to make tons of money, is the label side. They rape and pillage other peoples' work as if what they (the label) did the hardest work. Forget about all the time it may take to come up with a concept, then writing and actual song and recording and getting it just right. The biz in general sucks.

[McNeil]

Great article Shania!! very informative !!

Goddam labels/execs/white collars !!! Grrrr !!

[montyollie]

Thanks for posting this! It was really good reading.

[lights1961]

Great article Shania!! very informative !!

Goddam labels/execs/white collars !!! Grrrr !!

only flaw there... is that these same suits are the ones who help put the bands and artists on the radio, help book the early tours of their careers and push them to be the best they can be... with out that, most artist or bands would be in garages still.

Rick

[7 Wishes]

Shania, thanks for that information. The funny thing is, I recorded two CD's with my old band, and we self-produced and packaged 1,000 of our own CD's, which we sold for $10 at our gigs. We wound up selling out of the first pressing of the first CD, and sold about 750 of the second album. We kept our production costs low, and we actually made about $6 per CD. Granted, we only found a niche locally, but that's an illustration of how the internet has helped save melodic rock. The Outfield sold about 20,000 copies of their last record, and followed a similar pattern (except they had a worldwide audience and talent), and actually turned a fairly nice profit. There is a way around the big label bulls**t.

[SusieP]

Re tracking the songs played by covers bands...

I can only comment on how it works in the UK, but it must be pretty much the same elsewhere.

As a member of an Act who perform covers, I can tell you we perform at approx 3 different venues each week. We get a return booking every ten months, or so.
Every venue has to pay an Entertainments licence and a percentage of that fee goes to the Performing Rights Society.

On occasion we will be visited at the gig by people from the PRS.
They ask which songs we will be performing and who either composed or performed them originally. They then work out where the money goes. I carry a bunch of typed lists of every song we do and just hand them over when the PRS pay us a visit.

But these visits are not every single gig for every single covers Band.
So the PRS must just visit so many at random in a given time period, and then somehow calculate an average number of performances.

[The Fly]

Great read. Thanks for that info!

[Jenna]

Thank you----for the read---It appears you need to belong to MENSA---to understand what your paycheck is going to be-----------

[****]

A friend of mine worked in the Music Industry as a producer about 10 years ago. He said it is amazing how little the band eventually gets. I mean obviously they aren't poor - but its not what you would expect after paying for EVERYTHING they have to shell out.