How Music Royalties Are Calculated & Reported – An Industry Insight

This is by far, a very common doubt and one of the most asked questions in the industry. On a personal note, most of my client have popped this question at one point or the other. Well, to understand how music royalties really works? We need to go way back to understand certain important basics before we jump right in.

First off? What is Music Royalty

Music royalties are payments that go to recording artists, songwriters, composers, publishers, and other copyright holders for the right to use their intellectual property. The moment you voice your song in the studio and its final product is ready? It becomes your intellectual property. This intellectual property is whole-fully protected by copyright law. Most likely, copyright laws (in every country) give artists these exclusive rights to their work.

A copyrighted music is entitled to royalties (payments) when such music is exploited at certain levels. You get paid at different levels for different reasons and use of music.

What are the types of music royalties?

In as much as you may think of royalty as just a term? You see, there’s more to it. There are quite a few different types of royalties — what makes this whole topic somewhat complicated, is that even the same type of royalty can be paid out in different ways, depending on the context of use.

Public performance royalties, for example, are paid out by both your local cafe and global streaming heavyweights — but, as you might’ve guessed already, the processes there are very different. Then, to complicate things even further, the rates and payout processes also vary greatly depending on the country.

There are even some royalty types that are present in one country, and not in the other (for example, in the US, master rights holders don’t get royalties for radio airplay, while in much of the rest of the world they do). Are you getting confused? No worries. Let look at it from this perspective.

First, it is important to know and understand all the different types of music royalties. Then we will discuss how these types of music royalties are calculated. Good to go?

Artist Royalty Flowchart

1. Streaming Royalties

Just as we discussed above? For every level of exploitation of your music, you are entitled to certain percentage of payment as royalty. In this digital age, streaming royalties seems to be one of the most common types of royalties (sources) of which music artists pay attention to.

Music streaming is now at the very center of the recording industry. The chances are that the recording artist will make most of the money on streaming, whether it’s an up-and-coming local act or an international superstar — although the later will make about a million times more. As A Boogie Wit Da Hoodie puts it: “we ain’t even got no CDs out”.

CHECK THIS OUT: Calculate your streaming royalty with this tool

At the same time, the music streaming market is becoming exponentially more and more complex. As of 2018, there were over 200 DSPs with streaming capabilities, from regional players and niche services to international giants of Apple, Spotify and alike.

How does streaming royalties work? Well, in using the most basic explanation, streaming royalties are generated across streaming platforms over the total numbers of streams (plays) per song or project. Streaming royalties are highly dependent on the numbers of listeners consuming your music on these streaming platforms. It is largely a game of numbers (quality numbers to be specific).

For each monetized stream, you are entitled to cents of royalties (payment).

Oh really, Just like that?

You see, streaming platforms are built on business modules, by the reason of uploading your songs on these platforms? It means you’re in business with them. If they however end up making much profit from your product (music), you will be entitled to much streaming royalties.

These streaming platforms charge a substitution fee for the use of your content (music) on their platform. If for instance, out of 15 Million premium subscribers, 7M streamed your music? It just means your product (music) is: worthy, marketable, viable, sort after, has much traction, has given users value for their money (subscription fee) & has generated profit for the streaming platform. So, from the profit generated, you (owner of the content) gets a sliced cut dished-out to you as royalty (at the end of your first music circle).

This is just the simple calculation and business module behind digital streaming platforms & royalty payments. However, there are deep calculations to this, as different streaming platforms have different royalty rates. Check this list for digital streaming royalty payment rates.

There are also different factors that affect these streaming royalties. Such as:

  • Which country fans are streaming an artist’s music
  • What type of account are the streaming from
  • Relative premium pricing and currency value in different countries
  • An artist’s royalty rate based off of in-app advertisements

2. Mechanical Royalty

Mechanical royalties generate music income for the physical or digital reproduction and distribution of copyrighted works. This applies to all music formats such as vinyl, CD, cassette, digital downloads, and streaming services.

For example, record labels pay mechanical royalties to songwriters every time they sale a CD of their music. A copyright owner can also collect mechanical royalties from a digital music distributor service if they are independent.

How Are Mechanical Royalties Calculated?

The rate for Mechanical Royalties is different, depending on your country & the regulations. In the United States (for instance), it is set by the US government and is $0.091 per CD and digital download. That’s 9.1 cents to the composition owners every time the sound recording is pressed to a CD or downloaded from an online store. This rate can only change if the government legislates it higher or lower (hopefully higher) and is paid out by your Publisher, Publishing Administrator or Publishing Services.

There are other ways mechanical royalties are generated. This includes:

Royalties from Physical CDs

Physical CDs might be on their way out, but if you are signed to a major or independent record label, they will probably still be an ingredient in your royalty income for years to come. As Alaba International Market is still very instrumental in the industry (physical sales) And even if CDs go the way of the dinosaur, you can ironically apply this same concept to vinyl sales.

Here is the basic concept:

Number of Sales
Wholesale Price
Royalty Rate
X ________________________
Total Royalties Earned

A real-world example: if you are selling an album at a wholesale price of N3000 and your royalty rate is 15%, you earn N450 per album sale. The remaining would go to your record label (assuming you’ve paid off your advance).

RELATED: The Music Contract: As Explained By Bar. Akinyemi Ayinoluwa

music royalty

3. Performance Royalty

Performance Royalties are generated when copyrighted works are performed, recorded, played or streamed in public. This includes radio, television, bars, restaurants, clubs, live concerts, music streaming services, and anywhere else the music plays in public. Performance Royalties exist in two parts: Songwriter Royalties, and Publishing Royalties. Both are collected and paid out by your Performing Rights Organization (PRO).

Performing Rights Organizations collect Performance Royalties for artists that affiliate with their organization. In Nigeria, there are two major Performing Rights Organizations: COSON & MCSN. They pretty much do the same thing, that is; collection, protection and reporting royalties to artists who are registered members.

When registering a song with your PRO (Public rights organization) , you will notice that your Performance Royalty is actually split 50/50 into two sub-royalties which are:

Songwriter Royalties

Songwriting and Publishing. Songwriter Royalties will always be paid out to the credited songwriters of the composition. There is absolutely nothing any record label, publisher, producer, manager, or band-mate can do to take this royalty away from you. If you credited properly, you will get paid.

Publishing Royalties

Publishing makes up the other 50% of the Performance Royalty and, unlike Songwriter Royalties, Publishing can be assigned to outside entities called publishing companies. Music Publishing Companies temporarily take ownership of your songs and manages the lifespan and monetary potential for your music. But if you are not signed to a publishing deal with a Publishing Company, you might be missing out on 50% of your Performance Royalties. To avoid this, you can enlist the services of a Publishing Administration Company who will collect your Publishing Royalties on your behalf.

4. Synchronization Royalty (Sync)

Synchronization royalties generate income for copyrighted music paired or ‘synced’ with visual media. Sync licenses grant the right to use copyrighted songs in films, television, commercials, video games, online streaming, advertisements, music videos, and any other visual media.

However, a synchronization license does not include the right to use an existing recording with audiovisual media such as a YouTube video. A licensee will need a master use license before using copyrighted music with a new audiovisual project. This is an agreement between the master recording owner, such as a record label, and the person seeking permission to use the recording.

Any use of protected music in an audiovisual project will need a master use license and a sync license. It doesn’t matter if it’s a full song or short sample. For example, you need both a master and sync agreement before syncing up the latest Jauz track with your wakeboarding video on YouTube.

Conclusion

As we have seen, the four various royalties types are generated & earned differently depending on the level of exploitation of such content. Predictably, in the near future, new royalty streams will emerge in the music industry as technology continue to evolve. What ever the case may be, you only need to continue creating music as you keep your eye on the bright future

However, learning how to navigate the complexities of royalties can seem overwhelming. I hope this guide gave you a better understanding and the confidence to go about the music business.

Digital Junkie

Digital Junkie

I am married to two wives. Music & Tech. I love them all. **Yikes

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