Friday, March 19, 2010

Royalties: How, What, Who, Why, Where, When

We all know what royalties are, to some degree--that magical amount of money that somehow makes it way into the hands of songwriters even many years after the song in question was recorded. It's how successful songwriters make the incomes that up-and-comers aspire to enjoy. Some songs can generate millions!

But how exactly do royalties work? What are the different types of royalties? Who earns them, and when? Why do recording artists and songwriters earn different types of royalties? Where does the money come from? And how often can a songwriter expect to receive that exciting little check in the mail?

The first thing to remember about how royalties work is what we mentioned in an earlier post about copyright law. Typical music contracts dictate that when a song is published, the copyright belongs to both the song writer and publisher. However, here at HillTop Records, we do it this way: The songwriter owns and retains all rights to his or her songs (words and music) while HillTop owns only our musical arrangements and recordings.

Because of basic copyright laws, songwriters and publishers are due royalties every time the song is performed in public. This includes on the radio or TV and in live venues like restaurants, nightclubs and concerts. This is how songwriters can make a considerable chunk of their income. Royalties from live performances are paid to songwriters and publishers by Performing Rights Organizations (P.R.O.) like ASCAP, BMI, and SESAC. Different countries have different organizations in charge of the collection and distribution of these performance royalties and the actual numbers vary by venue and format. If your song is performed during prime time on a major network TV show, you can expect a pretty impressive royalty check!

Recording artists, on the other hand, do not earn the same performance royalties because they do not own the copyright to the song. Instead, recording artists earn the majority of their royalties when recordings are sold. Also, since the Digital Performance Rights in Sound Recordings Act of 1995, recording artists do earn some form of royalties from public performances. However, these royalties are limited to when music is played in a non-interactive, digital format (ie. online or via satellite) and the listener is a subscriber to the service.

The songwriter, publisher and recording artist also earn what are called "mechanical royalties." These are the royalties derived from a percentage of record sales, and paid by record companies. They are also the royalties most difficult to understand. Mechanical royalties are regulated by different parties and paid at different rates to songwriters/publishers and recording artists.

If you are a songwriter, the percentage that you are paid for a published song is called a "statutory rate" and is dictated by the U.S. Congress. Songs written in 2003 were set at a statutory rate of about 8.0 cents per song. That rate jumped to 8.5 cents per song in 2004 and to 9.1 cents per song in 2006. Keep in mind that these numbers are all rounded (the actual percentage is much more exact) and they can vary by song length. They can also be negotiated (usually lower) by the record company, especially if the songwriter and publisher are the same person.

Mechanical royalties work much differently for recording artists. They are actually much less, well, mechanical. The rate that a recording artist is paid can range anywhere from 8 to 25% of the recording's suggested retail value, depending upon the clout of the artist and the terms of his or her contract. Also, recording artists typically earn what is called a "recoupment" or an advance that is later deducted from royalties. Other factors that effect the artist's net income are free giveaways, record return policies, and allotment for broken or damaged shipments. As the industry continues its shift to a virtual marketplace, these factors are becoming less influential. Everything is, however, still open to negotiation.

If you are both the songwriter and the recording artist, you should be familiar with what is called a "controlled-composition clause." This clause allows a record company to deduct as much as 25% from your recording artist mechanical royalties so as to make up for the high performance royalties you will supposedly earn as the song's writer.

The songwriter and publisher can also earn synchronization royalties, which are slightly different from performance royalties. Synchronization royalties pertain to when a song is used as background music and spoken over, like in a movie or commercial. Say your song is integrated into a pivotal scene in a film. The production company will then owe you synchronization royalties for airing the movie to the public. Additionally, if/when a soundtrack for the project is sold, you will earn mechanical royalties from that as well.

Songwriters also earn foreign royalties when a song is used in another country and print royalties when the song is sold in print form (ie. sheet music.)

As of 1992, there is yet another way for the copyright owner to earn royalties on a song. This is through the Audio Home Recording Act, which states that manufacturers of recording devices (like tape recorders and CD burners) and blank recording media (blank tapes, blank CD's, etc.) are required to pay royalties to songwriters and publishers. The act was put into effect to counteract the potential loss suffered by songwriters, publishers and artists when an unauthorized copy of a song is made at home.

To answer the question of how often a songwriter can expect to receive a royalty check in the mail: Payments are made quarterly as long as certain minimum payment amounts have been realized, and the checks come from different places. Your performance royalty checks (accumulated and distributed by P.R.O.) are separate from your mechanical royalty checks, which are first sent from the production company to the publisher. The publisher then takes out his or her agreed-upon cut (say, 50%) of the mechanical rate before sending the rest to you.

Assuming that your song continues to gain air time, you can receive royalty checks your entire life (plus 70 years, which is the length of the international copyright.) The amount of these checks can vary drastically. Marketing, musical genre, the economy--all of these factors come into play.

Nowadays, internet royalties are also a hot issue. Due to the fluid, intangible nature of new technology, internet royalties are still very much open to negotiation. For the most part, they remain lower than standard mechanical royalties because there is no concrete equation from which to draw a numerical rate. However, this standard may be about to change. Debates over online mechanical royalties and digital performance royalties (and the grey area between the two) are still ongoing. Hopefully a mutually beneficial agreement will be reached soon. We will, of course, keep you updated.