Note: I got to know Ned when I worked at Windham Hill Records and I appreciate his willingness to post this informative piece here.
Edward (Ned) R. Hearn has represented clients worldwide in intellectual property and business matters related to creative artists, and technology and media-based companies. Ned's practice focuses on entertainment, internet, and computer software businesses and their convergence, intersecting content, media, and technology in the digital internet environment. He has worked with a vast client list during his 40 year career, including Windham Hill Records, Concord Records, Rounder Records, Ubiquity Recordings, Starbucks/Hear Music, Irene Cara, Michael Hedges, Will Ackerman, Ray Lynch, Paul Horn, Green Day, Joe Satriani, and RBL Posse. For more details, see www.internetmedialaw.com.
The primary sources of income from the commercial exploitation of a song include performance rights, mechanical licenses, synchronization licenses and print rights. These sources can be exploited through film, television, videos, records, CDs, MP3 downloads, streams, sheet music (both physical and digital), commercials, broadcasting, internet distributions, as well as other forms of exploitation.
All income from the commercial exploitation of a song, no matter what its sources, is “publishing” income. Generally, if the songwriter is not his or her own publisher, the terms of the contract between a songwriter and a publisher will determine how the publishing income will be shared between them. Usually, the share is fifty percent (50%) of all publishing income to the publisher, and the other fifty percent (50%) of the publishing income to the songwriter. The industry, however, normally uses the terms “publisher’s share” and “songwriter’s share”. Don’t confuse the use of the word “publishing” before the word “income” as always synonymous with income that goes to the publisher. It may be easier if you think the money generated from the commercial exploitation of the song in the form of a pie; with the pie being cut approximately in half, with one side going to the publisher (“publisher’s share”) and the other to the songwriter (“songwriter’s share”).
If the writer has his or her own publishing company, then both the publisher’s share and the songwriter’s share will go the writer. When the writer has his/her own publishing company and enters into a venture with another publisher to exploit the song, they often enter into what is known as a co-publishing arrangement. In this case, generally speaking, the songwriter will continue to get one-half of the pie (i.e., the songwriter’s share), and the songwriter’s publishing company and the other publishing company will, in turn, split the other one-half of the pie (i.e. the publisher’s share), fifty/fifty or perhaps some other proportionate division. With the fifty/fifty split of the publisher’s share, the songwriter would in effect be getting approximately seventy-five percent of the entire pie and the publisher the other twenty-five percent.
I should stress, however, that these observations are merely general. Each deal between a publisher and songwriter can result in a different division of income. The primary sources of commercial exploitation for a song are explained below. Also note this discussion applies to United States-based uses of music and fees, and practices and publishing royalty rates may vary in other countries.
1. Performance Income
Essentially, performance income is money that is generated by the performance of the song, whether live, in a club or broadcasted over television or radio, or streamed over the internet, or delivered by cable or satellite, or any other kind of performance. In the United States, Broadcast Music, Inc. (BMI), the American Society of Composers, Authors and Publishers (ASCAP) or SESAC act as collecting agencies on behalf of publishers and songwriters to collect performance income. They are known as performing rights societies. Each performing rights society, through a series of complex formulas, determines the appropriate share to be paid to the publisher and to the songwriter based on all the monies collected by the performing rights society through a quarterly reporting period and the number of performances of a particular song through that quarterly reporting period, and whether the songs are performed on radio or national, regional, or local television broadcast, or in venues, such as concert halls or clubs. The performing rights society then pays the publisher’s share directly to the publisher and writer’s share directly to the writer. If there is a co-publishing arrangement with the writer and publisher, then the writer usually looks to the publisher for his/her portion of the co-publisher’s share, but not the writer’s share, which he or she will receive directly from the performing rights society. Sometimes the portion of the publisher’s share that is to be paid to the songwriter as a co-publisher will be paid directly to the songwriter if the other co-publisher agrees.
2. Mechanical Royalties
The mechanical royalty is a payment made for the right to use a song on a commercial recording that is released for sale to the public in the form of a phonorecord, whether a CD, a digital download, or some other medium. Under the most recent update of the 1976 Copyright Act, that royalty is fixed at 9.1¢ per song or 1.75¢ per minute of playing time, whichever is greater per record made and sold or downloaded.
For mechanical royalties on ringtones, the United States Copyright Office has ruled that ringtones are phonorecords, and that compositions used for ringtones do fall under the compulsory licensing provisions of the United States Copyright Act. As such, the publishers are not free to withhold permission to use their compositions or to require the ringtone companies to negotiate rates with the publishers for the royalties to be paid for ringtones. The Copyright Office has issued a ruling setting the mechanical royalty rates for ringtones at 24¢ per download.
If a song has never been released on a phonorecord for sale to the public, then there is no obligation on the part of the owner of the song to allow someone else to record the song. If another person wants to record it, then the owner can negotiate whatever fee the owner wants to charge, although usually the statutory rate is the maximum that is charged. Once, however, the song is released on a phonorecord which has been sold the public (including as a ringtone), then thereafter anyone may obtain a compulsory mechanical license under the Copyright Act to record the song on a record that is sold commercially to the public. The person who records the song, however, has the obligation to pay the mechanical licensee fee to the publisher of the song. The money then gets divided between the publisher and the writer in the manner described above. The publisher generally collects all of the mechanical license fee, retains its share, and pays the songwriter his/her share if the songwriter is not his or her own publisher.
The Copyright Office also has adopted the industry negotiated mechanical royalty rates for streams and “conditional downloads” or “incidental” DPDs, e.g., digital phonorecord deliveries that time out or that are streamed on demand and temporarily buffered or cached in that process. These rates currently are 10.5% of revenue less music performance fees (if applicable) retroactive to January 1, 2008, with an 8.5% rate less music performance fees to apply to the period, January 1, 2001 to December 31, 2007, subject to minimal royalties which are described in detail in the Schedule for these fees released by The Harry Fox Agency (see www.harryfox.com for the formula on the computation of these minimum rates). These rates are in effect until a determination is made to review and revise the mechanical royalty rate schedule.
(For more detail, see Section IV, “Digital Phonorecord Deliveries of Music”, in my article “Digital Downloads and Streaming: Copyright and Distribution Issues”.)
3. Synchronization Rights
If someone wishes to use music in connection with a soundtrack for a film, television program, webisode, video, or some other audio/visual format or media, then they must obtain permission from the owner of the music (the publisher or the songwriter if he/she has not entered into an agreement with a third party publisher). The owner of the music licenses the producer of the program the right to use the music on the audio soundtrack of the visual work. Without that license, the use of the music on the program’s soundtrack would be an infringement of the rights of the owner of the music. Usually, a flat fee is negotiated for the privilege of using the music on a soundtrack, and the amount to be paid depends on the amount of use made of the music, the type of use to be made of the music, the popularity of the song, and the relative bargaining strengths of the producer and the owner of the music. If the music owner is the publisher rather than the songwriter, it collects the synchronization fee, deducts its share and passes on to the songwriter his/her share.
4. Print Music Income
Money is also generated from the sale of sheet music of a song, whether as a single song or whether as one song in a book containing a number of songs, and whether in print media or digital downloads of “sheet” music. Most music publishers enter into agreements with print publishers who print the sheet music and pay a royalty to the publisher of the song for the right to sell copies of the song in sheet form. This royalty is then paid to the publisher who deducts its share, and passes on to the writer his/her share. Publishers receive between 40¢ to 50¢ per single sheet music sold and approximately ten percent to twelve percent of the retail price of the book or folio multiplied by a fraction of the number of songs licensed by the publisher in the numerator over the total number of copyrighted songs in the book in the denominator. Writers get between 6¢ to 10¢ of the 40¢ to 50¢ (but writers can negotiate for a better share) and ten percent to twelve percent of the wholesale price of a book based on the same proportionate formula explained in the preceding sentence. Sheet music generally is available through digital download websites, such as, for example, www.musicnotes.com, and the economic arrangements are similar.
The preceding is a very elementary discussion and is not meant to provide an in-depth insight to the intricacies of the money system in the music industry. It does lay out the basic framework and should provide you with a fundamental understanding. For a comprehensive study of music publishing income, see Money, Music & Success: The Insider’s Guide to Making Money in the Music Business (7th edition, 2011) by Jeff Brabec and Todd Brabec, published by Schirmer Trade Books.
By Edward (Ned) R. Hearn