[UPDATED] The controversy surrounding music streaming and artist compensation has been earning quit a bit of press lately. Still, the actual process of licensing, publishing, and compensating those involved in music publishing is complex and convoluted. This article offers a clear and detailed breakdown of exactly how music rights and payments work.
Guest Post by Glen Sears of MediaNet
“I wish there had been a music business 101 course I could have taken.” -Kurt Cobain
If you write a song, you own that song. Maybe your record label owns a piece of your song in exchange for recording and distributing it. When your friend Andrew buys your song, the label gets a cut and you get a cut. The service it was bought from gets a cut, too. The more popular your music is, the more it gets used, the more everyone makes.
It’s a simple formula, and it’s how most of us think the music industry operates. In reality, this idea is quite inaccurate. Every song produced is a labyrinth of split ownership, licenses, and rights subject to decades-old laws spread across 100s of countries. They determine where a song can be played, how it can be used, and where the money goes afterward.
Calls for transparency and fair pay in the music industry have finally hit critical mass, capturing the attention of news outlets like NPR and building support for activism by stars like Taylor Swift. TIDAL was launched as an attempt to increase the amount of money artists are paid from streaming. Berklee College of Music released a 28-page report on its suggestions for repairing digital music. Everyone cares about music industry payments now.
It’s great news. But what about the next time you’re at a party and someone starts the “artists aren’t paid enough” conversation? How can anyone speak about music industry payments when they aren’t armed with all the information?
How does song ownership and payment really work, and can it be explained in a way non-industry experts understand?
Part 1 — What Is Music?
Sound Recording, Composition, and Copyright
On January 10, 1956, Elvis Presley recorded his seminal hit “Heartbreak Hotel” at RCA Studio B in Nashville. The moment the master tape stopped rolling, the genre-defining song became two main elements: a Sound Recording, and a Composition.
A song is made up of many pieces: lyrics, notes, structure, instrumentation, and melody. In copyright law, these intangible qualities that constitute a song are known as the Composition. When the composition is recorded, the recording of that composition is known as a Sound Recording. The sound recording is a “single acoustic event” of the composition that was put to tape. Two separate, uniquely important entities.
Making a sound recording from the composition grants special rights (called copyright) to the songwriters. Recording music, however, is a recent technological advance. It is not the only way to turn a composition into a copyrightable work. The intangibles of music also become a composition capable of being copyrighted the moment they are written down on paper.
We’ve been writing down musical compositions for a long time.1800 years before Elvis was lamenting his loneliness, an Ionian songwriter was penning the Seikilos epitaph in what is now Turkey. It is the oldest-known complete composition (notes and lyrics). By today’s copyright standards, it became a copyrightable composition at the moment it was inscribed in stone.
The Seikilos lyrics & melody (via Wikipedia)
Copyright is, plainly, a set of exclusive rights granted to the owner of a creative work. For a composition, this includes the exclusive right to publish works (recordings or writings) depicting the composition. Copyright requires anyone else wanting to use the composition to obtain permission (called a License) from the owner.
Back in Nashville, the “Heartbreak Hotel” sound recording was also now a copyrightable work. Almost all artist-label contracts dictate the copyright in the sound recording is granted to the label. Copyright law now requires anyone wanting to use the actual recording of the song to obtain permission from the label.
Two distinct pieces of intellectual property (each with their own copyright rules) now existed for “Heartbreak Hotel:” (1) the composition, and (2) the sound recording.
Part 2 — Reproduction
Licensing, Performing, and Pressing Play
Elvis has left the building. The lights on the 3-track RCA console have gone dark, and the 2" master tape reels have been taken to the factory, where they’ll be transformed into 7" vinyl records for sale. Multiple forms of intellectual property have been created. It’s time to start using them.
You might be surprised to know that Elvis didn’t write “Heartbreak Hotel”. It was written by Mae Boren Axton (aka “Queen Mother of Nashville”) and Tommy Durden. Elvis did manage to get a songwriting credit, but many believe it to be a vanity credit. These 3 songwriters are the technical owners of the composition. RCA Victor Records is the sound recording owner, and Elvis Presley is the performing artist for the sound recording.
Fast forward to 2015. You own a boutique digital streaming subscription service, one that serves exclusively Elvis music. In order to allow your listeners to press play on “Heartbreak Hotel,” you must obtain 3 different licenses:
a license to use the sound recording (specifically, Elvis’ performance),
a license to reproduce the composition (known as a “mechanical license”),
and a license to publicly perform the composition (“public performance” constitutes any exhibition of the song — radio, live shows, or even on the speakers at Steak Shack).
Each license is an agreement to pay the rights holder an arranged amount of money for the use of their intellectual property. Obtaining these allows Elvis Music Service to run, but only for streaming on-demand. There are other licenses that are needed for other uses of music. For example, licenses also must be obtained to attach music to moving pictures (a synchronization license), and to publish a composition’s words and notes on paper (a print license).
Each of these rights is owned by a combination of Elvis, Axton, Durden, RCA, and various third parties (more on that in a minute). Each expect a portion of the money earned from the use of their contribution to the work.
In addition, every different kind of digital music use (streaming, downloads, radio, movies) requires various combinations of these licenses in order to be legal. Some licenses are even granted by copyright law (called “Compulsory Licenses”), with pre-determined royalty rates.
In short, using music for any commercial purpose requires a litany of license acquisition from the owners; and that doesn’t even begin to cover payment.
Part 3 — Payments
Labels, Publishers, Societies, and Performing Rights Organizations
Paying labels for sound recordings is relatively straightforward. When the recording of “Heartbreak Hotel” is used, RCA Victor (now simply RCA) Records is paid for their ownership of the sound recording. Sound recording royalties are delivered on almost every use of a song.
But what about the composers, lyricists, and songwriters? How do they get paid when their compositions are reproduced on CD, played on the radio, digitally streamed, or otherwise used? In our example, payment comes from mechanical licenses (for compositions), and public performance licenses.
In theory, the Presley-Axton-Durden trio could have managed the right to the composition by themselves and act as their own publisher. Acting as your own publisher can be time-consuming and confusing, so most songwriters and composers opt to be represented by a publishing company like Warner/Chappell, BMG Chrysalis, Kobalt, Sony/ATV, and others — companies that promote the composition and ensure songwriters and composers get paid when their compositions are used.
A sampling of music publishing companies (via Craig Gentle)
Publishing companies license and collect mechanical (which you remember are royalties for the reproduction of a composition) and other royalties and distribute them to the proper songwriters and composers. These deals can take the form of a 50/50 “co-publishing” agreement, or a “publishing administration” deal. The former sells part-ownership outright in exchange for payment, the latter retains 100% ownership but pays the publishing company an administrative fee to collect royalties.
Performing rights organizations (PROs) are societies responsible for collecting income on behalf of songwriters and music publishers when a song is performed to the public. “Public performance” has come to mean much more than just radio or live performance, encompassing digital streaming as well.
In the U.S. there are 3 major PROs: ASCAP, BMI, and SESAC. They perform a similar job to publishers, and often collect royalties directly from users. The difference is that PROs are focused on public performance rights, not reproduction rights.
Part 3.5 — Payments, Complicated
A Thought Experiment
Remember your Elvis-only streaming service? Now that you know about payments, what would it be like for you to pay royalties on a single stream of “Heartbreak Hotel?” Let’s make up one possible scenario. (Disclaimer: this is not an actual breakdown of the “Heartbreak Hotel” ownership stack, and is only for the purpose of example.)
Your company makes $1 per play of “Heartbreak Hotel.” In reality the number is many times smaller than that, but for this example we’ll embellish (we wish music plays made that much). Your Sound Recording license deal stipulates a 60% payment to RCA Victor, so $0.60 goes to them.
In addition, you owe royalties to the songwriters: Presley, Axton, and Durden. Let’s say Presley and Axton are with Warner/Chappell, and Durden is with Sony/ATV. Each songwriter holds an equal share of the composition rights.
The mechanical royalty rate (set by Congress) is determined using a 4 step process with 15 sub-steps. Here is just one example of the mathematics and process used to determine the amount of money earned by songwriters:
Only one step of 4 in the royalty calculation process (via the U.S. GPO)
If reading this excerpt seems confusing, that’s because it is. Mechanical royalty calculations are extremely complex. In essence, publishing royalties are paid based on the revenue of the entire music service, not each work. The series of calculations eventually spits out the “Per-Work Royalty Allocation” you see above. This is the amount each composition earns based on the total number of plays. This is paid to the publishing company, to be delivered to the songwriters.
Before that payment (let’s say a total of $0.30, $0.10 for each songwriter) is delivered to the songwriting trio, it is subject to the terms of their individual publishing agreements. Maybe Axton and Presley have a deal with Warner/Chappell to retain 100% of royalties with a 10% administration fee, so they each receive $0.09 and Warner/Chappell receives $0.02.
Durden, on the other hand, may have a co-publishing deal with Sony/ATV which splits the publisher royalties 50/50. In this case Durden retains his 50% writer’s share of $0.05, and then splits the publisher’s share of the remaining $0.05 with Sony/ATV. Each get $0.25.
It’s worth noting here that royalties are the primary income for songwriters and composers.
On the performance royalty side (remember, in this case a digital stream counts as a “public performance”), the PRO also receives a percentage of your music service’s overall revenue. Let’s say all the writers are represented by ASCAP. When that money is distributed to ASCAP, another deal determines how much the trio receive of that payment.
One more thing — these numbers are only true for one type of streaming music service in the United States. If “Heartbreak Hotel” is played on a different type of service, things change. In the UK, another entirely different set of contracts and rules. Russia? Same story. Each country has its own societies, administrators, and organizations, along with different laws that must be adhered to.
All to pay for one single play, of one single song, on one single service.
Part 4 — The Conversation Now
Transparency, Fairness, and The Future
Now that you know, in somewhat simple terms, how music is owned and paid for the current conversation around transparency and fairness can be seen in context. The information required to process and pay for digital music use often passes through at least 6 different entities. Every step of the way, data has the opportunity to be obscured or lost.
Berklee’s Fair Music Report and its contributors see this as the primary issue facing digital music today. When an artist’s song is played, it can be exceptionally difficult to know who needs to get paid. Or how much they are owed. Or where the money is.
It’s simply too easy for big companies to sit on money because they can’t find out who to pay, or don’t care to know. It’s time to demand more accountability and transparency. — Casey Rae, Future of Music Coalition
From outside the industry, it can seem like a simple problem. Fix the pipes, centralize the information, make it clear where money is going. But these complex practices have had over 100 years to grow, and not everyone has made the graceful transition to digital. The truth is it isn’t a surprise digital music is broken, and it isn’t any one person’s fault or singular responsibility.
Instead, every company working in digital music has to work together to ensure music use is licensed, tracked when distributed, reported in an easy-to-understand format, and properly paid for. Paid to labels, artists, producers, musicians, publishers, PROs, songwriters, composers, lyricists, administrators — everyone.
Every contributor to a piece of music has the same right to proper payment. We’re all in this battle together. Conversations about how much each person in the musical supply chain is paid won’t mean a thing until we can ensure the existing contracts are fulfilled. Music needs systems that tie ownership, rights, licensing, reporting, and payments together in order to succeed.
MediaNet is building those systems, but we can’t do it alone. The entire music industry needs to know for certain who owns what and how much they’re owed — then we can begin deciding if it’s enough.
Glen Sears is Editorial Content Manager at MediaNet, powering the world’s best-loved music apps with catalog, licensing, payments, reporting, and rights management. Email him at firstname.lastname@example.org, or chat with us on Twitter: @mndigital