There are a variety of methods that your favorite musicians monetize their songs. In what ways are they able to sustain themselves as artists, songwriters, and producers? Sure, you could say, "By selling albums or concert tickets, of course." Although they do get money from such places, a sizable chunk of it comes from a less apparent source: royalties from their music.
As you know, the music industry couldn't function without these royalties. Everyone who is part of the field knows that it's an essential part of how everything works.
Artists, songwriters, and anyone with rights to an asset have used Royalty Exchange to sell investors a piece of their future royalties. This way, they can get a large amount of money all at once, which they can put toward future investments, creative endeavors, or debt repayment.
But music royalties are a complicated business. For that reason, we will go more into the various forms of music royalties, the parties involved, and the process by which the creators receive their payment once a song has been played.
What Are Music Royalties?
When people have assets, like songs, they can let others use them in exchange for a payment called a "royalty." Payments in the music industry are commonly referred to as "music royalties."
You earn a share of the profits generated from using your asset instead of receiving a single payment. A "royalty interest" means having the ability to receive a portion of future royalty payments.
Music royalties are beneficial because they represent a significant portion of the earnings. The owner of the music royalty is entitled to their portion before anyone else receives payment, including high-ranking executives or shareholders.
Music royalty payments are usually made on a regular basis, like monthly or every few months. And as usage increases, the potential for earning more money also increases.
Music royalties can be more comprehensible when considering the intellectual property (IP) rights that enable their existence.
It is common knowledge that copyright laws are in place to safeguard musical works. Therefore, the originator of a unique melody is legally bestowed with the sole privileges of that composition. Additionally, the owner has the authority to control how the song is used and to collect royalties when it is used by others.
There are two main types of music copyrights that generate royalties:
- The Musical Composition Copyright
This covers the song as it is written, including the melody, lyrics, and arrangement. It is typically owned by the songwriter or their music publisher. Think of the musical composition as the blueprint of the song.
- The Sound Recording Copyright
This covers a specific recording of the song. It is typically owned by the recording artist or their record label. The sound recording is what you actually hear when you play a song.
Take, for instance, the song "Knocking on Heaven's Door." The composition copyright protects the song as written and is owned by the songwriter. This is the person who wrote the melody, notes, lyrics, and so on.
When a song is recorded, another copyright is created called the Sound Recording. The song's copyright is owned by the person or band who records it.
Bob Dylan is credited with writing and recording the original version. He has the exclusive rights to the musical composition as the songwriter. He, being the recording artist, also holds the copyright for the sound recording of his particular version. However, multiple songwriters may work together to write a song, and each has a royalty interest in the composition's copyright.
When Eric Clapton recorded his well-known cover of the song, he obtained a new copyright for his version. But, since he didn't write the song, Bob Dylan still retains the copyright to the musical composition. When Clapton's version is played, Dylan still receives royalties because he owns the underlying composition.
This system of copyrights enables various individuals involved in the music industry, such as songwriters, publishers, artists, and labels, to generate income from a single song. But how do these royalties work, and what are the various types?
Key Types of Music Royalties
Now that we've covered the basics of music copyrights, let's examine the three main types of royalties they generate.
Mechanical Royalties
Getting Paid for Reproductions
Whenever you purchase music on iTunes, listen to it on Spotify, or buy a physical CD, you're actually interacting with a copy of that song.
These reproductions generate mechanical royalties, which, in turn, are paid to songwriters and publishers to compensate them for the use of their compositions.
You can think of mechanical royalties as the "manufacturing" royalties.
And in the US, these rates are set by the Copyright Royalty Board, ensuring songwriters and publishers receive a fair cut whenever their songs are reproduced.
Performance Royalties
Collecting for Public Performances
When a song is performed in public, whether it is broadcast on television, streamed online, or sung live at a venue, royalties are generated. These are performance royalties. These royalties can be found throughout the world.
Performance Rights Organizations (PROs) such as ASCAP, BMI, and SESAC are the entities that are accountable for the collection of royalties on behalf of publishers and songwriters. PROs are responsible for monitoring public performances, collecting royalties, and distributing those royalties to the owners of the rights.
Synchronization Royalties
Placing Music in Media
When music is licensed to be used in movies, TV shows, commercials, and video games, synch royalties are paid out.
People who own the copyright (usually a publisher or record label) and people who want to use the music (like a film studio or ad agency) talk about syncing licenses directly with each other.
There is usually a one-time fee for these licenses. The amount depends on things like how popular the song is, how long it will be used, and what kind of media it will be used in.
Stakeholders in Music Royalties
Think about all the people who worked on a song you really like. Different people or groups work on different songs and make money off of them.
Artists
Artists are often the first people to come to mind. The people who perform bring the music to life, whether they sing, rap, play an instrument, or do a mix of these things.
Record labels often make deals with artists. Written deals would state that the labels will distribute and promote the artists' music.
Additionally, the artists can also get royalties from people who buy and stream their music.
Songwriters
Artists may be the public face of music, but songwriters give it its heart and soul. You can say they are the starting point in all of these.
These people create the melodies, lyrics, and compositions. In short, without the work of songwriters, there would be no songs and artist wouldn't have something to perform.
A lot of songwriters work with music publishers to make sure their songs get published and get paid royalties. Some songwriters write music just for certain artists, while others write songs on their own and offer them to different artists. It doesn't matter what approach they take; their artistic contributions are very important to the music that we love.
Publishers
Songwriters come up with the ideas for music, and publishers run the business side of things. Publishers of music work to promote songwriters and their songs so that they can be heard by many people and make money.
Music publishers are in charge of licensing songs and making sure that they are used legally. Aside from that, maybe the most important, is that publishers make sure that the people who wrote the songs are paid properly for their work. In addition, they are very important for getting the songs heard by artists, labels, and other possible users.
Record Labels
As the companies that make, distribute, and promote sound recordings, record labels are very important to the music business.
They put money into artists and make sure they have the tools and help they need to make and promote their music.
In turn, labels get paid royalties when people buy or stream the music. After that, a portion of these royalties is given to the artists and other people who had a hand in making the music, like producers and session musicians.
Record labels make it possible for a lot of people to hear music, and they have a big effect on the success of artists and the business as a whole.
The Flow of Royalties: Composition vs Sound Recording
So, how does money flow from music users to rights holders? It’s different depending on if it’s about composition royalties or sound recording royalties.
Composition Royalties
Composition royalties, which compensate songwriters and publishers, include mechanical royalties, public performance royalties, and synchronization fees.
Here's how they typically flow:
Mechanical
For physical sales and digital downloads, the record label collects payment from retailers and then passes the mechanical royalty on to the publisher, who shares it with the songwriter (usually a 50/50 split).
For streaming, the process has recently changed with the launch of the Mechanical Licensing Collective (MLC) in 2021. Now, streaming services pay a blanket license to the MLC, which is responsible for locating and paying the songwriters and publishers.
Performance
Whenever a song is played publicly (on the radio, in a live venue, etc.), performance royalties are generated. These are collected by Performance Rights Organizations (PROs) like ASCAP, BMI, and SESAC in the US. The PROs then pay out the royalties directly to both the songwriter and publisher.
Synchronization
When a song is used in a movie, TV show, commercial, or other form of media, the publisher typically negotiates the sync fee and then shares a portion with the songwriter. In some cases, songwriters without publishers may receive these payments directly from music licensing platforms.
Sound Recording Royalties
Sound recording royalties compensate the recording artist and often their record label. They include reproduction royalties, performance royalties, and sync fees. The flow here is a bit different:
Reproduction
When music is sold or streamed, reproduction royalties are generated. If an artist is signed to a label, the label collects these royalties and then pays the artist according to their contract. Independent artists can use digital distribution services like CD Baby or TuneCore to collect these royalties directly.
Performance
In the US, artists only earn performance royalties for digital and satellite radio plays. These are collected either by SoundExchange (a PRO-like organization that pays artists directly) or by the record labels (if they've negotiated their own licenses with the digital services).
Synchronization
Like composition sync fees, sound recording sync fees are paid when a recording is used in media. They are typically collected by the record label and shared with the artist, or by online licensing services if the artist is unsigned.
Conclusion
The ecosystem of music royalties is fascinating, as we have seen. Much needs to be sorted out. Nonetheless, it proves how much we cherish originality and intellectual property in the end. Somewhat of an acknowledgment that there are skilled people who should be paid for their contributions to every song that touches us.
Although intricate, the system's goal is straightforward: to keep the music playing for the sake of both artists and audiences.
Naturally, if you've never done one before, it might be a challenge. But Royalty Exchange fills this need. They allow artists and songwriters and producers more time to concentrate on creating music by streamlining the royalty collection and distribution process. Additionally, they contribute to the industry's liquidity and new capital by making the royalty investment market accessible to a broader range of investors.
On Royalty Exchange, investors can purchase royalties to some of the biggest songs by the biggest artists in the world. Including massive streaming successes with over 1 billion streams like Drake's "In My Feelings" and OMI's "Cheerleader". Classic hits by artists like Jimi Hendrix and Dire Straits have been sold at auction. Most of the top nominees for this year's VMA's have some of their biggest hits available for fans to invest in on the platform. Once you sign up in just a few minutes, you can start making offers and earn money each month or quarter when royalty payments are sent from distributors.
Each listing that you check out on the platform shows all of the past 5 years financial information about earnings so you can see which catalogs are continuing to grow and which are consistent earners. Imagine Post Malone or Ariana Grande performing their biggest hits during the VMA's this year and you making money during the show! Now you can.
We’ve prepared this guide on Royalty Investing Made Easy to help you out if you are new to music royalty investing and want to see why they are some of the best alternative investments available to add to your portfolio.
At Royalty Exchange, you can choose from thousands of the most popular songs to invest in. We offer hundreds of catalogs that are up for auction today, so sign up as an investor to get started.
Frequently Asked Questions (FAQs)
What is a royalty?
Royalties are payments from the licensee to the licensor for asset use. The asset can be music, minerals, oil, copyrights, trademarks, or patents. A percentage of asset use revenue is used to calculate royalty payments.
What am I buying?
Royalty Exchange lets you buy the right to receive future royalty revenue from an asset. The auction listing's Financials tab details the royalty stream and its assets.
Do you provide royalty stream revenue data?
We provide a royalty revenue history for each listing. Earnings data will match the asset for sale. If an asset accounts for 25% of the seller's royalty stream, the financials will reflect 25% of historical earnings. A spreadsheet with raw royalty data will be provided for analysis. See current listings on our website.
How long is a royalty stream investment?
Type of royalty-generating asset and share of royalty stream sold affect investment term. The auction royalty stream investment term will be stated in each listing.
When and how will I get royalties?
Quarterly or biannual royalties are typical. Royalty Exchange administers all marketplace assets unless otherwise stated. In such cases, the buyer must collect from the payer. You will receive your first royalty payment in the first distribution period after stream reassignment.
Visit our website for royalty distribution details.