Music Publishing Money Explained pt. 2: Mechanical Royalties & Neighboring Rights

Music Publishing Money Explained pt. 2: Mechanical Royalties & Neighboring Rights

Note: This is part 2 of a multi-part series called “Music Publishing Money Explained”. To read the first article in the series, “The Two Copyrights,” please click here.

RECAP: The Two Copyrights

Okay, so in part 1 of this series, we did a deep dive into the two music copyrights, how they’re different, and how they get you money from your music. Here is a quick recap:

The Composition Copyright protects the underlying music in a song, aka the lyrics and melody, and is owned by the composers, songwriters, and lyricists. Composition Copyrights earn Performance Royalties, which are collected for the Composition Copyright holders by organizations called Performance Rights Organizations, or PROs. 

The Sound Recording Copyright protects the recording of the song, and is owned by the performers, producers, and audio engineers. The Record Royalties, also known as Master Royalties, are collected by distributors or record labels. 

So Wait, There’s Actually More to This? AND There’s More Money Too?

Yep, much more in fact! Up until this point we’ve discussed the Composition and Sound Recording Copyrights as two separate entities. In reality though, there are two ways in which they “overlap” and interact with each other, and each way generates its own type of royalties.

  • Money generated from the Sound Recording Copyright is paid out to the holders of the underlying Composition Copyright in what is called a Mechanical Royalty.
  • In contrast, money generated from the public performance of a Composition Copyright is paid out to the holders of the Sound Recording Copyright in what are called Neighboring Rights Royalties.

We created a little chart that may help visualize how all these royalties interact:

So what exactly are these royalties, and how do they work exactly? Let’s break it down:

Mechanical Royalties

To understand Mechanical Royalties, let’s take another look at The Sound Recording Copyright. Sound Recordings generate money when they are reproduced and purchased, digitally or physically, and for sales equivalents of interactive streams. But every sound recording also contains an underlying musical composition (The Composition Copyright). So wouldn’t it make sense to compensate Composition Copyright holders when the sound recording that contains their composition is purchased? We think so, and so did lawmakers, which is why Mechanical Royalties were created in 1909.

Cool, right? But… How much are we getting paid from this? Well, unfortunately the answer is… kind of… complicated. There are, in fact, multiple payout rates for Mechanical Royalties depending on a variety of factors, but let’s start with the simplest one: 

Physical Sales and Digital Downloads

Every time a sound recording is reproduced and purchased, a Mechanical Royalty is generated for the publisher of the Composition Copyright. They are paid at what is known as the “Statutory Rate”, which is the legal standard Mechanical Royalty rate for physical sales and digital downloads. Basically, for every song sold, the publisher/publishing entity of the Composition Copyright is owed 9.1 cents. But that’s only if the song is under 5 minutes. For songs over 5 minutes, the publisher makes an additional 1.5 cents for each additional minute (or fraction thereof). So for a 3 minute song that sells 1 million copies, the publisher would be paid out a total of $91,000 in Mechanical Royalties.

Streaming Platforms

Unfortunately, unlike physical and digital album sales, Mechanical Royalties generated from interactive steaming are a WHOLE mess. Instead of having one simple rate per stream, publishers as a whole are generally paid between 3.5 and 7% of the streaming platform’s total revenue. However, this may not always be the case, and this rate can change depending on the subscription tier of the listener, as well as the type of device used to stream the music. Spotify alone has 7 different payout rates for Mechanical Royalties according to their specific rate sheet on the Harry Fox Agency’s website, and no two streaming services have exactly the same rate sheet. And, since these figures are based on revenue or cost of the streaming platform, these payout rates are different every single pay period.

Sounds complicated, right? Well, unfortunately it is. In a future article we will really get down into the nitty-gritty of these streaming rates, but for now, feel free to check out this page on Harry Fox Agency’s website with breakdowns of all of their rate sheets based on medium and streaming subscription tier.

Okay Word, Well I at LEAST Always Make That 9.1 Cents on Actual Sales Though, Right? 

Well… not always.

Unfortunately, many record labels and publishing companies employ what’s known as the “Controlled Composition Clause” into their contracts. This states that if the recording artist or producer is ALSO a songwriter, composer, or lyricist, they are now entitled to a lower payout rate of Mechanical Royalties. They will now receive 6.82 cents per song, 75% of the 9.1 cent statutory rate. 

Then it gets even worse. In many cases, they will also put a cap on the maximum amount of Mechanical Royalties paid out per album sale, called the “maximum aggregate mechanical penny royalty limit”. This means that regardless of the number of tracks on the album, you will only be paid the equivalent of 10 songs, so 68.2 cents per album. This is the topic for a whole other article, however, more information about the controlled composition clause (CCC) can be found here.

Luckily, there is hope for a better tomorrow: BMG is now the first major record company to do away with the controlled composition clause entirely, which has drawn a lot of praise throughout the industry:

Also, because of the Digital Millennium Copyright Act of 1998, there are no controlled composition clauses that affect digital downloads or streaming, which is great news for creators.

So How Do I Get This Money Though?

Well, in the United States, there are actually four organizations that each collect Mechanical Royalties from various platforms. Different platforms or service providers choose which organization to work with to obtain Mechanical Licenses from, and pay out Mechanical Royalties to, publishers and publishing entities. So who are these organizations and where do they each collect royalties from? Let’s break them all down:

Harry Fox Agency

Established in 1927, the Harry Fox Agency, or HFA for short, has historically been the largest and most comprehensive institution for Mechanical Royalties and licenses. They currently collect all Mechanical Royalties generated from physical and digital album sales, as well as from a number of major streaming services such as Spotify and YouTube.

Music Reports

Established in 1995, Music Reports was created as a tech centric solution for mechanical licensing and royalty reporting. Despite the fact that they are a comparatively new company, they have quickly become one of the largest mechanical recording collection societies in the US. They currently collect from a number of major streaming and tech platforms such as Soundcloud, Tidal, and Peloton.

Medianet

Established in 2000, Medianet is a business-focussed digital music platform that provides catalog services and rights administration. Although a smaller operation based in Seattle, WA, Medianet has become an important service facilitating services and royalty payments from various platforms such as Music Choice and Snapchat.

The MLC

The Mechanical Licensing Collective, or The MLC, is a new non-profit organization created by the 2018 Music Modernization Act (MMA). Due to the act, The MLC is now the new authority for mechanical licensing in the U.S. by offering a new blanket license that will streamline and increase payout rates, as well as actively reconcile metadata to increase the accuracy of registrations and payouts. We recently wrote an entire article about The MLC that breaks everything down into more detail.

Neighboring Rights

So now that we’ve broken down Mechanical Royalties, there’s still one more way where The Composition Copyright and The Sound Recording Copyright interact with each other: Neighboring Rights.

As we’ve explained in the previous article, Composition Copyrights make money in a number of ways: for example, when the song is broadcast, like on terrestrial or digital radio stations. Another example is when the song is publicly performed, like background music at a business or playing music at a venue. But what about when these broadcasts or public performances are of a sound recording, not just the composition? Shouldn’t the owners of the Sound Recording Copyright be compensated in these instances too? We think so, and at least 96 countries around the world agree, paying out what are called Neighboring Rights Royalties. But wait… what about those countries that DON’T pay out Neighboring Rights? Why should I care? Well…

How the US Differs From The Rest of the World

In 1961, at least 19 countries met at the Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations to sign a treaty that “secures protection in performances for performers, in phonograms for producers of phonograms and in broadcasts for broadcasting organizations.” You can find much more information in the links above, but this treaty essentially outlines the creation of Neighboring Rights and how they work. Since 1961, more countries have signed on to this treaty, and the total as of early 2021 stands at 96.

However, since the United States has never signed the treaty, broadcasters and public venues do not have to pay Neighboring Rights to Sound Recording Copyright holders according to U.S. Copyright Law. They do, however, still pay Composition Copyright holders for these public performances on radio or in their venues, just not the performers or Sound Recording Copyright holders.

Digital radio, on the other hand, does pay out Neighboring Rights to Sound Recording Copyright holders, regardless of what country the stream happened in. This is because digital radio doesn’t fall under the same jurisdictions and laws as terrestrial broadcast and performance.

So Does That Mean I at Least Get Some of My Neighboring Rights Royalties Then?

Yes in fact, you do! All is not lost, because in September of 2003, an organization called Soundexchange was created. Now, Sound Recording Copyright holders in the US can sign up for a free account with Soundexchange, which collects on Neighboring Rights from digital radio worldwide, and from terrestrial radio and public performance in a number of those territories that signed onto the Rome Convention. Soundexchange

has 46 international performance rights agreements with Collective Management Organizations (“CMOs”) in 35 territories around the world, covering all of the top music markets and approximately 80 percent of the world outside the US”.

soundexchange.com

So how exactly do they pay you? Let’s break it down:

Of the royalties collected by Soundexchange:

Soundexchange has a nice chart that breaks it all down in visual form:

For Sound Recording Copyright holders outside the US, the Collective Management Organizations (or CMOs) in their territories will collect their Neighboring Rights on their behalf.

So basically, do you want ALL of your royalties? Beyond your PRO or distro service? Then make sure you’re signed up and registered to collect your Mechanical and Neighboring Rights Royalties.

And, if you don’t want to have to go through all the hassle of signing up and registering your songs with 7-8 different collection societies here in the U.S., then check out our publishing administration services here at Gvngaroo Publishing. All you have to do is register your works ONE time with us, and we make sure that your works are registered with all societies here in the U.S., as well as with collection societies around the globe, that way you’re not missing any of your royalties. Our Neighboring Rights Admin services are in the works as well, so be sure to sign up for a free account on our site so you can stay up to date with all things Bounce Gvng.

Music Publishing Money Explained pt. 3 is coming next week, so be on the lookout!

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