How Do Music Royalties Work?
We all wonder how superstars like Beyoncé make millions of dollars, even though most profits go to the music studio they are signed with. One of the most significant money-making opportunities is music royalties.
Did you ever wonder as a teenager why your school hosted fundraisers to finance local productions of well-known plays? In addition to set designs, the costs to bring that play to life likely went to purchasing music. Unless music like Happy Birthday or any other creative content has entered the public domain, you must pay creatives to use their work.
Every time a song gets played on Spotify or a commercial, an artist gets paid for their work. They are called royalties, and they keep people from using innovative products without giving the people who created them the credit. It seems like a great idea, but how exactly do music royalties work?
Let’s explore!
The Different Types of Royalties
Not all music royalties are created equal. There are several different types of music royalties, and each is paid in an entirely different manner depending on the style. Royalties even vary from country to country. They break down as such:
Streaming Royalties — When we talk about streaming royalties, we are discussing popular services like Spotify. Since services like these now have risen far above physical purchases like CDs, streaming royalties are essential.
Neighboring Royalties — These royalties can get a bit complicated. Music rights aren’t limited just to the artist. This includes recording studios and record labels. So, when an artist gets paid, the studio and record label will, too.
Digital Performance Royalties — The US does not require radio stations to reimburse artists for using their songs. But this is where the definition of “radio” gets tricky. Radio is only classified as stations that run on AM and FM, so satellite giants like Sirius don’t count.
Sync Licensing Fees — Remember those Target commercials that play your musical favorites but don’t show the artist? What about video games like Call of Duty? Anytime music is used as part of an ad, movie, or television show, it is considered a sync licensing fee, and the company must pay up.
Public Performance Royalties — When an artist performs a song during a live performance, it falls into a different royalty set called public performance royalties. If someone uses an artist’s songs for public performances and the artist isn’t present, it still falls under this type of royalty.
Mechanical Royalties — When a CD gets produced, it is considered a mechanical royalty. These types of royalties are less common, but certain types of digital platforms also make mechanical royalties.
Who Gets Paid?
The first answer that comes to mind here is typically the artist. It should be that simple, right? Unfortunately, it’s not. Royalties get paid out to several different entities, and usually, a song doesn’t just belong to the artist who created it.
Things can get even more complicated when you think of more famous artists who don’t write their songs or produce them. The royalty equation then involves a songwriter, the person performing it, and the person composing the record. All three of these people have rights to the songs in their own right. So, who gets paid?
1. The artist who records the song — While we want to think of people like Justin Timberlake as solo artists, more often than not, there is more than one artist involved in a recording. Each artist is entitled to their share of the profits, even if it’s a small piece of the pie—fun fact: the featured artist typically gets the largest share.
2. The label — Artists need recording labels to help them bring their music mainstream. In signing a record deal, the agreement also includes verbiage stating that the most significant portion of an artist’s profits goes to the record label. In this situation, labels get most of the profits, and the artists only get a small share depending on the details of the signed contract.
3. The songwriter — In many cases, the performing musician is also the songwriter, but these two are not mutually exclusive. Songwriters partially own the rights to the song.
4. Licensing companies and distributors — These people get your music out and are responsible for its appearances on TV, radio, and other outlets. They also get a share of the royalties for their work.
How Does the Process Work?
The way the music industry works is a challenging process to both understand and explain. Each situation with an artist makes the royalty process work differently, but it all depends on contracts. Other details play a part, too, like how many individuals and enterprises were involved in creating the music, and who gets a share of what. But largely, the process works like this:
An artist or group creates music. Sometimes a songwriter is part of this process.
Your work is distributed to outlets.
Your music is played.
A middleman collects the profits and takes their cut.
You get paid.
Why Doesn’t an Artist Get Most of the Royalties?
The answer to this question has developed into a heated topic between artists and record companies alike in the past few years, and the answer is often complicated. After everyone gets their cut, an artist only gets between 10% and 15% of the overall profits from the music they record. It seems unfair, doesn’t it? A lot goes into creating music and getting it to the ears of listeners, and the longer the chain of command involved in distributing that music, the lower the cut of the profits the artist receives. This is why many independent musicians incorporate new ways to promote their sound online. They are desperate to keep a more significant portion of the profits.
Mirada Media
While music starts as a passion, most musicians dream of turning their first love into a lasting and profitable career. Part of having a prosperous career is learning how music royalties work and how to collect them. This guide is not all-inclusive, but we hope it helps you understand some of the fundamentals behind royalty collecting in the music industry.
Mirada Media is your one-stop-shop for your independent artist needs and to help you on your journey. If you are ready to learn more about our services, contact us today!