How are royalties calculated?
UPDATED: February 20, 2013
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Royalties are determined and divided according to their type and source. They are calculated and divided as follows:
Mechanical Royalties: Record companies pay the publisher mechanicals based on the amount of phonorecords sold. Sales of sound recordings are determined by the record companies through Sound Scan and other sales reporting systems. Unlike most countries, which base mechanical royalties on percentages, US mechanical royalties are calculated on a penny (¢) basis per song. Record companies pay the recording artist either a current minimum statutory penny rate, or a "reduced" penny rate. The current statutory rate for a U.S. copyright is 7.1¢ per song. This minimum rate is effective until January 1, 2000, after which it will go up every two years until 2006, at which time it will remain at 9.1¢ per song until changed.
However, recording artists rarely get maximum (statutory) rates from their US record companies. This is because most of their the domestic recording or production contacts usually contain a standard "controlled composition" clause which allows the record company to pay the artist and/or music publisher less than the minimum rate for songs written or "controlled" in whole or in part by the recording artist. This negotiated or "reduced" mechanical royalty rate is generally a percentage of the minimum compulsory license rate, up to a maximum number of songs. A common example is 75% (of 7.1¢) per song, with a cap of 10 songs, no matter how many songs are recorded and released on the album. This negotiated "min stat x 10 rate" is collected by the music publisher, which then pays the residual to the recording artist per their publishing agreement.
Before the artist/songwriter eventually receives their "reduced" US mechanical royalties, there are numerous withholdings by the recording company pursuant to the artist’s recording contract. There are frequently several clauses that give away "freebies" and eat away at the artist’s basic royalty rate (e.g., getting paid on less than 100% of units sold, receiving no royalties for "free goods" or promotional CDs, or for "non-controlled" songs, getting a lower royalty rate for CD’s, cassettes, and record club or budget records, giving free licenses for promotional music videos, etc).
There are also other provisions in the recording contract that delay and reduce payment of royalties. For example, most record companies pay mechanicals on a quarterly basis, i.e., 60 to 90 days after each quarter. Moreover, a certain percentage of the reduced royalty rate is withheld by the record companies in "reserve against returns",.i.e. in case of over shipment and returns.
After the record company takes out its numerous deductions and withholdings, it pays the mechanicals royalties to the music publisher, if any. Under a typical "co-publishing" deal, American music publishers also deduct their 25% publisher’s share and sometimes take out "administrative" deductions. Sometimes, a music publisher may also deduct for using the services of a third party to help administer and audit compositions or catalogues.
Foreign mechanical royalties are calculated differently from domestic mechanical royalties. Unlike in the US (where musical compositions are licensed on a cent per-song basis), foreign mechanical societies grant mechanical licenses for the entire record based on a percentage of the wholesale or retail price, regardless of the number of songs. The rate of foreign and/or domestic mechanical royalties paid to the songwriter is determined by the US publishing and/or sub-publishing agreement by specifying in those contracts whether the writer will be paid by an "at source" or "receipts" method of calculation. "At source" means the percentage paid to the sub-publisher is based on earnings in country where earned (e.g. England), which is considered the "source". "Receipts" means the percentage of the foreign mechanicals paid to the sub-publisher is based on earnings in country where received (e.g. USA).
(2) Performance Royalties: Each quarter, the US PRO’s first deduct from gross receipts a small administrative fee for "operating" expenses. They may also get reimbursed for payment of fees to foreign societies for their sub-publishing percentage. Then the remaining net performance fees are divided among the participants of the same PRO, depending of the amount of their respective radio and TV air play. After "weighing" the air play, the PRO then bypasses the music publisher and pays all of the net "writer’s share" performance income to their songwriter member writer directly, with the music publisher getting paid their "publisher’s share" separately.
The amount of public performance monies collected by the PRO’s depends on their survey and consensus of how many times your songs were played, when, and on what type of medium. The amount of blanket license fees charged to music consumers and received by the U.S. PRO varies, as each have their own unique monitoring systems and detection techniques based on either a random survey, census, sampling, or digital detection method.
ASCAP uses the random survey and consensus method to detect performance royalties. In contrast, BMI uses a scientific sampling method of tracking performances. SESAC relies on cue sheets for TV royalties, but, utilizes a more accurate and cutting edge method of detecting radio performances. It uses digital pattern recognition technology created by Broadcast Data System (BDS), the same company that monitors radio air play and that Billboard magazine relies on to help determine chart positions.
Under a "standard" co-publishing deal, and per a letter of direction to the PRO with which the author is affiliated, the song writer gets 100% of the writer’s share, and 50% of the publisher’s share, or 75% of all performance royalties. The music publisher gets the "publisher’s share" of performance royalties, or 25%.
(3) Synchronization Fees: Unlike mechanical royalties, synch fees are purely negotiable and are not regulated by statute; they are strictly contractual and vary greatly in amount depending on the usage, subjective importance of the song and production, and medium used. Ranges can vary as low as free for an unsigned artists for an unknown and un-released song for a local public TV program, up to $250,000 or more for a major artist’s hit song featured in a high-budget feature film. Generally, however, synch fees are determined and negotiated by custom and practice based on a number of objective and subjective factors.
(4) Print Income: Domestic (US) print royalties are paid by printers to the song owner that granted the print music license (usually the music publisher). The print licenses are usually non-exclusive and limited to three to five years in duration. For a single-song sheet music, publishers are usually paid 20% of the marked retail price (or about 70¢ @ $3.50 retail price). Folio royalties are paid at 10% to 12½¢ of the marked retail price (or about $14.95 to $16.95). There is usually an extra 5% of marked retail price for personality folios, which requires an additional license or consent for the right of publicity.
Foreign print music is collected by the foreign sub-publisher(s), which base their charge depending on whether they actually manufacture and sell the material. If they do, they generally charge from 10% to 15% of the marked retail selling price. If they license out the print music, the sub-publisher retains the same percentage as all other income (15% to 25%), and remits the balance to the writer.
If a folio is the selected work from a single songwriter, only that writer’s music publisher receives the print royalties. If the writers on a folio collection vary, different music publishers will receive their pro-rata share. For example, if one publisher owns 10 songs from a 20 song collection, it gets 50% of the (10% to 12.5%) royalty.
Under a standard "co-pub" deal, after taking their 25% share, the music publisher pays the artists 75% of their pro-rated share. For personality folios, the extra 5% for the use of name and likeness (if any) is paid directly to the artist.
(Reprinted with permission of Ruben Salazar, Esq.)