When TuneCore first began, we called George: few people understand the music business as deeply. George Howard is a professor of management at Loyola University, New Orleans. He is the former president of Rykodisc, and founder of Slow River Records. He is the senior editor for Artists House Music, and a board member and advisor for a number of companies including Wolfgang’s Vault and Daytrotter. He has written two books on the music business for Berklee Media. Check out his personal blog at www.9giantsteps.com.
All about Income Streams, Part I
–By George Howard
One thing that’s very important to get a handle is the multiple royalty (income) streams available to artists. As an artist in today’s landscape you must think in terms of varied sources of revenue. What many artists don’t understand is that there is a HUGE difference in potential income streams for the person who writes the song versus the person who performs the song. This article will explain these differences and illustrate the first two multiple streams of income. Future articles will explain further streams.
Concept of the song as a separate entity from the performance of the song
To begin to understand how this works, you must separate out the performance (or recorded version) of the song from the actual song itself. Think of it this way, Frank Sinatra never wrote any of his songs. He performed songs written by lots of different people on his albums, on his TV appearances, via radio broadcast, and in venues, but he didn’t write any of the songs. Why is this important? It’s important because, every time Sinatra released a record, the person (or people) who wrote the songs got paid. It’s important because, every time Sinatra sang on TV, the person (or people) who wrote the songs got paid. It’s important because every time one of Sinatra’s records was played on the radio, the person (or people) who wrote the songs got paid. It’s important because when Sinatra was one of the top-grossing touring acts in the world, the person (or people) who wrote the songs the he performed on stage got paid.
Now in some of the examples above, of course, Sinatra also got paid. But what’s crucial to begin understanding is that Sinatra got paid for something completely different than the writer(s) of the songs did. Sinatra got paid for performing the song, not writing it. For performing the song, Sinatra received a royalty from the label called an “artist” or “record” royalty (both terms are used, they mean the same thing). This “artist” royalty is based on a percentage of the list price of the album, while the writer of the song(s) received what is called a “mechanical” royalty based on the number of songs the writer has on the album.
“Artist” Royalties
I know this sounds confusing, but it’s so very crucial to understand. To try and make it as clear as possible, let’s imagine Sinatra releasing a record. Using hypothetical numbers (based on reality). The record cost one million dollars to record and market. The record is priced at $15 (again, for easy math). The record sells one million copies. The record contains 10 songs. Five of these songs are written by writer “A,” and five are written by writer “B” (none are written by Sinatra). Now, because Sinatra is a superstar, he has a higher than normal “artist” royalty, and receives 20% of the retail list price of each record sold. So, 20% (the royalty) of $15 (the list price) is $3 per record. On a million records sold, therefore, Sinatra is owed 3 million dollars. Of course, it cost the record company $1 million to record and market those records so the record company “recoups” (pays themselves back) that money before paying Sinatra. He, therefore, ends up with $2 million in “artist” royalties.
Mechanical Royalties
There is, however, another completely separate and distinct stream of income that is generated from the sale of these records. Remember, as stated above, there are two different songwriters (writer “A” and writer “B”) who each wrote 5 of the 10 total songs that Sinatra recorded on the record. By law (statute), these writers must be paid by the record label. The record label pays the songwriters a license fee for the right to “mechanically” reproduce the writer’s songs on the Sinatra album that the label releases. This is why this is called a “mechanical” license. What’s important to understand is that neither the record label nor Sinatra owns these songs that are being released on the record—the songwriters do— and the label is only licensing the songs from the songwriters, and the only thing the label can do with these songs is release them on Sinatra’s record. The label, then, owns the body of work that is comprised of the artwork and the collection of songs, but NOT the individual songs themselves, these are owned by the writers. As stated, in exchange for the ability to use these songs on their record, the label pays the songwriters a mechanical license fee.
The copyright board sets the fee that the labels must pay to the songwriters. This fee has historically always gone up. Currently, the rate is nine and one tenth cents per song ($.091). This is the license fee that the labels must pay to the songwriter(s) for every song that they have written that the label uses on their album. The labels must pay the songwriter this per song fee for every album they sell.
So, to go back to Sinatra’s million-selling record. Writer “A” and “B” both wrote 5 songs on the album. This means that each is owed forty-two and one-half cents for each record sold ($.091 x 5 songs = $.455). On a million records sold, therefore, each writer receives $455,000 ($.455 x 1 million records = $455,000). Had there been only one writer who wrote all 10 songs, she would have received $910,000 ($.091 x 10 songs = $.91 x 1 million records sold = $910,000).
While this income is less than what Sinatra received in “artist” royalties, it’s still significant money. Also, remember, had Sinatra written his own songs, his total payday would have been $2,910,000 ($2 million in “artist” royalties and $910,000 in “mechanical” royalties).
For Part II, please click here.
Related Posts
