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How are royalties calculated?

Royalties are determined and divided differently according to their type and source:

(1) Mechanical Royalties: Record companies pay the publisher mechanicals based on the amount of phonorecords sold. Record companies manage the reporting either through Sound Scan and other sales systems. Most of countries calculate the Royalties based on percentage. In 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. Growing up every two years till 2006, it reached 9.1¢ and will remain at this rate.

Unfortunately most of US recording companies insert a clause in the recording artist agreement which does not allow getting maximum (statutory) rates above. That is called “controlled composition” and it is a standard clause in record companies’ contracts. 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 rates” is collected by the music publisher, which then pays the residual to the recording artist per their publishing agreement.

Recording companies pay reduced” US mechanical royalties to the artist/songwriter after numerous withholdings. Again there are numerous clauses in the contract 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).

Regarding the payment, there are also 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.

Foreign mechanical royalties are calculated differently than US mechanical royalties. The basic difference between the 2 systems is the way musical compositions are licensed. As seen before in US musical compositions are licensed on a cent per-song basis, whereas 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. By the way, 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: Paid by PRO’s (Performance Rights Organisations). 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 pays all of the net “writer’s share” to their songwriter member directly as per their performance income without going through the music publishing. Then PRO pays music publishing the “publisher’s share” separately.

Before paying the music songwriter and the publishing, PRO’s collect the public performance monies based on their own unique survey and consensus. These systems aim to track the closest way 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. Whereas 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: Synchronization Fees is out of PRO’s control and responsibility. Indeed 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 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: US print royalties are paid by printers to the song owner that granted the print music license (usually the music publisher). Duration of a print licenses are usually non-exclusive and limited from three to five year. Commonly publishers are paid 20% of the marked retail price (or about 80¢ @ $4.00 retail price) per single-song sheet music. Folio royalties are paid at 10% to 12.5% 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 sub-publisher(s) collect foreign print music and calculate 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.