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January 16, 2015
Creatives: Understand Music Industry Royalties
Blogging, social media marketing, and e-commerce websites have made copyrighting a newsworthy topic on the Internet. Recently, the various changes in Facebook’s privacy rules have spurred a hoax-driven campaign alleging to protect posts from being used based on copyright law. Because of the sheer volume of websites, numbering in the 600-millions, and the ease of sharing files, the music industry has been hit hard with revenue losses due to royalty infringements.

Types of Royalties
Payment for music that is performed live or prerecorded and played on the radio or streamed on Pandora or Spotify is called a performance royalty. Some of these royalties go to the performer, some to the songwriter, and some to both. The way the laws in the United States are set up, the music that you hear on the radio only pays the performer and not the songwriter. Performance royalties are generally collected by a Performance Rights Organization (PRO) like BMI or ASCAP and distributed to the artists.

Paying for the right to “hold” a digital copy of music, either on vinyl, CD, or streamed, is a mechanical royalty. These rules have been around for a long time and are not adequate for today’s sharing and streaming via cloud technology. Because of this, streaming music companies like Beats need to pay both mechanical and performance royalties to stay in compliance with the rules.

Calculating Royalties
ASCAP has published a royalty calculation formula. The equation multiplies factors of use, licensee reputation, time of day, percent of ownership, and extra licenses, then adds premium fees from radio and TV usage to come up with the payment credit. This money is divided up between the PRO, which delivers it to the artist and songwriter, the publisher, which will give some more to the songwriter, and the recording label, which will give some money to the artists, depending on their contract. These percentages change depending on the type of royalty and the method of aggregation or distribution.

Pros and Cons of the Streaming Model
Internet technology has allowed for distribution of music in ways that were previously unimagined. Streaming media like Bandcamp, SoundCloud, and Spotify are just some of the new ways that artists can find listeners and generate some revenue. Each of them has their own payment formulas, fees, and fine print. Spotify pays between $.006 and $.0084 per stream to artists and has gotten a lot of bad press, as some artists claim that they are not being paid at these rates. YouTube is even worse. Google, which owns YouTube, requires an artist’s non-disclosure agreement so it is hard to find out their pay scale, but some musicians claim to be making less than $100 for millions of streams.

The Internet has also created a market for royalty-free or one-time payment music. Shutterstock is one of the companies that offers music as well as images and video for a fixed license amount. By doing it this way, the artists get their music out there and get paid, but the licensing fees do not break the user’s budget. Shutterstock’s royalty scale offers one price for low-volume users and one price for high-volume users so that it is fair for everyone involved.

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Paul Reyes-Fournier has served as the chief financial officer for social service organizations, churches and schools. He created his own marketing firm, RF Media. Paul holds a BS in physics and an MBA.
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