Deep Dive (Part 2): Music Royalties How Royalty Rates Are Set + Claiming Royalties + Royalties Flow For Independent Artists in 2024
Hey, welcome back! Hope you’re all geared up for the second part of our deep dive. Otherwise, a coffee boost should be enough to get those brain cells working because yes, we’re diving deep into another level of our favorite talk – music and MONEY!
Topics to uncover:
How royalty rates are set, and collected? How to get paid royalties?
Claiming Royalties
Royalties Flow For Independent Artists
Okay, here we go.
More often than not, people are mostly only aware of how composers, songwriters, lyricists, record labels, and performing artists get paid. But have you ever thought about those who work ‘behind the scenes’? Let’s get started!
First, let’s quickly discuss how the forefronts get paid.
Master Rights Holder
A master rights holder is the individual or company who funded the recording of the song. If you are an independent musician who self-funded and recorded your original composition or even a cover song, you are then the master rights holder. However, if you are signed to a record deal and your record label pays for the time of your recording, then master rights and the label shall be the master rights owner.
Master Rights Holder(s) generate royalties through:
Streaming Royalties
Mechanical Royalties
Neighboring Rights Royalties
Master Recording License Fee
Songwriter
Independent artists are typically the songwriters and even the publishers of their compositions. A composer’s songwriting percentage is perfectly negotiable and is customarily based on their contribution to the song.
Songwriters generate royalties through:
50% of Performance Royalties (songwriting share)
Neighboring Rights Royalties
Sync Licensing Fees
Print Music Royalties
Bonus Question! "How to split mechanical royalties with co-writers?"
When you co-write a song, you would have to agree on how to split the mechanical royalties for the composition. This is usually done by assigning a share of ownership to each co-writer, based on their contribution to the song. You can negotiate different splits depending on the situation.
Publisher
A music publisher can either be an individual or a company that is responsible for promoting, licensing, and collecting royalties.
Publishers generate royalties through:
Commonly, 50% share of Performance Royalties
Agreed percentage of Sync Fees or collected royalties paid to the songwriter.
Performing Artist
A performing artist is anyone who performs the songwriter’s original work. They do not obtain publishing rights (nor royalties in most countries) unless they are also the songwriter.
Performers generate royalties through:
Performance Fees
Ticket Sales
Merchandise Sales
Ancillary Revenue Streams
I work BEHIND THE SCENES - “How do I get paid?”
And finally, onto our overlooked heroes in the business, the ones who play a vital role in the creation and success of any music – Producers, and Engineers, Managers, Booking Agents, Session musicians, and Creatives.
Producer, Mixer, or Sound Engineer
Record Producers bring the vision of a recording to life. They are responsible for determining and leading the creative and technical aspects of recordings, whether for a single release, an album, or any soundtrack. But how do they get paid?
Not only do they get paid according to their contract/work-for-hire agreement, but they also get a fair share of their contribution in terms of music royalty ‘points.’ Points are a music industry term for the percentage of net record sales the producer receives as royalties. The industry standard is 2.5 points or 2.5%, but can range anywhere from 1% to 5% and could even be more for the ones we call the “superproducers.”
These points are usually negotiated when working with an established record label and are essentially a share of the revenue generated from the commercial exploitation of the music they've worked on. (ref. Indie Music Academy) Typically, producers receive 2 to 3 points per track and if the master is sold as part of an album and if the producer did not produce the entire master, the percentage should not come out to 2% or 3% of the total sales of the album. In this case, the royalty is paid on a “pro rata” basis based on the percentage of tracks that the producer produced on the master.
Independent artists, on the other hand, have more flexibility when it comes to giving these points for they usually own the full 100% of their recording royalties. If not, a producer might get between 15% to 25% of net royalties on the sound recording (from the artist’s cut).
Otherwise, let’s tackle how these so-called ‘points’ are awarded in other ways:
Flat Fee
Producers may be paid a flat fee during a contractual agreement between the producer and the relevant parties. The negotiation sets the terms for how the producer will be compensated for their creative contributions, which can vary depending on the budget and success of the artist or album. The outcome of these negotiations can significantly impact the producer's long-term earnings and recognition within the industry.
Album vs. Single Points
Briefly mentioned in the introduction of this section, producers are often given the flexibility to negotiate different points for singles and albums. As such, producers may secure a higher percentage of royalty points for single releases, which rather have the potential to hit major success, while album points are generally set at a lower percentage as it could present a challenge to make success out of an entire album. This approach provides producers with the opportunity to fairly incentivize their contribution to a record’s potential success.
Hourly Rate
Similar to a flat fee, a producer may also be paid an hourly rate for their work in the studio. Hourly rates may also depend on how long it takes to complete a track, with additional fees added for any extra time needed to finish the project.
The hourly rate is not attached to royalties and producer points, though. The latter, as you know, are only earned from the success of the master. Thus, producers need to know how to negotiate at best to ensure that they get fair compensation for their contribution to what may be the next top-charter.
Advances and Recoupment
In some cases, producers may receive an advance against future royalties as part of their compensation package. This advance serves as an upfront payment, providing financial support during the production phase and beyond. However, it's crucial to understand that these advances are not additional earnings but rather prepayments of future royalties.
The concept of recoupment comes into play here. Advances must be recouped, meaning that the producer's share of royalties will first go toward paying back the advance before they start receiving additional payments. Once the advance is fully recouped, any subsequent royalties become additional earnings for the producer. (ref. Indie Music Academy)
“In any case, everyone involved in the composition of music must learn to negotiate their points to ensure that they receive a fair and equitable share of the royalties generated by the record they help create.”
Creators Work
Session Musicians
At times, members of the band are often mistaken as session musicians. Session Musicians make a “one-off” contribution who come on board to play during a “session” on stage or in the studio but are not part of the main act or band. A session musician could be a guitarist, brass player, percussionist, DJ, or even a “beatboxer.”
Session musicians co-own the copyright in the sound recording for their live performances in equal shares with the rights owner of a master record. This means that they are also entitled to any royalties generated from the use of the release. However, if session musicians agreed to a flat fee, they are entitled otherwise.
In rare instances, session musicians are offered a portion of the future royalties of a release. This usually occurs when the artist cannot afford to pay session rates. Indeed, this setup is not ideal as this may also lead to the exploitation of both parties. In such and in any deals, secure a contract of agreement with a lawyer to safekeeping both parties’ rights, enabling both to get their just share from the royalties generated.
Record Label
Record labels collect the sound recording royalties from music sale downloads of music releases. These will be passed on to you, if you are an artist, or to your signed artists if you are a label. These royalties are collected from your distributor (that’s us!).
Record labels can keep a cut anywhere between 50% to 90% of the sales earnings. It is an industry norm for a new artist to only receive 10-16% of their sales. You may say that such a fraction is far from being fair, and we can’t disagree with that. The reason for this proportion is that record labels take on almost all of the financial risk that artists may not be able to shoulder on their own.
Artist Manager
In this industry, your Artist Manager is and must be your number-one fan. And since they are responsible for a lot of duties in the success of your music career – from the creative process of choosing a producer, being mainly responsible for the decision-making process, etc., Artist Managers usually warrant a 15-20% cut of an artist’s earnings. These percentages are applied to your gross earnings, meaning that this is a percentage off the top of what you make. They also receive 15-20% of the music royalties generated from your past releases, if any, even if they weren't your manager at the time.
Additionally, Artist Managers’ cuts and fees can be determined and received in several ways, including but not limited to:
Flat Fees
You know how this works already by now. A flat fee is a one-time payment that they charge artists for their services. This fee is usually paid upfront, and not based on a percentage of the artist’s royalties.
Sometimes, the idea of paying a flat fee may seem not ideal. It’s common knowledge though in this industry that a flat fee is a pay security for the artist manager’s effort and time. As to the artist, at least they can better manage their finances this way. However, the disadvantage may be that the artist could not possibly get the best out of their artist manager’s potential to massively contribute to the success of their music, since the artist manager does not get a share in the artist’s royalty earnings.
Flat fees are more common in the music industry despite the potential advantages and disadvantages.
Retainer
A retainer is a monthly payment that an artist manager demands for their services during the longevity of the project or campaign. Like flat fees, a retainer is typically paid upfront, and it is not based on a percentage of the artist’s royalties.
Bonus question! “I work in the other creative side of things, meaning the album art, etc. How do I get paid?”
The answer is, that a creative can get paid in the form of either of the following:
Work for Hire Agreement
Flat Fee
Hourly Rate
Unfortunately, regardless of how the music or an album may attain success, creatives do not get a share of the master’s royalties. But hey, do not get discouraged! Seeing your artwork being featured on top of your pay is indeed a bragging right! ;)
Before we get started, we must inform you that there have been important updates on the Spotify royalty payout scheme. Please continue reading so we can fill you in.
How do music royalty payments work and get generated?
As a general rule, royalty payments are generated monthly. Otherwise, it ensues quarterly. There is, however, no particular date and revenue an artist can receive. This depends on the agreement between the artist and their distributor (or record label).
Royalties are generated depending on the type of usage and licensing.
Mechanical Royalties
It’s all digital nowadays, so mechanical royalties are and will always be an artist’s mainstream of revenue in the industry. When a unique user has played about 30 seconds or more of your tracks on digital streaming platforms (i.e., Spotify, Apple Music, or YouTube Music), the royalty will be generated. The platform will collect this money, take their share, and distribute a large proportion back to your distributor.
Mechanical Royalties Percentage Rate:
New Artist: 13-16%
Mid-level Artist: 15-18%
Sensational Artist: 18-20%
While Print Music royalties are different. Consumers pay retail prices to buy CDs, and vinyl records. The physical or retail distributor will take its share and transmit the rest of the sale to you, as the artist, or to your record label. The physical sale will generate mechanical royalties for the record’s songwriters and publishers.
Performance Royalties
Performance royalties are the fees music users pay when music is performed publicly such as played over a coffee shop, radio, in a restaurant or bar, or over streaming platforms such as Spotify, YouTube Music, Apple Music, Deezer, etc., are considered a public performance.
Streaming Rates for Streaming Platforms:
Spotify: *Continue reading for the complete information on the latest Spotify payout changes.
Apple Music: $0.01 per stream
YouTube Music: $0.008 per stream
TIDAL: $0.013 per stream
Amazon Music: $0.004 per stream
Deezer: $0.0064 per stream
Pandora: $0.0013 per stream
These royalties are collected by Performing Right Organisations (PROs), that safeguard the revenue to music publishers, songwriters, and composers.
Sync Royalties
These are fees paid for the use of copyrighted music in audiovisual productions such as in movies and films, television, adverts, video games, etc. The sync royalty rate is usually negotiated between the two parties, and these royalties are paid to record labels and recording artists.
Print Royalties
Print royalties are the least common for recording artists, but essentially significant for classical and film composers. These are fees paid to the right owner when the music is transcribed or published in sheet music, songbooks, or magazines. The print royalty rate is usually a percentage of the retail price or the wholesale price of the printed material, depending on the agreement with the publisher. The standard print royalty rate is 10% of the retail price or 20% of the wholesale price.
In our recent blog, we’ve discussed right off the bat how music royalties are calculated. And to refresh your memory, here are the formulas for your ease of reference.
Mechanical Royalties
Mechanical Royalty Rate X Number of Sold Units or Generated Streams = Mechanical Royalty
Performance Royalties
Performance Royalty Rate X % Generated Revenue (that is attributed by the use of your music, depending on the type and size of the media or venue)
= Performance Royalty
Synchronization (Sync) Royalties
Synchronization Royalty Rate X Number of Sold Units or Generated Project Views = Sync Royalty
Print Royalties
Print Royalty Rate X Number of Sold/Distributed Copies = Print Royalty
For additional information, please read Deep Dive (Part 1): Unlocking Music Royalties.
As mentioned above, we want to ensure that you are well-informed of the crucial updates on royalty payout changes. Keep reading to learn more.
SPOTIFY ROYALTY PAYOUT CHANGES IN 2024
Streaming services such as Spotify are renegotiating commercial deals concerning artificial streaming, ‘functional’ audio and minimum payment thresholds -- factors for the most significant changes to Spotify’s royalty structure since its launch in 2008.
Spotify will be charging distributors a financial penalty on a per-track basis for tracks that are found to be artificially streaming.
FUNCTIONAL AUDIO
Functional content is defined as ‘non-musical’ audio and examples of this might be ambient/environmental (nature) sounds, white/brown noise and singular frequency audio, ASMR. Spotify will completely de-monetise all functional audio under 2 minutes in length and heavily reduce the royalty payable on monetised streams over 2 minutes.
MINIMUM PAYMENT THRESHOLDS
Starting in early 2024, tracks on Spotify must have reached at least 1,000 streams in the previous 12 months in order to generate recorded royalties.
Please be aware there are also minimums on the number of unique users, so artists who repeatedly stream their music to reach the 1000 stream minimum will still not qualify for payment (rather, may attract a fine for artificially streaming).
For more information, please read on Track Monetization Eligibility.
Also, note that the 1,000 stream threshold is on a rolling 12-month basis and is recalculated each month (not per calendar year). Streams that are below the threshold in previous months do not get back-paid once the 1,000 stream threshold is reached - only streams from the applicable month will be counted in the royalty calculation. Below is an example from the Spotify website:
Royalties Flow For Independent Artists
This is pretty simple. If you, as an independent artist, funded and created the studio recording of your release, then you are the master rights holder, and you must get paid the royalties through your music distributor (that’s our partners at FreshNoise Distro!).
If other creators are involved in the production of your music release, nonetheless, the below flowchart should help you better understand and visualize how royalties flow.
Image source: Figma
… Would you like to dig deeper into this topic? That, my friend, will be one of the subjects for our next blog. Stay tuned!
