How Are Royalties Distributed In The Music Industry?

Summary of Sleepwell's "Music Streaming Royalties 101" Article

This article does a really good job explaining a very complicated topic – how streaming royalties for the music industry in the U.S are distributed.

I had to read this article 2 or 3 times to really get a better understanding because of all the complexities involved in the music industry but it was well worth it.

Especially since the dynamics of music ownership have frustrated artists for decades and after reading this article you will understand why.

First, in order to understand how the music industry works and how the royalties are distributed, you need to understand some of the major players that are involved in making, producing, distributing and monetizing a song.

These players are the songwriters, artists (singer), producers, musicians, labels, publishers, distributors, managers, agents, lawyers, streaming platforms, digital stores, radio, collection societies and more.

The author of this article, Sleepwell, says that a song is made up of two separate individual copyrights known as the composition and the sound recording (master).

The composition are the notes, melody and lyrics as they are written on a musical sheet.

The sound recording (master) is the actual musical recording that is released to the world and that you hear on the radio, your favorite streaming service, YouTube, etc.

Monetization can get complicated in the music industry and that is why a song is made up of two separate copyrights. For example, a concert wouldn’t pay a recorded music royalty because the artist performing the song isn’t using the actual sound recording (master) that you hear on the radio or on your favorite streaming platform. The concert would pay a publishing royalty instead.

Music Publishers work with songwriters by trying to sell the songs that the songwriter write to an artist. 

Music Labels work with the artists by managing the creation of the artists’ album, promoting the album, distributing it and monetizing it.

The person who writes the song and the person who performs the song can be 2 separate entities. Most artists like Justin Bieber, The Weekend, The Backstreet Boys and Britney Spears don’t write their own songs. They just perform the songs that their songwriters write.

Max Martin is a famous songwriter who has written thousands of songs that you most likely heard before but didn’t know it.

A producer is the person who has a very similar role as a director in a movie. The producer will help the artist create the album by picking songs for the album and by turning all of the lyrics and sounds into a professionally recorded song with instruments and beats.

A producer and a studio cost money so this is where the label comes into play. The music label will finance the creation of the album if the artist doesn’t have enough money to do it herself.

The labels will usually give the artist an advance to work on the album that will be paid back from the album sales. After the advance is fully repaid, the artist will usually get a small percentage of the album sales meanwhile the label will get a much higher percentage of the album sales since they took the risk in financing the artist.

The label will also own the rights to the master recording. The contract can be for multiple years as well which means the artist will likely be obligated to make more than one album. All songs created during the contract will be owned by the label but once the contract is over, the artist can then sign with a different label if they choose or go independent. The songs that the artist made during the contract will still be owned by the initial label though.

This paragraph above is why I think so many artists are frustrated. They put in a lot of work in making their music but they don’t own the masters. Kanye West was very vocal at the end of 2020 about his frustrations with this current setup.

After an album is created, it then gets distributed to all of the digital service providers (iTunes, Spotify, etc.). If the artist is independent, they will use a distributor like CDBaby or TuneCore because uploading the artists’ songs to every digital service provider out there and collecting all of the royalties from them would be too much work.

If the artist is signed to a label (instead of being independent) then the label will take care of the distribution to the digital service providers. The label will also put the artists’ songs on the radio, do the marketing, music videos, artwork and working on the artist’s image.

Distribution used to mean manufacturing CDs and selling them but today it means uploading all of an artists’ songs to the digital service providers like iTunes and Spotify.

Streaming platforms like Spotify typically pay out around 2/3rds of their revenue to rights holders depending on the agreement. The agreements are a lot more complicated than just a fixed percentage though since they depend on a formula that may include minimum payouts, marketing and many other factors.

There are specific types of royalties that have to be paid out because remember from earlier that the composition and the master (sound recording) are separate.

The royalty for the master (sound recording) is paid directly to the label and distributor (notice it isn’t paid directly to the artist), meanwhile the royalty for the composition is paid directly to collection services.

There are two different royalties for the composition: performance and mechanical.

Performance royalties are for when a song is played in a public place like a concert venue, Costco or nightclub.

Mechanical royalties are for music that is reproduced through a physical medium like a CD but the rules here are old so this mechanical royalty applies to streaming as well.

Music publishing rates for compositions are overseen by the government so there is a limit to how high the rates can be but there are no limits on how high the rates can be for the master (sound recording).

A successful artist can make a lot more money by being independent than by signing with a label.

Labels still offer a lot of value for new artists through advances, connections, know-how and marketing but industry changes are making it easier than ever for new artists; especially since the power is slowly shifting more towards the creators and the platforms like Spotify.