All About Income Streams, Part II

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.

Click here for Part I.

Recoupment of royalties

Now, let’s move it a bit closer to reality in order to show you how important mechanical royalties are. Let me say this clearly, most records never recoup. The money that the label spends recording and marketing the record is almost never made up in sales, and therefore the artist receives no ($0) “artist royalty.” To make this completely clear, suppose in our example above that Sinatra’s label had really decided to “go for it,” and had taken a year to make the record, and had gone all out trying to market it (made numerous videos, paid for visibility in all the major stores, tried to make a song a #1 hit on top-40 radio, etc.). This marketing effort ended up costing the label $3.5 million dollars. Sadly, even with all the additional marketing efforts, the record still sold the same million copies and generated the same $3 million dollars in royalties for Sinatra. But, because the label spent $3.5 million, Sinatra actually owes the label a half-million dollars. In industry parlance, Sinatra is unrecouped (or upside down) to the tune of a half-million dollars

For writer “A” and writer “B,” however, nothing changes. Each writer still receives their $455,000, even while Sinatra receives nothing! The label has to pay these mechanical royalties for the right to use the songs, whether they make a dime in profit or not—it’s the law.

Cross Collateralization is a no-no

It’s also very important to know that these two different streams of royalties (the “artist” royalty and the “mechanical” royalty) should never be “cross collateralized.” This means that the label should never recoup any of their losses from the record out of the mechanical royalty; it should only ever come out of the “artist” royalty. This becomes very crucial when the performer (the person who receives the “artist” royalty) is also the writer (the person who receives the “mechanical” royalty)—as is often the case. For example, Bob Dylan, who typically writes and performs all his own songs, still has two separate streams of revenue from the record label: the “artist” royalty and the mechanical royalty, and these should never be cross-collateralized. That way, even if Dylan doesn’t recoup on the “artist” royalty, he still receives his “mechanical” royalty.

Multiple writers in a band

To finish this discussion up, you may be wondering if you’re in a band how this works. In other words, if the singer for the band writes the lyrics, and the guitarist writes the music, and the bass player and drummer don’t participate in the songwriting (they may come up with their bass and drum parts, but they are really not writing the lyrics, melody, or chord progression), there are some decisions that have to be made. The members of the band MUST determine what percentage (if any) they have of authorship of the song. In the example above (which is, by the way, basically the situation for the Stones, the Who, Zeppelin, the Beatles, etc.) the typical scenario would be that the singer (who writes the lyrics) would split the authorship (and, therefore, the copyright) with the guitarist (who writes the music), and the other members (the drummer and the bass player) would have no percentage of the authorship (i.e. copyright) of the song, and, therefore, earn no income from mechanical license fees.

This is why, in many, many bands the singer (who often writes the lyrics) and the guitar player (who often writes the music) end up being far wealthier then the other members of the band.

Other bands do it differently. REM, for instance, divides the songwriting credit evenly among the three (for many years, four) members of the band. There are infinite ways to do it, but what’s important is that you sort it out early, and you make clear for each and every song who owns what percent of the copyright. It is this percent ownership of the copyright of the song that determines your share of mechanical income. If you don’t determine the splits, by the way, the courts will simply divide the ownership by the members in the band—four band member, each will have 25% ownership. They will not take the time to sort it out.

As an aside, if all the band members are signed to the label, you also have to determine the splits on the “artist” royalty. Typically, in these cases, all members receive an equal percentage, so the bass player and the drummer would receive the same percentage of “artist” royalty income as would the singer and guitar player.

Summary

Hopefully by this point you’ve seen that mechanical income is really where the money is. Very, very few bands recoup, and therefore the only income ever generated is mechanical income. You must be aware of this, and understand the significance of mechanical income if you hope to survive in today’s record business. Remember, mechanical income is generated any time a song is mechanically reproduced and sold, so there is income that must be paid on songs downloaded from, for example, the iTunes music store.

The record industry is changing, but what will remain constant is that artists who can generate multiple streams of income from their songs via publishing will succeed.

Comments

[Jeff Paul Scam]

I just want to say that the best way to track is by using a trusted source like TuneCore to do the monitoring and collecting for you (this isn't a plug, by the way, it's just reality).

[Russell G Helvey Jr The Producer and Engineer]

Crucial Myth is a alternative Rock band With a
Commercial Sound We Have Been Told We sound a lot like the band LIVE I think That's Because of our Singer He has that Sound But The band is a slight bit Heavy in the music side of things. You can see us live on Youtube CRUCIAL MYTH on the Edge CD can be Down Loaded From ITunes , Amazon.com, Rapsady, The Live Videos
On You Tube are only done with one camera Mic
So The audio is not the best But The Recorded
Music is awsome Check it out if you Can !!!!!

[George Howard]

@Tyler Jones

Tyler,

It's a great idea to have a glossary of terms. Here's a *very* brief glossary:

http://www.9giantsteps.com/?p=854

best,

George

[George]

Ty,

It's a great question, and an increasingly large problem. For online sales, the best way to track is by using a trusted source like TuneCore to do the monitoring and collecting for you (this isn't a plug, by the way, it's just reality).

For performance rights income from online streams, etc., it's important that you affiliate with one of the PROs (performance rights organizations), such as ASCAP, BMI, or SESAC. These PROs monitor the webcasting of songs, collect from the webcasters, and pay out to their affiliated writers. Of course, they also monitor non-online broadcasters, such as terrestrial radio stations, and pay out to their affiliated writers for these uses as well.

You should also affiliate with SoundExchange. They operate in a similar manner to ASCAP, BMI, and SESAC, but instead of collecting on behalf of the writer of the song, SX collects and pays out to the performer of the song and label who released the song. Currently, SX only does this for webcasting, as the current laws don't require terrestrial broadcasters in the US to pay the performer/label.

Of course, you may very well be both the writer, performer, and label of your songs. You should still do all of the above.

If you're not the label for your songs, and your songs are being sold via the online retailers, you'll want to make certain that you're mechanical royalties are being paid by the label who releases your songs to you (the songwriter). You can attempt to do this yourself by auditing and collecting from the label, or you can engage in what's called an administration deal with a music publisher or administrator. Bug music is the most commonly-known administrator, and will collect mechanicals on your behalf. (This is not an endorsement of Bug).

Hope this helps.

George

[Tyler Jones]

One other question I have, would be.
How can I track my own music online?
To make sure I'm getting everything I'm entitled to. I think most artist would love to know about DRM software and management tools for Indie Labels.

Ty.

[Tyler Jones]

I'm so glad I came across Tunecore, for the very reason of articles like this one. I have been producing music since the early 90's, mainly as a hobbiest. But with the knowledge that I'm learning from Tunecore and their friends, is prooving to be a truly great find.

What would be cool is a definition page, to explain in brief what certain terms mean.
ie: Mechanical - Brief description.
Royalty - Brief Description.
Etc.....

Even though many might know what these terms mean,
a small music descriptionary would be very helpful coming to grips with the various music industry terms. Just a thought...

Thanks, so much for your hard work.

Cheers! Tyler Jones.
Tunecore member.

[Dj Mesta]

perfectly explained! and so real!!