Behind the Deal: Licensing, Tracking and Paying Royalties for Recorded Music

As wireless delivery of music promises to be a big driver of entertainment revenue in the coming years, publishers, labels and artists are actively licensing their rights in music for digital entertai

As wireless delivery of music promises to be a big driver of entertainment revenue in the coming years, publishers, labels and artists are actively licensing their rights in music for digital entertainment.

They're setting fees and royalties at a variety of rates, some that may stick for the long term and others that may have to adjust to changing legal, business and consumer demands.

The following articles discuss current deal terms and related issues that the music industry and digital service providers face on a daily basis as they charge toward a wireless world.


In the United States, music publishers may either license compositions for ringtones and related uses directly to the aggregator or service provider, or they may permit the performing right organizations (ASCAP, BMI or SESAC) and the mechanical right organization (The Harry Fox Agency) to license the songs on the publishers' behalf. Contract terms -- including royalty rates -- vary from deal to deal.

Outside the United States, the laws in many countries require licensing from a local society that often controls performing and mechanical rights. These societies include GEMA in Germany and JASRAC in Japan.

Rights in Compositions: Ringtones and similar uses of music involve the process of uploading, transmitting and downloading recorded compositions. They may also involve streaming from Internet sites.

The performance right covers streaming and other processes that are considered to be public performances.

The mechanical right covers copying -- "fixing" a copy of the original composition embodied in a recording onto a computer server and making copies of the recorded composition for distribution to the public.

Licenses for Compositions: Publishers that enter deals directly with aggregators and mobile phone service providers often require payment of a one-time "fixation" fee per composition, which only permits the service to copy the recorded composition to its computer server. While some hit songs may generate a $50 fee, most compositions trigger a fee of $25 or less.

Sometimes deals cover performance and mechanical rights, with publishers often charging the greater of 10 or 12 cents for each completed download or a percentage (such as 10% up to 30%) of all monies earned or received by the service provider from all forms of exploitation and sale of the composition.

In other deals, this percentage may be based on the consumer price of the ringtone or similar use. Often the deal terms require the ringtone company to guarantee that: (1) the price to the consumer will not be less than some amount, such as 99 cents; (2) the ringtone will be sold to the consumer within a certain price range; or (3) a minimum royalty will be paid regardless of the price to the consumer.

If the song will be part of special promotions or marketing tie-ins, publishers often require additional fees.

For those who license from a performing right organization rather than directly from a publisher, ASCAP has a "wireless music license." BMI and SESAC offer a "mobile entertainment service license."

For mechanical rights, the Harry Fox Agency first negotiates an agreement with an individual service provider or aggregator. HFA then sends an "option" letter to its publisher members. If they elect to opt in, HFA administers and collects mechanical royalties for the use under that license on their behalf. If any publisher does not opt in during a certain period of time for that license, HFA does not include that publisher's repertoire under the license.

Overseas, many societies charge a percentage of subscriber revenue, such as 10% or 12%, and apportion part of the fee for the performing right and another part for the mechanical right.

Not all legal experts agree that each digital use includes performance and mechanical rights. While these rates continue to evolve, future laws and regulations may clarify the rights.

Publishers and the societies typically require aggregators or mobile phone service providers to provide quarterly royalty statements within 45 days after the end of each quarter.

Licenses for Masters: Licenses for use of the sound recordings embodying compositions must be negotiated and licensed directly from the sound recording rights holder, typically the record label.

These deals often require payment of a percentage of the consumer price. They may range from 30% to 60%, depending on the popularity of the featured artist and whether the rate also includes payment for the composition.

In an effort to keep revenue for mobile phone delivery within its own revenue pot, some publishers are recording compositions from their repertoire to license directly to mobile phone companies. In this way, they bypass the aggregators and record labels, keeping the share of revenue for the composition and the master recording within their company.


For music publishers and collection societies, ensuring that every composition is accurately registered throughout the world in order to track global earnings is a constant struggle.

Since song titles cannot be copyrighted or trademarked, many compositions share the same or similar titles. Artists and songwriters also use pseudonyms rather than their legal names on occasion.

Ensuring the entry of accurate identifying information in computers around the world is a must. From licenses for mechanical reproductions (CDs, digital downloads, ringtones) and public performances (TV, radio, venues) to deals for synchronization use (audiovisual) and print rights (lyric reprints, sheet music), even a misspelling can result in lost revenue.

Suspense Accounts: For example, publishers' representatives say that many labels and societies in the United States and abroad hold money to be paid to publishers that cannot be accurately identified.

Unlike identifiable royalty recipients who simply haven't kept their contact information up to date, these rights holders have not been paid due to inaccurate song titles, misspelled names or pseudonyms or incorrect publisher listings.

Some industry reps believe there are substantial sums of money in these "suspense accounts," which they say could be paid to proper parties if the labels and societies would provide the information they have available to publishers. It's unclear whether these funds are eventually paid to anyone.

Black Box Money: Outside the United States, the laws of many countries prohibit direct licensing by publishers for many uses of their repertoire. Also, the collection societies in these countries normally only distribute royalties received to publisher members that have offices in their countries.

As a result, mechanical and performance royalties generated in those countries are not paid to U.S. publishers when the revenue cannot be matched to a local publisher or a publisher affiliated with another society. The money ends up in a so-called black box.

Typically this money is held for a period of time and then either used for certain society purposes or distributed to the society's publisher members for them to share in varying percentages. Germany, Italy and Holland hold the largest amounts of such funds, sources say.

Meeting the Challenges: In an effort to integrate accurate song registration with reported uses of repertoire throughout the world, many publishers and societies are using the Common Works Registration. This system is essentially a standardized template for consistently showing information globally.

While not in use everywhere yet, many societies say they support the system and hope to integrate it in the future.

Successful publishers also believe that publishing revenue can only be efficiently licensed, tracked and collected with centralized administration. However, it is also important to have well-respected representatives or employees based in foreign territories to actively monitor the publisher's rights and royalties.

Every foreign rights society has its own unique rules and standards. They tend to interpret rights and royalties in a fashion that is easiest for them to incorporate into their own systems, publishers say, even if the interpretation isn't consistent with the rights originally granted -- or restricted -- by songwriters to the publishers.

If publishers don't pay attention to these details, sources say, the foreign societies may be licensing rights that the publishers -- and therefore the societies -- don't have contractually. Even if the publisher has the rights, they add, sometimes foreign societies do not ask for permission to license the work, resulting in rates set lower than the publisher would or could set for the use.

For example, U.S. publishers typically grant the U.S. performing right organizations the non-exclusive right to license digital performances of songs. In European territories, the rights societies typically have exclusive rights to grant digital performance licenses, but not due to any legal requirement, sources explain. They simply base this right on agreements made in the past.

To avoid over-reaching by foreign societies, some publishers say that they must be very proactive outside the United States to ensure their digital licensing rights are protected and their royalties at the publisher's rates are collected.


For record labels, keeping track of sales, licenses and returns, and then calculating royalties according to hundreds of varying contractual terms, is an enormous task.

This is the result of many years of negotiated recording contracts with a wide variety of provisions requiring multiple calculations. Royalties are listed as a percentage of some price -- most often a retail price -- and numerous deductions and reductions from that price are taken before determining the amount upon which the royalty percentage is based.

For example, royalties are only paid on 90% of sales under older contracts still in effect. Under other provisions, labels are not required to pay royalties on "free goods" that reflect discounts provided to the distributors' customers, they take deductions for the cost of packaging, and they reduce royalty rates when distribution is through the use of "new technology" or units are sold outside the United States.

Trying to interpret and match terms in contracts -- some with more than 100 pages -- with current accounting parameters is a daunting task, especially in royalty departments that are running leaner with fewer personnel.

The challenge has become even greater with the substantial increase in data received. While information once consisted predominantly of album sales, the amount of new data has increased exponentially with the online sale of individual digital tracks.

While major labels are providing more details in their royalty statements than they did in the past, auditors say it will take time for their accounting systems to run efficiently and cost effectively while incorporating all the new digital distribution methods.

In response to the accounting challenges under these deals and complaints by artists, major labels are considering offering more "transparent" deals. These new deals would have simpler calculations -- royalties based on a wholesale price without complex deductions.

While business managers say they are not uniformly in place at any label yet, they caution artists and their legal representatives to be prepared for a change in mindset when royalty rates may seem to be lower than current rates.

A current royalty deal for a 20% royalty with various deductions could, for example, effectively equal a 14% rate without deductions. The number sounds much lower, resulting in artists balking at the rate. After running some numbers, however, artists could find they will receive more cash in hand under a new deal without deductions.


While artists may make fewer inquiries of record labels after receiving more detailed royalty statements, artists will - and should - continue to audit labels, artists' auditors say.

There will be errors in calculations or in tracking specific album titles and recoupable expenses.

More importantly, business managers say, certain contractual provisions are open for interpretation as they relate to the actual amounts calculated. This is one of the reasons that an artist's auditor -- who acts as an artist's advocate rather than an independent third party -- and the label rep end up at the negotiating table after the auditor presents the amount found to be due to the artist.

One issue involves "retail" prices, which are really a fiction, sources say. Record companies cannot set retail prices -- that could be considered to be unlawful price fixing. They may only control their wholesale prices.

Therefore, a retail price used to calculate royalties is actually the wholesale price plus some increased percentage rate that the label determines.

For example, some CDs may sell at retail for wholesale plus 80% ($10 wholesale, $18 retail) while others sell for lower prices. Instead of itemizing each actual retail price, labels may use an "average" bump of 20%, 25% or 30%, auditors say. Artists' representatives will argue that the "retail" price should be a much higher percentage, resulting in higher royalty payments.

Another negotiating point involves artists who are signed to U.S. record companies and whose records are sold in international markets.

As the foreign record affiliates collect and remit payment to U.S. companies, they are generally required by the laws in their country to withhold certain amounts for local taxes, often around 10%.

U.S. labels then typically reduce an artist's royalty by the pro-rata share of this tax paid. However, the U.S. label may claim the withholding as a tax credit -- gaining a financial benefit. Since the money was not directly withheld from the artist in the foreign territory, the artist may not claim that withholding.

Labels rarely credit this benefit back to the artists, auditors say. For artists with substantial international sales, this withheld amount can add up. Artists with clout have been known to negotiate a deal with the label that requires the artist's pro-rata share of any amount the company actually used as a tax credit to be credited to the artist.

Overall, artists' auditors say the major labels' accounting systems as a whole accurately track the inventory and sales. The majors retain independent auditors to verify their financial records. While this doesn't ensure that an individual artist's expenses or sales are in the right account, these independent audits ensure an accounting system that is accurate within a very small margin of error.