Tracking How Royalties Flow In the Digital Age, And How the MMA Will Play a Role (Guest Column)

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As a songwriter or an artist, you sometimes have to wait up to six months or more to get paid for your work. It’s frustrating, even for those who have been working in the music industry for decades. 

If royalties were generated yesterday, why would it take half a year to reach your pocket? To understand this problem, you need to take a closer look at the entire business process. 

Here is a poster that captures all the nuts and bolts of the music industry in a single snapshot. While it is mainly constructed from a European point of view, the U.S. flow of revenues will increasingly look like this once the music licensing collective and the blanket mechanical license created by the Music Modernization Act begin functioning on Jan. 1, 2021.

The Publisher Process

• The songwriter writes a song.

• Once the song is ready, the songwriter reaches out to a music publisher (a.k.a. publisher) to sign a contract; and has either signed with a performance rights organization already or will then do so. In signing with a publisher, the songwriter assigns the song copyright to the publisher and agrees to split the royalty generated from the song. The split can start at 50-50, depending on the contract, or could be a greater split if the songwriter signs a co-publishing deal or administration deal.

• The publisher helps register the song at different collecting societies around the world. Registering a song is like announcing to the world that a song belongs to a particular publisher and that all royalties from that song must be paid to that publisher.

• Publishers pitch the song to record labels and artists so that the song is finally recorded and released.

• Publishers collect the royalties generated from the song across all the different channels around the world and pay the due share back to the songwriter.

The Challenges Publishers Face

• It is difficult for publishers to register songs with all societies globally because societies in different countries follow different rules to register a song. In some countries, publishers cannot even directly register a song and have to go through local publishers. Following a different set of rules for each country can be a complicated and time-consuming process.

• Most publishers have contracts with songwriters that were signed before the introduction of online channels. This may mean that the publishers still have to adhere to old contractual agreements. One such example is sending printed statements to songwriters: with online streaming, the volume of these statements has gone up drastically. But some publishers still have to send these printed statements in big boxes and trucks, either for contractual reasons or because of failing to upgrade systems, which adds significantly to operational costs running in the millions of dollars.

The Record Label Process

• The record label (usually the A&R, i.e. the artists and repertoire department) discovers an artist and signs him/her to record a song.

• The record label arranges and invests in everything that is required to record the song.

• If need be, the record label then connects with the music publisher or the collecting society to acquire a license for the song.

• Once the song is ready, the record label distributes it to all channels and does all the marketing to promote the song.

The Challenges Record Labels Face

• Distribution to ever-growing music channels is difficult. More and more startups are working in the music landscape and it is difficult for record labels to keep track of new channels/apps that are introduced every day for music consumption.

• Every time a song is streamed the labels are paid anywhere from near 2/10’s of a penny up to nearly a penny; and the ability to process such micro-pennies adds complexity. Either the record labels have to find a better way to process these tiny sums or wait until they add up to at least a penny.

Ways To Monetize Music

There are many ways or license rights through which a songwriter or artist can make money.

• Performance license -- This is a license given to play a song on radio, TV, in restaurants, retail stores, clubs or at live performances. In this case, the royalty is paid to both songwriter and artist.

• Mechanical license -- This is a license given to an artist (or record label) to record a song written by a songwriter. In this case, the songwriter gets a share of the income that the record label and artist make by CD sales, streaming or services such as iTunes etc. 

• Synchronization license -- This is a license given to use song in TV programs, films, videos, commercials, video games etc. In this case, the user of the song pays for the license and the royalty is paid to both songwriter and artist.

Key Expectations of Artists and Songwriters From Record Labels and Publishers

• Record labels must help songwriters and artists in reaching out globally through all possible channels with their songs. This helps them maximize their revenue and stature.

• Songwriters and artists want to be paid from the publisher or record label as soon as the royalty is generated.

• They want the publisher or record label to provide them with a prediction of their future income.

• They want to be guided on how to utilize their social data – whether more engagement with fans on social media would mean potentially more revenue.

Key Issues Artists and Songwriters Are Currently Unhappy About

• Publishers and record labels can sometimes take 6-12 months to pay their songwriters or artists from the day the royalty is generated.

• Songwriters and artists are creative people that want to focus on creative work. They don’t want to deal with distribution, marketing, registration, licensing, etc. This is the reason they want to latch on to publishers and record labels that would do these things for them.

• Societies that collect royalties for offline channels sometimes tend to miss reporting a live performance or an event. In such a case, songwriters and artists lose that royalty. Ideally, publishers and record labels would keep a closer tab on such things.

The Statement Flow

After the societies collect the royalty, they send royalty-calculation statement files to publishers and record labels. 

Publishers and record labels then process these files to do song matching, which is basically matching songs sent by societies in statement files to songs in the publisher/record label's database. (In the U.S., this song matching is the responsibility of the digital service. On Jan. 1, 2021, this becomes the responsibility of the licensing collective created by the Music Modernization Act.)

This matching is required to identify exactly which song generates royalties and thus which songwriter and artist must be paid; and matches the royalty amount in the statement files to what the publisher/record label actually gets in its bank account.

Statement Flow Challenges

• The biggest bottleneck in the statement flow is the matching process. Around 30-40 percent of the songs sent in statement files have to be manually matched. The main reason for this is the song title sent in statement files is different from the song title in publisher or record label databases. This makes the process very slow.

• Due to a matching bottleneck, songwriters and artists sometimes have to wait as long as a year to get paid.

The Income Flow

Once a song is consumed, it generates publishing income and recording Income. Publishing income can reach the songwriters in four different ways: 

• Performance License -- Income is collected by societies, which in turn pay out to publishers and songwriters. Or the societies pay only to publishers, which then pay to songwriters.

• Mechanical License (Physical) -- Income is collected by societies, which in turn pay out to publishers. The publishers pay to songwriters. 

• Mechanical License (Digital) -- Income is collected by DSPs, which in turn pay out to publishers. The publishers pay to songwriters.

• Synchronization License -- Income is collected directly by publishers, which pay out to the songwriters. 

All recording income is paid directly to record labels, which in turn pay out to artists.

With the onset of the digital transformation of the music industry, publishers and record labels are slowly moving toward the value proposition of who pays the fastest and who can collect royalties globally without ever missing an event. Let’s see who wins the race.

Narjeet Soni is the CEO of Lean Apps. Soni is a digital expert who is implementing technologies like web, mobile apps, blockchain and machine learning to transform music publishers and record labels.