Music publishing agreements series; (part 13) How do publishers work with the royalty collection societies? (Mechanical Royalties)

I will now give a brief and somewhat simplified explanation of how mechanical royalties are calculated and paid through the societies, either to the composer or the publisher or both. The biggest of these, in terms of turnover, is still the pressing of CD’s and DVD’s (although internet downloads are set to rival this in the future, and copying by broadcasters is not to be underestimated as a revenue stream [it is believed that the SABC owes SARRAL’s liquidators around R4 million for this, at time of writing]). As you know, in order to acquire the right to mechanically reproduce a song on a record, the record company must pay the composer (or his publisher) a fee. How is this fee calculated and distributed?

Let’s start with the UK, because South Africa’s conventions come from there:

United Kingdom

In the UK, the fee is set by the Copyright Tribunal, who determined the dispute between the representative body of all the major record companies, the BPI and the representative body of all the major publishers, the MCPS. There is one set rate of mechanical royalties rather than the royalties being negotiated each and every time a different song is exploited. At the moment, the mechanical royalty is equal to 8.5% of the published dealer price of the record. These figures are prior to the deduction of the MCPS collection fees, which are either 4.75% for record companies operating under the “API scheme” or 12.5% for others.

This formula presumes that the composer wrote all the songs on the particular record: if he did not then the figure is pro-ratised accordingly, so that if for example, a composer wrote only five of the ten songs on a CD then the mechanical royalties will be halved. The other half will be paid to the composer or composers who wrote the other five songs (or his or their publishers).

Traditionally, these amounts would be paid by the record company to the MCPS who will deduct their standard collection fees and then account to the publisher who in turn would account on to the composer for the composer’s royalty, the difference being retained by the publisher as his “margin.” The recent trend, however, is for the MCPS (and SAMRO did follow suit) to pay the publisher his share and the composer his share, directly. CAPASSO has stated that it intends to pay the entire mechanical royalty to the publisher, on the assumption that this will simplify the process. (Some feel that this does not protect the composer from dishonesty or insolvency on the part of the publisher, but CAPASSO will revisit this if it becomes a problem).

South Africa

When distributing royalties collected from various sources, CAPASSO issue(s) statements in the name of the composer/copyright owner for each types of royalty. It also gives as much information as is practically possible to ensure that the composer/copyright owner can easily identify the recording that has taken place. Thus, CAPASSO has separate royalty statements for “phono” (royalties from sales of records, tapes & CD’s emanating from record companies), blanket licenses (such as SABC, television recording licenses) and individual production licensing. (This latter section includes royalties from such sources as film licensing, private recordings, video recordings, recordings for advertising, etc.)

In truth, “phono” mechanical royalties have not largely been handled by the societies in South Africa for some time, due to the turmoils of SARRAL. The labels have preferred to deal directly with the publishers, not coincidentally because every major label owns a publishing house as well, thus societies have been quite easy to ignore. ELS, Times Media’s logistics company, have been handling this. But this is possibly set to change with the introduction of CAPASSO, which will presumably attempt to bring the majors back to the collecting society table.

It is presumed that CAPASSO will follow a similar trend to what has gone before it. If so, on completion of the analysis and allocation of royalties to the various composers and copyright owners, these amounts, less commission, will be posted to their accounts. At the end of every calendar quarter a relevant statement will be issued, provided there are royalties in the account. The timescales are traditionally as follows:

• Local composers/copyright owners receive royalties within 60 days of the quarter ending March 31, June 30, September 30 and December 31.

• Foreign owners receive their royalties within 60 days of the half year ending March 31 and September 30.

Naturally, the royalty collection society will deduct its commission before paying. Societal commission vary from year to year and are differently structured, depending on the society. It’s worth investigating what CAPASSO’s fees are (since it works on an “agency” basis), but anything lower than 15% is excellent, and anything over 30% is unacceptable.

A good touchstone is the Regulations on Collecting Societies for needletime, which state that the maximum commission should be 20%. Note that royalties emanating from other countries are subject only to a commission being charged by the society in the country of collection. On the receipt of the royalties by the local society, a further commission might be charged before passing the royalty on to the local composer / copyright owner.

SAMRO has long and involved tariff sheets, and generally charges between 5% and 8% for a normal mechanical production, using the split royalty model. (Since their members can be songwriters or publishers, they will send the publisher his share, and the composer his, just as they do with performance royalties).

SAMRO and NORM do not charge commissions in addition to administration costs, like SARRAL did NORM, representing publishers, will generally only pay the publishers, who will then reimburse their composers. Through these two bodies, mechanical royalties emanating from other countries are passed on bi-annually as quickly as possible to the local composer/copyright owner in the same way. CAPASSO will only charge agency fees.

“Cue sheets” are supposed to be provided by users for their mechanical reproduction of music, but the laborious and involved process of getting cue sheets from broadcasters, production houses and other users has been problematic, as has the manual processing of the cue sheet information that is received. CAPASSO intends to address this with a sophisticated IT system, which should make correct distribution of mechanical royalties much easier.

Our mechanical royalty rates are basically set by agreement between the publishers (in the form of SAMRO and NORM) and the labels (in the form of RiSA). This is because, although the Copyright Act does provide for a statutory rate of 5%, it also provides that this can be varied by “industry agreement.” (The industry agreement model follows the UK method, and is currently 6,76% of PPD for physical product, 8% for digital downloads and 9% for iTunes). Not so in the US.