The recording contract series; (part 19) the controlled compositions clause

The controlled compositions clause

This is a very, very important topic for recording artists who are also songwriters.

A “controlled composition” is a song which the Artist himself owns, writes and records, rather than a song written by someone else which the artist records. The artist therefore “controls” the song or, more particularly, he controls the mechanical release. As songwriter, and therefore copyright-owner of the composition, he is entitled to a mechanical royalty every time the label wants to print a copy of the CD on which his song appears. Now, it should be no surprise that record companies hate paying mechanical royalties, especially to their own artists. So they will, when signing the artist, use their bargaining muscle to get the artist (if he wants to be signed), to waive his right to some (or even all) of his mechanical royalties, as songwriter.

Essentially, a song is a “controlled composition” if the artist wrote it or otherwise gets a piece of the earnings of the compositional copyright. Sometimes, this definition includes (depending on the record company), compositions owned or controlled by the producer of the recordings (this is bad news for the artist, because he loses a lot of publishing control to the producer. This happened to Seal on his second album, on which Trevor Horn got significant controlled compositions control, and therefore lots of mechanical royalties).

A songwriter (or his music publisher) is paid mechanical royalties each time his song is reproduced in any way (particularly on someone else’s record). In most countries of the world, this mechanical royalty is fixed (rather than being negotiated on a case-by-case basis) as a percentage of the published dealer price. Currently, the mechanical royalty in the UK and South Africa (simplifying things a little) are approximately 8.5% and 6.76% of the dealer price. Thus, if the dealer price of a CD album is R90.00, and assuming the songwriter writes all the songs on the album, he (or his publisher) will be entitled to mechanical royalties of about R6.08 on each and every CD album sold. (If he writes only, say, five of the ten songs on the album then he would receive about R3.25 per album).

Although this is only a general rule, there is in practice, really no such thing as ‘negotiating a rate’ individually in South Africa. As a rule, the rights societies set the price, after negotiating with the labels in the form of RiSA. This is a far better situation for the publishers, because they are not then subjected to the often overwhelming bargaining power of the record companies. CAPASSO now being the administrative agency for mechanical rights in South Africa.

The position is different in the USA: rather than the mechanical royalty being a percentage of the retail or wholesale price it is, instead, a fixed number of cents per song or per minute. From 1909 to 1976 it was 2c (for a song of 5 minutes or less). In 1976 it went up to 2.75c. In 2004 it went up to 8.5c, and in 2006 it went up to 9.1c per minute of playing time or fraction thereof, and 1.75c per minute or fraction thereof, and so on.

As at December 2013, the US statutory mechanical royalty rate for physical recordings and permanent digital downloads is set at 9.1c for recordings of a song 5 minutes or less, and 1.75c per minute or fraction thereof for those over 5 minutes. This then multiplied by the number of recordings the user wishes to make.

In Canada, there is no compulsory (statutory) mechanical rate, as there is in the USA. Instead, there is an agreement between the Canadian Record Company Association and the main publishers resulting in a set rate in pennies or dollars.

For some time, USA and Canada record companies have argued that these amounts are too high. Given that US and Canadian law usually permits them to do so, they have therefore sought in their agreements with their artists to reduce the so-called “statutory rate” to three-quarters of the normal amount paid for mechanicals. This is sometimes known as the “75% Mechanicals Clause” (in the US, it is called “75% of statutory”). This clause is commonly applied (and there is even a 50% Clause for record clubs and budget records).

But even though this clause applies to a uniquely North American situation, South African (and other) record companies have started to use the term “50% of statutory rate” in local contracts. This, of course, is a mistake – what they mean to say is “50% of the normally applicable (or standard) mechanical royalty as set by the applicable mechanical royalty collection society or industry agreement as permitted by the Copyright Act.” (the South African Copyright Act does provide for a 5% statutory mechanicals rate, but also allows for ‘industry agreement’ to replace that, and that is what has happened. Our applicable mechanicals rates, therefore, are not statutory, but contractual. They are 6.76% of PPD for physical product and 8% of retail for downloaded product).

In any event, what the label is doing with this clause is reducing the mechanical royalties it should be paying on each CD, by using its bargaining power over the songwriter, at the time the songwriter is signing as recording artist.

In addition, record companies will often seek to limit the number of tracks on which they pay mechanical royalties – usually no more than two songs on a single and no more than ten songs on an album, even if, say, the single has three songs on it and the album has fourteen songs on it (as modern CD’s normally do). Today, composer artists should be trying for more than this, if they write all the songs on the album they are recording.