Types of royalties (& income streams) related to musicians

In a nutshell, when a piece of music is written, a legal right to it, called a copyright, comes alive and vests on the songwriter. This is the copyright in the composition (i.e. the creation of the song, its idea, lyrics, melody, structure etc). If that piece of music is later recorded (by anyone, including the songwriter himself), a totally different copyright, and usually vests not in the songwriter, but in the record company (or whomever paid for the recording. If this happens to be the songwriter as well, only then does the copyright in the recorded work also vest in him).

However music is used, everyone involved needs to keep these two separate rights in mind at all times. The importance of understanding these two distinct and separate rights cannot be over-emphasized, and anyone involved in music needs to be very clear on how they are all dealt with in transactions.

Through detailed comprehension of the types of royalty streams that can be earned by musicians and the differences between the different streams; hopefully one can gain understanding of the music business.

Outlined henceforth are the different types of royalty streams:

Performance royalty:

A performance fee is not copyright related. It is the fee an artist gets paid for performing (usually live). A performance fee is normally paid by the club manager or concert promoter and is nothing more than a payment for performing (playing live, performing on a broadcast, doing a session, appearing at an event, etc.)

Performance royalties, on the other hand, are copyright-related. When music is 'performed' to the public, a performance royalty becomes payable to the owner of the copyright in the composition. This person is usually the songwriter or his publisher if he has one, or (less commonly) another person to whom the copyright in the composition has been sold or transferred. In this definition, music is 'performed' when it is played live in public or when it is broadcast (transmitted) on radio or TV or other format, or when it is diffused (played off CD or radio or any other format in a public venue).

Mechanical royalty:

A mechanical right, therefore, is the right that arises when music is transferred from one format to another (from a master tape to a CD for example), or when it is copied. The nature of mechanical usage can vary, e.g. when CD's are pressed, when videos are put on a different format for broadcasting, when a song is uploaded to or downloaded from iTunes or other site, or when music is copied onto radio or television programming systems. Another example would be when an artist 'covers' a song written by another person and records it.

On transference or copying, a mechanical right is raised and a license (also called a 'mechanical release', or just plain old 'permission') must be obtained from the copyright owner before the transfer may legally take place. (This is subject to the exception of "compulsory mechanical licenses")

Artist royalty/recording royalty:

This royalty is the percentage of sales income paid by the record company to the artist (as opposed to the songwriter) every time a copy of the artist's product (usually his CD or DVD) is sold to a retailer, aggregator or other person. These days, it obviously also includes the artist's percentage of the purchase price paid by download organisations to the record company. The artist/recording royalty is paid by the label to the musician in his capacity as artist (or in the case of bands, the band members), rather than as composer, for sales of CDs or other products.

Needletime:

Under the concept of needletime, recording artists, background singers, instrumentalists, and anyone who contributed to a recording that is receiving airplay (performance) will be compensated for use of their work when it is performed or communicated to the public. This means that needletime stems from the copyright in the recording (not the composition). It is also important that it is a sub-category of performance royalties.

VPL:

VPL (Video Performance Limited/Live) is, put simply, needletime for music videos, i.e. a royalty paid by the user (usually a TV station) to the owner of the copyright in the video recording (usually the label) for the public performance of the video.

Synchronisation (synch) royalty:

A synch royalty is the fee paid to the composer or publisher for the use of his composition on a film or video (synchronisation). Where an existing recording of the composition is used on the film or video, a separate royalty is payable to the owner of the copyright in the recording, usually the label. This means that normally, when a synch license is granted, in reality, two licenses are granted - one for the composition and one for the recording. It has become industry practice to include both two licenses in one document and for one fee to be charged and split between the publisher and the label (either of whom may have facilitated the synch). This leads many people to believe, incorrectly, that one license is granted when a recorded work is synchronised.

Producer's royalty:

Sometimes, a producer is paid a percentage of sales, just like the Artist Royalty, by the label. This is often around 3% or 4% of PPD. (often he will be paid an up-front producer's fee instead of, or even in addition to, the royalty). Where he is paid an ongoing sales royalty, this is directly related to the sales created by the label after it has acquired the copyright in the recording.

Performance fees/Touring:

Refers to payment an artist receives from delivering a performance (usually live) and should not be confused as a royalty payment which stems from licensed copyright use. A performance fee is normally paid by the club manager or concert promoter and is nothing more than a payment for performing (playing live, performing on a broadcast, doing a session etc.)

Merchandising:

Merchandising comprises the acts of seeing to the manufacture and promoting goods or services for retail sale, including marketing strategies, display design and discount offers. Merch items can include; t-shirts, sweatshirts, CDs, DVDs, memory sticks, hats, mouse mats, jewellery, bumper stickers, etc.

Sessions & appearances:

These fees are normally for a musician or band making an appearance at an event. Could be as an honoured guest, an MC etc.

Sponsorship & endorsement:

Financial payment or payment in kind by a third party to the artist or other entity in return for promotion of the third party’s products or brand.