Follow the Money
To thrive in the new music economy, today's musicians need to become educated about all possible revenue streams.
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Developing a music career today requires a broad set of musical, business, and social skills mixed with a healthy dose of out-of-the-box thinking. That's because the industry continues to shift from a commodity-driven business (e.g., recorded music) to a service-oriented one. As career self-management tools develop and as the barriers between musicians and their audiences break down, gatekeepers and middlemen become less relevant. Music licensing, performance, teaching, and music-related byproducts have become essential elements of a career strategy. Much has been written about the potential earnings from high-profile television, film, and video-game music placements. This article explores some lesser-known revenue streams and touches on future trends that could help musicians garner additional income from their intellectual property.
Along with a solid understanding of the complex rules of the "old" music business, artists are wise to stay on top of "new" music-business issues, such as disruptive trends in Web and mobile application technologies, media production, marketing, product development, and branding. Understanding the forces that are driving this disruption can help musicians get a head start on future trends and opportunities. As venture capitalist and musician Roger McNamee recently noted, "Just assume the future will be different from the present. If you start from that [premise], it will be a huge help."
Know Your Rights Organization
Performance rights organizations (PROs) such as ASCAP, BMI, and SESAC provide opportunities for composers and music publishers to maximize performance revenue and take advantage of educational, networking, and promotional programs. Each offers workshops and special recognition awards for writers.
Neara Russell '10, an eclectic composer and performer, has tapped a broad mix of revenue streams. An ASCAP member, Russell is a recipient of an ASCAPlus award and the 2010 Richard Levy Composition Award. Since moving to Los Angeles, she has worked as a keyboardist and background vocalist with pop artist BC Jean. She has also been performing her own pop and contemporary classical music, composing for music libraries, teaching, and appearing as a musician in movies and television shows. She is a passionate entrepreneur who has educated herself on all aspects of the music business. "Music is a service now," she says. "Publishing survives today because it is a service."
Russell became involved with ASCAP before she entered college but learned about the ASCAPlus Awards from Berklee Composition Department Chair Greg Fritze. The program was "set up to compensate our many members whose music is primarily performed outside of the venues and broadcast media that we survey," says ASCAP Executive Vice President of Membership Randy Grimmett. "We also give ASCAPlus awards to writer members whose catalogs have prestige value for which they would not otherwise be compensated. Each writer chooses a broad division [concert music, jazz or popular music] then summarizes his or her performance activity for the preceding year-live concerts, airplay on terrestrial or Internet radio, placements in film and television projects, etc. Anything that would [constitute] a public performance. The ASCAPlus Awards are open to any [ASCAP] writer or composer. We make sure that the submissions in each division are judged by a panel of experts in that field."
In Russell's case, her concert works qualified her for the award. "I've had performances [of my works] at Berklee and had orchestral premieres in Brazil and Argentina," she says. "I perform my pop music in small clubs. Every spring, I compile a list of performances for the year, the size of the venues, and the exact pieces that have been performed. ASCAP calculates a royalty that is an estimate of what I would have received if these performances had been surveyed."
The program is open to writers (not publishers) who earn less than $25,000 a year in domestic performance royalties. Awards are paid once a year as part of the January writers' distribution. According to Grimmett, ASCAP distributes more than $2 million in ASCAPlus awards money each year. "The number of recipients fluctuates depending on how many applications we receive, but it's typically around 5,000."
BMI Live allows writers to input performance information online capturing data to yield payments that might otherwise fall under the radar. BMI also offers its members a wide variety of workshops, educational opportunities, and awards programs across genres.
BMI, ASCAP, and SESAC each survey music performances somewhat differently. Depending on an artist's musical genre and career goals, one organization may be a better fit than the others.
Digital Dollars
Established in 2000, SoundExchange is an independent nonprofit organization that administers the collection and distribution of recording royalties from noninteractive digital music performances. This is a new royalty stream paid to record labels, featured performers, and backup musicians. It costs nothing for a musician to register. Thus far, SoundExchange has distributed almost $1 billion in digital-performance royalties, and this number will continue to grow as music streaming becomes more pervasive.
To understand which revenues SoundExchange administers, and where they fit into the complex mix of music revenues, you may want to review the underlying principles of copyright and music publishing. Several books outline this complex subject, including Randall D. Wixen's, Plain & Simple Guide to Music Publishing and Donald S. Passman's, All You Need to Know about the Music Business, which are excellent resources for every musician's bookshelf.
Performing Arts and Sound Recording Copyright
Songs and instrumental compositions are registered with the U.S. Copyright Office on what is called a performing arts (PA) copyright form. This registers the underlying musical work, but not a specific recording or performance of this work.
Recordings are registered with a separate form, called a sound recording (SR) copyright form. Understanding this distinction is essential to tracking the various royalty streams paid to composers and performers.
Here's the breakdown: Songwriters, composers, and music publishers receive royalties for the use of their work, and performers, and the sound recording copyright owner (usually a record label) receive revenues from sales and licensed use of the sound recording itself.
Let's consider an example summarized from Wixen's book. The Beatles had a major hit with their recording of the song "Twist and Shout" by Phil Medley and Bert Russell. The music publishers of the song own the composition and, therefore, the PA copyright. After the Beatles recorded the song, the group's record label registered an SR copyright. Similarly, the record label for the Isley Brothers-who also recorded a version of the song-registered an SR copyright for the duo's recording.
The Beatles' record label paid two royalties for the recording of "Twist and Shout": one to the song's publisher for the PA copyright (called a mechanical royalty), and another as an artist or recording royalty to the Beatles for the group's SR copyright. Understanding the difference between these kinds of royalties is very important.
Recorded Music: Mechanical and Artist Royalties
A mechanical royalty is based on a statutory rate per unit sold, which is currently set by copyright law to be a maximum of 9.1 cents (or 1.75 cents per minute if the song is longer than 5 minutes) per copy distributed. This statutory rate also applies to full digital download sales through companies such as iTunes. As a result of negotiations, the actual rate paid to the publisher is typically reduced.
An artist royalty is the negotiated percentage (typically 10 percent to 15 percent) paid to the artist by the record label. The artist royalty is applied to what are called recoupable expenses: advances for recording costs, marketing, etc. Usually, the artist must repay all recoupable expenses out of his percentage before he receives royalty payments from the label.
So, when recorded music is sold, in either a physical or digital format, the record label pays two royalties: a mechanical royalty to the song's publisher, and an artist royalty to the performer.
In the record deals inked before digital rights existed, licensing and sales were treated quite differently. Artists received 50 percent of all income from the licensing of master recordings. Recent highly publicized lawsuits by artists including Eminem and Chuck D claim that digital downloads are in fact, "licenses," not "sales," which could significantly increase the amounts owed to artists by their record labels. Stay tuned, as this dispute is far from settled.
Performed Music: Terrestrial and Digital Royalties
Now let's consider two other kinds of royalties. When a musical work is performed or broadcast publicly, a royalty is sometimes paid on a PA, SR, or on both copyrights. Live performances and radio and television broadcasts pay a royalty to the music publisher and composer. These licenses can be negotiated directly with the publisher but are usually administered by a PRO. The music publisher and the composer split these returns 50-50.
Terrestrial broadcasters are required to pay only performance royalties on the PA copyright (music publishers and composers), not the SR copyright (record labels). This provision was "grandfathered" into law because radio was considered a promotional partner for record companies. In recent years, this has become a hotly contested issue. Record labels and musicians have lobbied to force broadcasters to pay the SR royalty, while the broadcast industry has fought hard to retain its exemption claiming that this would constitute a "tax" on music.
With the advent of noninteractive online music streaming (e.g., Internet radio), Congress established that royalties from digital performances should be paid on both copyrights. And this issue brings us back to SoundExchange.
SoundExchange works much like a PRO, but it collects and administers royalties on noninteractive digital performances, distributing proceeds to record labels and performers. Royalties are divvied up 50 percent to the owner of the SR copyright, 45 percent to the featured performer, and 5 percent to the backup musicians. If you are a featured performer under contract to a record label, SoundExchange pays you directly, sidestepping any recoupable expenses assigned under your recording contract. SoundExchange tracks digital cable and satellite television services (Music Choice and Muzak), satellite radio services (XM and Sirius), and noninteractive webcasters such as Pandora, Slacker, and Federal Communications Commission-licensed terrestrial radio programming that is broadcast over the Web.
In August 2011, Sirius XM Radio announced that it would work with Music Reports Inc., a music-rights administration service, to directly license music from record labels. This change could have major implications for performers as well as Sirius XM programming policies. If a featured performer's royalty is sent directly to the record label for distribution, it could be applied to recoupable expenses or even paid at the artist's contract rate. Sirius XM could also change its music programming policies as it works directly with record labels. The Future of Music Coalition, a nonprofit education and advocacy organization for musicians, is following this development closely.
To summarize: When a song is noninteractively streamed on a website, the site must obtain a performance license in the United States from ASCAP, BMI, or SESAC. This royalty is paid to the publisher and composer. Unlike terrestrial radio, the site must also get a "compulsory license" from the owner of the recording copyright. SoundExchange administers this royalty and pays it to the record label, featured performer, and backup musicians. Download sales work much like CD sales; the record label pays a mechanical royalty to the song's publisher and an artist royalty to the recording artist.
Royalties for on-demand digital streaming services such as MOG, Rhapsody, and Spotify are not administered by SoundExchange. Interactive audio-streaming deals are still quite new and not yet standardized. In November of 2011, more than 200 independent labels withdrew their music from Spotify and similar services, stating that these platforms are not a good value for musicians and will undercut music sales. Proponents see on-demand streaming as a big part of the future, providing listeners with a monetized alternative to illegal downloading.
Registering with SoundExchange
Artists wondering whether digital plays have been logged for their music can search the databases on SoundExchange's site (see www.soundexchange.com(Opens in a new window)). Even if there is no listing for a musician's music, it's advisable to register. It's free and the process is simple. Many independent musicians are not registered with SoundExchange and don't realize that there may be unpaid royalties waiting for them. So don't leave money on the table. Over the past year, revenues from streaming services grossed more for the industry than subscription services and on-demand "spins" combined. In 2010, total SoundExchange distributions were $249.2 million, up from $155.5 million in 2009. This is real revenue and is expected to continue growing.
Before you send your music to online distribution services, make sure it is labeled correctly. Millions of dollars come to SoundExchange earmarked for "artist unknown" or "self-released." This is part of an industry-wide problem created by a lack of standardized and quality metadata. SoundExchange has created a downloadable Checklist for New Artists that can help you organize your copyrights and other legal details.
Additional Licenses
To synchronize a piece of music for commercial use in film, video, video games, websites, or mobile apps, a producer must obtain two additional and distinct licenses: a synchronization license from the music publisher and a master-use license from the record company for use of the sound recording. These licenses are negotiated, not determined by statute, and are entirely separate from mechanical, artist, and performance royalties. The licensing fees, and the territory and scope of use are negotiable. Because two licenses are involved, licensees such as music supervisors prefer to work with music libraries or record labels that control both sets of rights and can clear them quickly. When there are multiple publishers, writers, and labels involved, licensing a recording for synchronization can be costly and time-consuming.
Denny Tedesco's documentary film, The Wrecking Crew, which tells the story of the legendary Los Angeles session musicians of the 1960s, demonstrates how complex and costly this can be. The commercial release of this highly anticipated film has been in limbo for several years due to the large number of diverse musical clips, each of which has to be licensed by all rights holders for use in the film.
Several other kinds of licenses are less common but can be lucrative revenue sources, including sheet music, lyric books, use for karaoke, ringtones, and downloads of digital sheet music. Yet another licensing revenue source is known as a "derivative work." This kind of license includes sampling, interpolation of musical elements from a preexisting song, or setting foreign-language lyrics to a preexisting melody. As technology continues to advance, many new commercial applications of music will arise and create new revenue opportunities for rights holders.
Production Music Libraries
The growing world of music libraries provides another revenue opportunity for composers. "The business is changing almost daily." says Joel Goodman '84, an independent composer and cofounder of MusicBox production library. "It is a strong industry with a solid client base. I would say that 90 percent of the music used in TV promos is from music libraries. Movie trailers use quite a bit, and probably 70 percent of the music on cable and reality TV shows comes from libraries. It is ubiquitous."
Music libraries act as record label and publisher in one, controlling the master recording and synchronization rights. Their vast catalogs contain every conceivable style of music, and they are continually developing new material. Composers can be paid up front with work-for-hire fees, but the bigger payoff comes from performance royalties paid on broadcast music placements. If a television show goes into national or international syndication, or a library track is used for a radio or television theme, one piece of music can generate royalties for many years.
Libraries license music from composers on an exclusive or nonexclusive basis. It is important to understand the pros and cons of each approach.
The larger music libraries generally work with composers on an exclusive basis, retaining rights to the master recording as well as the music publishing. Performance royalties are split 50-50 between the composer and the music library. For the composer, there are several advantages to an exclusive deal:
- Some money is usually available up front for the composition.
- Exclusive libraries may have a greater likelihood of high-income-generating music placements.
- Many television producers will work only with exclusive music libraries.
- There is less risk of administrative error, which means more money is available for the composer.
Nonexclusive music libraries such as Pump Audio and Jingle Punks have become popular in recent years. The composer submits music to the library but retains all rights, including the right to license his or her music to competing nonexclusive music libraries. The library retitles the tracks and adds them to a catalog. When a track is licensed, some libraries will split the synchronization fee, and the performance royalties are generally split 50-50. Be wary of any library that takes a piece of the writer's share of performance revenues. A nonexclusive arrangement can make sense under certain circumstances, but there are disadvantages as well:
- Nonexclusive libraries can miss out on international, territorial revenue that can be substantial for the composer.
- Retitling can lead to administrative problems. Many PROs use audio fingerprinting to identify track placements.
- When the same track appears with multiple titles it can create confusion about whom to pay.
- High-end production companies value exclusivity, and many won't license from nonexclusive libraries.
- By licensing your music nonexclusively, you essentially give up the future option of entering into an exclusive deal with a music publisher.
To learn more about the production music library industry visit the Production Music Association (PMA) at www.pmamusic.com(Opens in a new window).
Putting It All Together
With so many possible licensed income streams it is essential that composers keep accurate records. Patricia Blair, the owner of First Note Music Service and the former vice president of Universal Music Group Copyright Administration, spends a great deal of time tracking copyright issues for her clients and has some words of advice:
As soon as your work on a musical composition has been completed, clarify the ownership with the other writers. The shares must total 100 percent. Get the contact information and share for each writer down on paper and have everyone sign. Don't wait until "something happens" with the song.
Once money enters the picture, people's claims have a strange way of changing. If you are asked to sign any document with respect to your role as a writer, make sure you understand everything. I have seen too many composers sign away rights or agree to royalty rates without even realizing that they have done so. People using songs do not want to spend time searching for missing writers or hassling over song splits-they'll just choose another artist's song if they see any clearance problems.
If you are going to be in the business of writing music, educate yourself about music publishing and licensing and follow up on the business side of things. If the business aspect isn't for you, find someone who likes the data and details to help you. Whatever you do, don't neglect this-it's very difficult long after the fact to collect income due. In the case of performance royalties, it may be impossible.
Toward a New Golden Age
We can't solve problems by using the same kind of thinking we used when we created them.
-Albert Einstein
Roger McNamee believes that we are on the verge of another significant technology disruption that will upset dominant markets and create windows of opportunity for innovative businesses that are not afraid of risk.
At the 2011 National Association of Recording Merchandisers convention, McNamee shared his excitement about HTML5 and described some entrepreneurial strategies that he believes will be moneymakers for his band Moonalice.
The group bagged its traditional management team and redirected its operating budget toward social media, its own satellite-TV network, and an HTML5 website. Moonalice creates original psychedelic poster art for each show. The images are shared freely with fans that can create related products and pocket all the proceeds for a year. In subsequent years, a licensing agreement kicks in. By harnessing free and low-cost production and distribution technologies, McNamee is breaking down the barriers between the band and its audience while simultaneously building future revenue streams.
McNamee predicts that HTML5 will usher in a new golden age for creators. Each element on a Web page can function like a mobile app, presenting new opportunities for online advertising and increased consumer engagement-and ultimately for musicians.
"HTML5 is just getting started," McNamee said. "The learning curve is . . . more profitable for those who commit to it from the beginning. . . . Artists who come out of nowhere will create huge value for next to no cost. . . . Encourage new product ideas and new forms of content. HTML5 is a blank canvas and there is no telling what people will do with it."
Old Meets New
For decades the music industry has thrived on recorded music sales. Technology has flattened the costs of production and distribution, creating a broader range of smaller income streams. For composers and musicians, the keys to success in this rapidly changing climate will be a creative mashup of old and new, understanding the fundamentals of music licensing, thinking creatively, and leveraging disruptive trends and new opportunities.