Every time we enjoy our favourite song, whether streamed on Spotify, downloaded, watched on YouTube, listened to on the radio, featured in a movie, or even purchased on vinyl, the artists and creators behind the track will be paid music royalties for their part in creating that song.
The process of paying music royalties is a common challenge for many businesses in the music industry. Read this guide to understand the types of royalties you may need to pay, the various parties involved in the payment process, and discover how to solve the common challenges of paying music royalties in your own business.
While big-name artists may diversify their income streams through affiliate marketing, influencer marketing, merchandising, and of course public performance (Taylor Swift was reported to have earned $305m from her Eras tour alone), music royalties remain the primary form of payment for many musicians.
What are music royalties?
Music royalties are payments made to the copyright owners of a piece of music. Paid in exchange for the right to use or publish the song.
For all songs, there will be 2 types of copyright that will generate different types of royalties:
- Sound recording copyright
The artist accredited to the copyrighted performance of the song. - Composition or mechanical copyright
The artist/s responsible for the composition of the song’s melodies, notes and lyrics.
In some cases, the singer and songwriter will be 2 or more different parties, each receiving their share of royalty payments for their specific copyright. However, a singer solely responsible for writing and recording their own music will hold both these copyrights and therefore receive a larger portion of the fees generated.
Using The Beatles’ song Hey Jude as an example, you can think of the sound recording rights as relating to the studio-recorded audio of the song, performed by The Beatles band. While the composition rights relate to the written music, tune, melody, and lyrics of the song, written by John Lenon and Paul McCartney.
When must royalties for music be paid?
The payment of music royalties is triggered by a songs play on radio, within TV or movies, advertisements, or in a live setting such as public events, sports games or political rallies.
The different ways in which the copyrighted material can be used relate to specific “rights” – a licensee may choose to license one or more of these rights, which will impact the amount of royalties they will in turn need to pay.
These rights relate directly to the 2 types of music copyright, with different types of rights pertaining to the sound recording and composition copyrights.
Rights to the sound recording
- Synchronisation rights to the sound recording
Licensing a recorded song for use on TV or film etc - Reproduction rights to the sound recording
Licensing to sell a recorded song, including streaming, downloads and physical copies - Performance rights to the sound recording
Licensing to play a copyrighted song recording in public or on the radio
Rights to the composition
- Synchronisation rights to the composition
Utilising a copyrighted composition on TV, film etc, but not the original recording - Mechanical rights to the composition
Selling or streaming a new recording of a copyrighted composition OR selling the composition in a written format - Performance rights to the composition
The right to perform a licensed composition in public or on the radio
Who pays royalties for music?
Royalties for music are paid by the licensee, paying to license and use the song, such as the radio network, TV broadcaster, movie production company, or nightclub.
Who receives royalties for music?
Music licensing company
The licensing company issues music licenses that allow businesses to play live or recorded music in public. This includes shops, offices, bars and sports grounds.
The music licensing company in turn receives reporting from their licensees about what music has been played, calculating and collecting the relevant royalty payments. From this they will deduct their own administrative fees before paying out to labels, publishers, or artists. In the UK, this is carried out by PPL.
Record Labels
In many cases the record label owns the performance rights on behalf of their artist and therefore receives 100% of the royalty payments pertaining to the sound recording rights. They will in turn payout to their artists in accordance with the specific agreement they have in place. According to indie music academy, new artists receive on average 10-16% of the royalties their label receives for their work, with that often increasing for more established artists.
Publishers
The majority of songwriters or composers will sign to a music publisher, and in doing so grant ownership of their composition copyright. The publisher is responsible for sourcing and managing uses of the composition that will generate royalty payments. Typically these royalties will be split 50/50 between publisher and songwriter.
Performers
The artist/s responsible for performing a song recording will receive a % of the performance royalty payments from their label. Independent artists choose not to work with a record label and therefore receive the full amount of the royalties pertaining to their copyright.
Songwriters and composers
The songwriters responsible for creating the song’s lyrics and/or musical composition will receive a % of the composition royalty payments via their publisher.
Streaming services and download platforms
Unlike most other licensees, streaming services such as Spotify, Apple Music, Amazon Music or Youtube will handle their own music royalty payments, paying directly to the labels and publishers as opposed to paying via a licensing company.
How are royalty payments calculated?
Music royalties are deducted from any revenue earned from the song, taken before any other costs and deductions are made.
The calculation for royalty payments can vary greatly depending on how and where the song has been distributed. For example, streaming services are reported to pay between $0.006 and $0.0084 per stream.
The cost of licensing a song for a movie can vary greatly, taking into account the likely reach of the movie, the popularity of the song or artist, how long the song will play for and how many times it will feature. On average, this is estimated to range between $20,000 USD and $45,000 USD, but in some cases can be a great deal more.
That royalty fee will be paid by the licensee to the music licensing company, who in turn will payout to the relevant parties following their charges. For an independent artist, the licensing companies will commonly pay them directly. In other instances, that payment will go via numerous distributors, publishers, and record labels, each taking their cut before it reaches the final artist.
The top 4 challenges of paying royalties for music
Royalty payments are not a simple direct transaction, with the royalties generated flowing through multiple stakeholders, each taking their slice of funds before paying down the line.
Regardless of where in the chain an organisation sits, anyone tasked with paying out music royalties will face a wide range of challenges.
- Large payment volumes
With millions of singers, songwriters, musicians and creators around the globe, music labels and publishers will be paying out to a huge number of artists on a regular basis. For top performing artists these payments will be sizable, but the majority are likely to be micro-payments.
- Fluctuating payment amounts
With the amount of royalties generated directly tied to the performance and popularity of the song, the size of outbound payments that organisations make will constantly fluctuate. In a modern world, internet virality can happen overnight, quickly generating $000’s in royalty payments out of nowhere, only to drop off again just as quickly, therefore no 2 royalty payments will be the same.
- International payment complexities
UK Music cites the value of music exports for the British economy as £2.3bn in 2020 – down from a pre-pandemic value of £2.9bn. Music is clearly a global business and therefore, stakeholders will be widely distributed around the globe, making and receiving payments in different countries, different currencies and via different payment methods.
Add to this the need to ensure tax and legislative compliance across all the countries in which you operate, and it can be an extremely manual and painful process for many in the music industry.
- Artist satisfaction and retention
A late, incorrect, or generally cumbersome payment experience can quickly turn a label-artist relationship sour. Music labels and publishers rely on their artists and, therefore must offer a positive payment experience to keep them happy, otherwise risk losing them to a competitor that can.
How to pay royalties for music efficiently
With music royalties paid to large numbers of recipients at once, manually processing these payments via traditional bank portals and CSV uploads is certain to cause huge bottlenecks, rife with human error. Implementing a solution to automate these payment processes will be essential for the majority of businesses in the music industry looking to increase efficiency, scale operations, and retain their artists.
Modern payment automation solutions can integrate with reporting tools to seamlessly generate payments based on a song’s performance, and payout to thousands of payees in multiple countries, currencies and payment methods. All while accelerating the approval process, simplifying tax compliance and streamlining reconciliation with ERP or accounting platforms.
The right solutions for automating music royalty payments incorporate self-service onboarding features. With large numbers of payees, manually collecting payment information and setting up payees can be a full-time task. Self-service onboarding features instead put the onus on the payee to provide their own payment and tax information and self-select their preferred payment method and currency, while automated validation rules ensure the information is correct before a payment is made. These powerful self-service portals allow businesses to onboard more artists, labels, or publishers, and give payees real-time online access to their payment status, with minimal reliance on internal finance staff.
Removing these manual bottlenecks enables music businesses to scale, onboard more artists, expand globally and deliver a first-class artist experience, all while maintaining a lean and agile team.
How Spitfire Audio reduced the time taken to pay music royalties from 6 weeks to 30 minutes
Spitfire Audio prides itself on providing the very highest quality music sample libraries, working exclusively with world-class musicians and producers.
The process of managing royalty payments sat with Spitfire Audio’s finance team and relying heavily on Excel worksheets, proved to be very manual and time-consuming. As the business grew, it became clear that the current process of managing music royalty payments was increasingly inefficient and unscalable.
By implementing Tipalti’s Mass Payment solution, Spitfire Audio was able to automate all their royalty payouts globally, increasing the accessibility of financial data, accelerating decision-making, and drastically reducing payment errors by eliminating manual data entry. Tipalti’s unique artist portal also allowed them to onboard more artists and improve artist communications and satisfaction.
With manual workload drastically reduced, Spitfire Audio’s finance function was able to dedicate more resources to the wider business and “spend more time on value-adding activities.”
“It took us four to six weeks of solid work to do all the statements and payments, whereas, now, it’s 30 minutes of solid work. We were spending a long time trying to get royalty payments done, and now we’re ahead.”
Shahid Khalid,
Head of Finance, Spitfire Audio
Conclusion: How to pay royalties for music
Businesses and organisations pay music royalties to the copyright holders of a song, in accordance with the specific rights to that song they have licensed via a music licensing company.
Automating the process of paying royalties for music is proven to greatly increase operational efficiency for businesses in the music industry while improving the experience of receiving music royalties for artists, composers, songwriters and musicians. If your business pays music royalties, refer to this link to find out how automating your royalty payments can help retain talent and scale your business.
