In short, mechanical royalties are what you get when your composition is manufactured on a CD, downloaded from an online music store like iTunes, or streamed on an online music service like Spotify. There are lots of different types of royalties, but right now we’re just talking about mechanical royalties. If you want to see where mechanical royalties fit into scheme of things, check out my overview about how the music business works.
Friendly Word of Caution: you might want some coffee before you proceed. And I wouldn’t recommend trying to get through this when there are crying babies or construction workers nearby! 🙂
Let’s dig into the details!
A composition is different than a sound recording.
Take a look at this little diagram. It shows how a writer creates a composition and then an artist (often the same person as the writer) creates a sound recording (also called a “master”) from it. To do this, the artist must acquire a mechanical license to publish the sound recording. I talk about mechanical licenses specifically in another post. But I’ll try to stay on topic and continue with mechanical royalties. In this simple case, the writer owns the composition copyright and the artist owns the sound recording copyright.
A writer may choose to sign with a Publisher to help him manage and exploit (in a good way) his compositions. To do this, the Publisher usually owns the corresponding composition copyright. Likewise, an artist may choose to sign with a Record Label to help him manage and exploit his sound recordings. To do this, the Record Label usually owns the corresponding sound recording copyright. In this case, the diagram would look like this, but the idea is the same.
If you are a solo artist writing your own material, that means you basically act as your own Publisher and your own Record Label. You therefore own both the composition copyright and the sound recording copyright and get 100% of everything. If you signed with a Publisher, generally they would split the mechanical royalties with you.
It still makes sense to pay mechanical royalties.
As you can see in the diagrams, either way the sound recording is a direct result of the composition. So, then, it makes sense that when the sound recording is used, the people who own the composition should be compensated appropriately, right? Right. Note that we’re talking here about a composition that was recorded, rather than performed live.
So what do I mean when the sound recording is “used?” Well that is the interesting part and leads us to the part about where the term “mechanical” came from.
Mechanical royalties and what they mean today.
Apparently, in days of old, when a composer created some music, it could be manufactured as a “piano roll” that could be used on a player piano. People could play the music over and over using the piano roll, sort of like how you can play a CD with a song over and over again. Thus, a “mechanical royalty” was paid to the owner of the composition when the piano roll was physically created.
As technology changed over time to digital, the “mechanical” part of the story became less apparent, but the basic idea remained.
- Physical CD’s: mechanical royalties are due to the Publisher (owner of the composition) when each CD is manufactured.
- Notice that I didn’t say when the CD is sold. So, if someone presses 1,000 CD’s of your song, they owe you mechanical royalties for 1,000 copies of the CD, even though they haven’t been sold yet. It makes sense if you think about it… the Publisher should still get paid if someone distributes a CD with their work to others, whether or not they choose to give the CD away for free or sell it for $100.
- Once a CD is created and the mechanical royalty is paid, and a user receives or purchases the CD, it doesn’t matter how many times the user plays the music from his CD player for personal use… no more mechanical royalties are owed to the Publisher.
- Digital downloads: mechanical royalties are due to the Publisher when a user downloads the sound recording.
- Notice that I didn’t say when the user purchases the digital download. Just like with the CD example, the Publishers should still get paid even when the Record Label (owner of the sound recording) decides to give away the sound recording for free. That’s why it is a big no, no to do a cover song and post it online for people to download for free! You technically owe a mechanical royalty to the Publisher for each download, even if it is free to the user!
- Once a user receives or purchases a digital download, the user can play the music for personal use for as many times as he wants without causing any more mechanical royalties to be owed to the Publisher.
- Stores like iTunes and Bandcamp are good examples where digital downloads can be purchased.
- Online interactive or “on-demand” streaming: mechanical royalties are due to the Publisher every time a user streams the sound recording.
- This one’s a bit trickier, but the concept is the same.
- Services like Spotify, Apple Music, and TIDAL are good examples of platforms that offer interactive streaming.
Although terrestrial radio, and online radio such as Pandora (the non-interactive version), do generate other types of royalties, they do not need to pay mechanical royalties.
Who pays the mechanical royalties?
This one is really interesting to me. You’d think that it’s simple and the Record Label (owner of the sound recording) would pay mechanical royalties to the Publisher (owner of the composition). Like this:
But it’s not that simple. In today’s world, with so many publishers out there, it turns out that the Record Label usually pays the mechanical royalties when they manufacture CD’s and when they sell a digital download… BUT, although they can pay it directly to the Publisher like it shows in the diagram above, most people go through a 3rd-party service such as Harry Fox Agency’s SongFile or Loudr to acquire the mechanical licenses and pay the royalties for physical CD’s and digital downloads in the US (see below). Most of those third-party sites require that you indicate how many CD’s you’re going to manufacture and to guesstimate how many downloads you’re going to sell in the US. If you end up needing to create more CD’s, or if you end up selling more downloads in the US than expected, you’ll have to use the service again to pay your mechanical royalties. Check out the page dedicated to mechanical licenses for more information.
NOTE: Digital downloads outside the US operate differently: services outside the US withhold the mechanical royalty portion for the Publisher (see the international section below) from the sales price. In other words, you don’t pay or prepay for those mechanical royalties directly.
Online interactive streaming is yet another mess. Although the Record Label can use a service like SongFile to pay the required interactive streaming mechanical royalties at an ultra-crazy rate of $0.01 per play (if you did this you’d quickly go into debt when your song is played), it just so happens that they don’t usually need to do that unless they’re using uncommon or custom services to stream the music. The big boys like Spotify and Apple Music actually take care of the mechanical royalties for you, paid for by withholding a portion of your royalty and giving you the rest! That’s right, the Record Label doesn’t have to directly pay mechanical royalties for online streaming for the major players. This is true for both in the US and internationally.
Those interactive streaming companies like Spotify usually pay the mechanical royalties to a third-party mechanical license service of their choice like Harry Fox Agency (HFA) or Music Reports. Those two companies are competitors with pretty different business structures… check out my article about HFA and Music Reports.
Here’s what the diagram now looks like when we include all of the above (to keep it clean and understandable, I didn’t include direct payments from Record Labels and Interactive Services to Publishers):
How much are mechanical royalties?
The rate for mechanical royalties is set by the government and is $0.091 per CD and digital download. That’s 9.1 cents to the composition owners every time the sound recording is pressed to a CD or downloaded from an online store.
The mechanical royalty calculation for interactive streams on services such as Spotify is unfortunately complex, but it’s roughly the same percent of overall cost: 8-10%. The average blended rate is usually around $0.0007-$0.0008 per play. For those decimally-challenged, that means 1,000 plays would generate about $0.70 of mechanical royalties.
What about international mechanical royalties?
Every time a digital download is sold or your music is streamed in a foreign country, it also generates mechanical royalties for you… in that country. Remember, you don’t directly pay or prepay mechanical royalties for digital downloads or interactive streams that occur outside the US. Instead, the service in that country withholds the mechanical royalty portion and pays the mechanical royalty to its local collection agency. And even in the US, interactive streaming services reserve the mechanical royalty portion of the stream to “pass on” to the Publisher via HFA or Music Reports. So how do you get at international mechanical royalties that were collected for you?
This is where services such as CD Baby Pro (an add-on feature in CD Baby) and TuneCore Music Publishing Administration come to the aid of us little indie artists. They do the leg work for you… for a percent of everything they find for you. In order to collect mechanical royalties around the world, an indie artist would need to work with each corresponding mechanical licensing service like HFA and Music Reports in each country. That would be a nightmare!
It turns out that it’s not as grim as it seems, though, since HFA has reciprocal agreements with around 90 territories around the world, which ultimately means that they are able to collect the mechanical royalties in those countries. It’s really up to each artist to decide how to collect on those royalties. Music Reports, however, only collects US mechanical royalties… but they do send out those royalties to publishers without the publishers needing to do a thing!
On a personal note, I used CD Baby Pro, but then discovered that the bulk of my international mechanical royalties that they collected came from HFA, and the cost of using CD Baby Pro was more than I netted in return. So, I ended up canceling CD Baby Pro and registering with HFA directly. Maybe in the future I’ll use their service again, if I start generating lots of international mechanical royalties to make it worth it. Don’t get me wrong, CD Baby Pro and similar definitely have a place and it really depends on the situation, distribution, and fan base of each artist whether or not it is the right type of service to use.
WARNING: HFA’s services are unfortunately very cumbersome to use, overly complex, and hard to understand. If you decide to go with HFA directly, be prepared to spend a lot of time trying to wrap your head around and use their services. Also, HFA doesn’t have reciprocal agreements everywhere in the world, which means that services like CD Baby Pro and TuneCore Music Publishing Administration would potentially be able to collect more for you.
How do I actually get and deposit the mechanical royalties into my bank account?
Ah… that’s the million dollar question (pun intended)! Actually, I should have said “that’s the few dollar question!” 🙂 The point I’m getting at is that it’s important to keep mechanical royalties in perspective to everything else. Without complicating things (yet), mechanical royalties account for roughly 8-10% of your total earnings for a sale, download, or stream.
Remember how I said that the online streaming companies like Spotify can choose which mechanical licensing service to use (aka report and pay the mechanical royalties to)? Well, in the US there are two main players:
- Harry Fox Agency (HFA)
- Fees: They take a % of the mechanical royalties as a processing fee.
- Getting the money: Unless the Publisher creates an account directly with HFA, the mechanical royalties will sit there and remain uncollected (and I assume eventually be lost for good… but from personal experience, I can tell you I was able to collect mechanical royalties from Spotify through HFA that occurred 6 years before I signed up for HFA)! As an independent artist, your choice is to try to act like a bonafide Publisher and sign up directly with HFA, or to use a service like CD Baby Pro or TuneCore Music Publishing Administration. Otherwise, you won’t see any of those mechanical royalties!
- Major services that report to HFA: Spotify and Apple Music
- Music Reports
- Fees: None. They pass on 100% of the mechanical royalties directly to publishers.
- Getting the money: They search out and pay publishers by mail without publishers needing to create an account with them. They do, of course, also offer an online portal for publishers in order to download reports and such. Once they start getting reports and money for a publisher, they’ll contact that publisher by mail with their first check as well as with information about how to sign up online to use their reporting tools (I highly recommend doing that!).
- Major services that report to Music Reports: Pandora (the new interactive streaming part), Amazon Music Unlimited, TIDAL, Groove, Deezer, and SoundCloud
To make things even more confusing (sorry!), if you are acting as the Publisher and the Record Label of your music, you’re basically paying yourself a mechanical royalty to use your own composition. In this case, in the US and Mexico, stores like iTunes will bundle your own mechanical royalty with the download sale and pass it back to your distributor (like CD Baby or TuneCore). You’ll end up getting that mechanical royalty bundled with your payment from your distributor. In other countries, those same stores will send your mechanical royalty portion to the mechanical licensing service in that country (as described earlier). In other words, if you sell your own recording of a song you wrote, your own mechanical royalties you “pay yourself” to use your own composition will be kept by those international collection agencies, instead of being passed back to you through your distributor. Isn’t this all so crazy and complicated?!
So, if you’re based in the US, that means that you are already getting back your mechanical royalty portion bundled with your distributor income for any digital download sales of your own music in the US. For all other royalties, including interactive streaming in and outside the US, they are sent to collection agencies around the world. Unless the service in question is in the US and pays your mechanical royalties to Music Reports (who gives 100% straight to you), or you sign up with HFA directly, you’d be missing out on all your mechanical royalties (even your own mechanical royalties for using your own composition) that are “withheld” in all countries.
Therefore, since you’re already getting some of your mechanical royalties, that 8-10% number I mentioned earlier is probably more like 3-5% or less of uncollected mechanical royalties.
Where does that leave you? Well, here are your options:
- Just forget it all!
- Pros: Super easy… in fact, congratulations, you’re done!
- Cons: You’re missing out on around 3-10% of your CD, download, and streaming earnings, depending on your situation and international fan base.
- OR, use a service like CD Baby Pro or TuneCore Music Publishing Administration.
- Pros: It’s relatively easy. You just need to provide them with your information and they’ll do the rest for you.
- Cons: Quite a few.
- Most charge a hefty setup fee
- Most take around 15% percent of everything they find.
- Most require that they also become your publishing administrator for your PRO, such as BMI or ASCAP. This means that if you were already signed up with say BMI and making say $100 per quarter for your publishing side of things, then you would suddenly no longer receive any money from BMI for your publishing. Instead, the service would collect it, take their fee, and give you the remaining $85 for that quarter… another 1-3 months after you would have received the full $100 from BMI if you didn’t use their service. Also, be aware that you can only have one publishing administrator. Some music libraries that place your music in TV, film, etc. require that they are the publishing administrator.
- The money they find might not even pay for itself (or it might be a huge bundle!). Your mileage may vary.
- Most lock you in with a contract for 1-3 years.
- OR, do it all yourself.
- Pros: Depending which agencies you affiliate with, you’ll get a large portion of your mechanical royalties.
- Cons: A considerable amount of work, maintenance, and confusion! Don’t believe me? Simply try to find the right page and the right form to use to sign up with HFA (no cheating by using the link I gave you above!). 🙂 And that’s just the tip of the iceberg. You won’t be able to affiliate with some agencies internationally… either they won’t let you, or you won’t understand their language. Although you’ll probably get the lion’s share of your mechanical royalties, you’ll likely still be missing out on at least some mechanical royalties somewhere.
This is a big mess!
We’ll see what happens, but there is a new company that just started out that will hopefully clean up this entire mess: AMRA. One of their goals is to provide an international online service for collecting mechanical royalties. The idea is that all music services and stores in all countries would simply report their mechanical royalties to AMRA, and then publishers could create a single account with them to get all of their worldwide mechanical royalties in one place. Boom! Done. Hopefully, either AMRA or another service like that takes off and makes this whole process simple.
What are mechanical licenses?
In order to legally publish and distribute a sound recording of a composition that you do not own, you’ll need a mechanical license. Head on over to the page about mechanical licenses to learn more.
Congratulations, you deserve a cookie!
If you made it this far, congratulations, you deserve some yummy cookies! Here you go! 🙂
Have any success stories you would like to share, or helpful information that could benefit other musicians trying to wrap their heads around this? Then, please leave an awesome comment below. Thanks!