Different types of music licenses dictate how much, and when, a record label can make their due money off the music created by a band or an artist and duly released through the record label’s marketing and promotional machine.
The revenue is generally split between the label and the artists, but prominent artists may be able to arrange exclusive or preferential contracts. This option may not always be available for artists of lesser stature.
On average, record labels take between 50 and 90 percent of what an artist or band makes.
Types of Music Licenses
There are a number of different types of music licenses, all developed with the idea of ensuring that record labels can profit off the music made by artists and bands on their roster.
Public performing rights are the exclusive rights of the copyright owner of a piece of music to allow the performance or the broadcast of the music in a public setting. Public performing rights are covered under United States copyright laws.
There are also public performance licenses (different from public performance rights), which are licenses on behalf of the copyright owner, allowing the music to be performed or transmitted to the public or in a public setting.
Performance royalties come into play when copyrighted songs are played in bars, restaurants, on the radio, and even by using radio services on streaming platforms like Pandora or Spotify (which distinguish between on-demand streaming or downloads and streaming radio).
To earn money from performance royalties, a record label has to register an artist’s song with a performing rights organization (PRO). PROs split the royalties from streams between the songwriter and the record label (the former under songwriting royalties, the latter under publishing royalties).
There are reproduction rights, which permit the reproduction of a piece of music in the form of a compact disc, a cassette, or a record. Reproduction rights are granted under the Copyright Act for the exclusive right of the copyright owner.
Mechanical Licenses
Mechanical licenses are licenses that are issued by companies to a record company on behalf of the copyright owner, which gives the record company the right to reproduce and distribute a specific musical composition at a predetermined fee per unit made and sold.
These are paid out whenever a copy of a song is produced. The name is derived from when music was produced via physical media through mechanical manufacturing.
Even though physical media is more of a niche market compared to streaming and digital platforms, the term mechanical licenses (and related terms, like mechanical royalties) are still applied when talking about Spotify, Apple Music, Pandora, Dweezer, Tidal, and other streaming services.
They apply only when a listener plays or downloads a song. Mechanical royalties and licenses do not cover a song being played over a streaming radio service, only on an on-demand basis.
The rates for mechanical royalty are covered by the U.S. Copyright Act, which generally stipulates a payout of $0.06 for every 100 on-demand streams. For a song to make $1,000, it would have to be streamed 1.6 million times.
Synchronization & Print Licenses
There is also a synchronization license, which is issued by music publishers to copyright owners (in this case, usually the producer of a piece of music), which allows the music composition to be synchronized in timed relation to audio-visual images on film or tape.
Synchronization licenses cover pre-existing music being used in commercials and trailers for video games, TV series, and movies. They are usually one-time fees, with the studio creating the visual content paying the royalties a single time for the entire lifetime of the product. When the license is granted, it authorizes the music to be used for that specific visual media forever, without the studio having to pay every time the trailer is aired or played.
Print music royalties are a specific form of royalties that cover sheet music and tablature books that are intended as educational materials. These are not reproductions of the song, so they need their own royalties — specifically, print music royalties, which come from the sale of sheet music.
Royalties from the sales go to the songwriters and the publishers. They only exist for songwriters who authorize their music to be released in the form of sheet music.
Musicians who focus solely on mechanical and performance royalties, and never release their music in sheet or tablature format, could conceivably never collect any print music royalties.
Lastly, there are digital performance rights in sound recordings. Record companies license the exclusive rights in a sound recording on behalf of copyright owners (which is distinct from copyright in underlying musical works), under local copyright laws, to authorize streaming and other forms of digital transmissions.
How Are Music Royalties Calculated?
Popular, licensed music has a number of stakeholders who are entitled to a percent of the royalties generated by the music they have worked on.
To begin, bands and artists sign recording contracts with music labels. This gives the labels ownership of the copyright, which gives them a wide berth to do what they want with the music. It is from this that the label pays the band or the artist per the terms of the recording contract.
This can cover multiple band members as well as the music producers and engineers, session musicians, and anyone else who has a claim to the production and performance of the recording.
There is also a publishing deal, which covers the music composition itself. The publisher assumes ownership of the copyright. In return, it is the publisher’s responsibility to license the music composition and collect royalties on it (through the various forms of licensing mentioned above).
The royalties from a music composition are usually split evenly between the songwriter and the publisher. When there are multiple songwriters who have created a song, each person involved in the process could be due a different percentage of the royalties collected by the publisher. It is not unheard of for different songwriters to work with different publishers to collect the royalties for a single song.
The way record labels make money from the artists and bands on their roster is by investing in what is known as the release cycle. This starts from the recording of a song and continues to the marketing and promotion of the song (such as a music video, radio or streaming play, or live performance). This is the traditional record deal that exists for most artists and bands, and their respective labels.
Record labels can also sign a licensing deal, where they invest in only a certain portion of the release cycle. They then take a share of the revenue generated by the album to recover their investment and make their money.
References
Types of Music Licenses. MusicBed.
Permission to Record Audio (Mechanical). Praise Charts.
The Fi Hall of Fame: A Filmmaker’s Guide to Music Licensing. (December 2021). Film Independent.
Who Gets Paid for a Stream? (February 2022). Billboard.
How Musicians Make Money — Or Don’t at All — in 2018. (August 2018). Rolling Stone.
Even Famous Musicians Struggle to Make a Living From Streaming – Here’s How to Change That. (December 2020). The Conversation.