Why We Wrote This Guide

Over the last decade, the digital music industry has gained significant momentum. A wide range of digital platforms—streaming services, downloads, digital media players, webcasters, and more—has grown and consolidated to become major players in an entirely new sector of the music industry. According to Statista, an online market data portal, half of all music industry revenue in 2016, or $7.8 billion, can be attributed to digital music. In the same year, 39.3 million people accessed digital downloads and listened to digital music for nearly 6.7 billion hours per month.

The rise of computers and the Internet as both the primary means and medium for music consumption starting in the early 2000s created seismic disruptions within the music industry. As a result, relationships between artists, songwriters, publishers, record labels, distributors, retailers, consumers, and other industry players changed fundamentally.

Digital downloads are a great starting place for anyone seeking to better understand the modern music industry.

Who This Guide Is For

  • Songwriters & Music Publishers: Digital downloads are a major source of revenue in today’s music industry. A good comprehension of the concepts involved in digital downloading can help equip an independent songwriter, a songwriter with a publishing contract, or music publisher with the tools necessary to capitalize on this form of income and avoid nefarious exploitation of the composition copyright.

  • Recording Artists & Record Labels: Digital downloads exploit the sound recording copyright and serve as a major source of revenue. Record labels and recording artists would benefit from a solid understanding of digital downloads to make the best use of their assets and ensure transparent communication between them.

  • Interested Parties: Every day, lawmakers and industry players are developing an equitable and efficient means of exploiting this source of revenue which includes the best interests of everyone involved, including consumers of music. The information within this guide affects anyone who benefits from the existence of music.

Contents

Background
What is a Download?
Required Licenses for DSPs to Use Digital Downloads
The Compulsory Mechanical License for DPDs
Permanent Download Royalty Calculation
Tethered Download Royalty Calculation
Metadata
DPDs and the Controlled Composition Clause
Sources

Background

Beginning around 1998, several peer-to-peer (P2P) networks allowed the free transfer of digital audio files between participants. On June 1, 1999, Shawn Fanning and Sean Parker released a pioneering peer-to-peer (P2P) file sharing Internet service called Napster, initiating a legal battle for equitable copyright that began at the dawn of the 21st century and continues to this day.

In 2000, Heavy metal band Metallica found their demo of “I Disappear” circulating on Napster before its official release, along with their entire back catalogue of studio albums. On March 13 of that year, they filed suit. A few weeks later, producer and rapper Dr. Dre sent written notice to Napster asking them to remove his copyrighted work from the site. When the company refused, Dre filed suit as well. By 2001, Napster had 26.4 million registered users. Another series of lawsuits, however, proved crippling to the company, and it shut down its service in July 2001. Napster paved the way for other P2P music-sharing services, like Kazaa, Grokster, Limewire, and Morpheus, which managed to better avoid legal ramifications.

Computer hard drives could now store large libraries of music data for little to no cost. iTunes and the iPod allowed users to upload their CDs and MP3s into a music storage platform, then play back the digital media at will on a mobile device. Beginning in 2003, the iTunes Music Store offered legal, purchasable downloads. Other online music services, such as Internet radio, soon followed.

These changes resulted in a decline in revenues from recorded music. Globally, music sales dropped from $38 billion to $32 billion between 1999 and 2003. Data collected from Recording Industry Association of America (RIAA) member labels indicate that roughly 8% of the more than 10% total market growth taken by Digital Downloads came from losses in full-length CD sales. Total revenues from all music media (CDs, vinyl, cassettes, and digital downloads) dropped from $14.6 billion in 1999 to around $9 billion in 2008. Global recorded music industry revenues are rising again, with a total of $17.3 billion collected in 2017, according to Global Music Report 2018. These trends have continued to the present, with widespread consequences.

The music industry is working to attain some level of equilibrium. The Digital Performance Right in Sound Recordings Act of 1995, the Digital Millennium Copyright Act of 1998, the 2002 WIPO treaties, and the Copyright Royalty and Distribution Act of 2004 have each attempted to address specific issues related to the digital music industry. The Music Modernization Act, enacted into law in October, 2018, will update the music industry for the 21st century by making changes to the licensing process.

What is a Download?

A digital download (also known as a DPD, or Digital Phonorecord Delivery) is a transmission to the purchaser that allows them to download music to use repeatedly and indefinitely. This transmission can happen over the Internet, satellite, cell phone, or any medium as long as it is digital. Instead of receiving a physical copy from a record store or retail outlet, the consumer receives a digital file from an electronic sale (for example, an MP3 or WAV file). Digital downloads are categorized into two groups:

Limited Downloads

The consumer does not have full control over the download. Copyright owners of the work or digital service providers (DSPs) apply restrictions on how one may use the download. These restrictions can be based on time or use. Limited downloads are also referred to as “conditional” or “tethered” downloads.

Some DSPs offer a form of time-limited download which allows a user to download any song offered by the website, and listen any time—as long as the user pays a subscription for the service. As soon as a user stops paying the subscription, he or she can no longer access the downloaded material.

Example: Spotify offers a similar feature for its Premium members: one can download a certain number of songs for offline listening, but will lose access if the subscription expires.

Permanent Downloads

The consumer maintains full control over the download and owns it forever. The owner may copy it, but only for personal, non-commercial use.

Example: The iTunes Music Store offers permanent downloads.

Required Licenses for DSPs to Use Digital Downloads

To Use a Sound Recording for Digital Download
Any website wishing to offer digital downloads, whether permanent or limited, must secure a license from the sound recording copyright owner (record label). This license allows the website to make and distribute copies of the sound recording. It is not covered by any compulsory license and must be negotiated directly with a record label.

To Use a Composition for Digital Download
The Digital Performance Right in Sound Recordings Act of 1995 established a mechanical royalty for the compositions underlying digital downloads, identical to the one paid for physical phonorecord deliveries. Copyright Royalty Board hearings determine the statutory rate used for both digital downloads and physical sales. Through December 31, 2017, this was 9.1 cents per song or 1.75 cents per minute for songs greater than five minutes.

*The National Music Publishers Association (NMPA) and the Nashville Songwriters Association (NSA) have voluntarily negotiated with Sony, Universal, and Warner Music to keep these rates in effect through the year 2022.
*

The Compulsory Mechanical License for DPDs

The compulsory mechanical license states that after a song has been recorded and released to the public for the first time, the composition copyright owner must license it to anyone wishing to use it in a phonorecord for a designated royalty payment. Keep in mind, however, that this can only occur if very specific guidelines set by the Copyright Office are followed and royalty payments are made.

According to a provision within the Digital Performance Right in Sound Recordings Act of 1995, this compulsory mechanical license also applies to DPDs. In the particular case of digital downloads within the U.S., the digital service provider pays the statutory mechanical royalty rate to the master owner, who then pays the publisher/songwriter.

Permanent Download Royalty Calculation

To the Record Label

For permanent downloads, such as those offered by DSPs like iTunes, master copyright owners (record labels) get approximately 70% of the “wholesale” price of the download. Wholesale in this case means the total amount of money a particular DSP receives for the download. For example, if a consumer pays $0.99 for a song on the iTunes Store, the record company of the song’s artist will receive approximately $0.70.

  • Hypothetical Example: “War Ants” by the Stales has been downloaded on iTunes 400,000 times in the U.S. Assuming a sales price of $0.99 on iTunes, the record label of the Stales has received about $277,200 from iTunes for the song.

To the Recording Artist

Exact royalty calculations due to recording artists will vary from case to case based on the language agreed upon in the recording contract. Royalties might be based on an album royalty rate, a single royalty rate, the retail list price of the download, the wholesale price of the download, etc. Generally, a recording artist’s royalty rates will depend on the amount received by the record label from the DSP.

  • A Hypothetical Example: Joe Shmoe, a recording artist signed to Warner Music, has an album royalty rate of 17%. Warner Music receives $100 from iTunes for digital downloads of Joe’s song “Pickup Trucks & Cold Beer.” In turn, Joe’s album royalty rate leaves him approximately $17.00 for the song from his label. Note, however, that—between recoupables to the label and widely varying album royalty rates—it’s difficult to speculate with any accuracy what a recording artist will actually receive from a label for digital downloads.

To the Music Publisher

For a download to be made available legally, a mechanical license must be acquired from the composition copyright owner (the music publisher and/or songwriter) or the owner’s agency (such as the Harry Fox Agency).

Record companies in the U.S. can notify music publishers when they want to offer a digital download of a song using a notice of compulsory license. Within the notice, a record company will list the name of the song, the identity of the songwriters and music publishers, the identity of the record company, and the expected distribution date of the digital phonograph delivery (DPD) of the song. Like the compulsory license used between music publishers and recording artists, the digital download will pay royalties to the publisher according to the statutory rate unless a separate rate is agreed upon. The current statutory rate for permanent digital downloads is $0.091, or $0.0175 per minute of playing time or fraction thereof, whichever is larger.

  • Hypothetical Example: If a user downloads Jumbo Mary's “Tea & Crumpets,” her publisher, Warner/Chappell Publishing, receives $0.091 as a royalty for the download. Because this song is 3:16 minutes long, it does not exceed $0.091 and will not apply the $0.0175 per minute rate.

A direct license can also be arranged in two other ways:

  1. Between record labels (on behalf of recording artists) and music publishers for a mechanical license.

  2. from the The Harry Fox Agency, which offers mechanical licenses to anyone who would like one, including major labels, indie labels, and even individuals who want to distribute a limited supply of a certain composition. Learn how to become an HFA licensee.

After the digital service provider pays the royalty due to the record label, the record label pays the royalties due to the music publisher for a particular song. The Harry Fox Agency then pays the music publisher, which then pays its songwriter according to the splits agreed upon between the two. If the music publisher is not a member of the Harry Fox Agency, the record label will pay them directly through their direct license.

Tethered Download Royalty Calculation

In 2008, the Copyright Royalty Board affirmed a settlement agreement between the National Music Publishers Association (NMPA), the Nashville Songwriters Association International (NSAI), the Songwriter’s Guild of America (SGA), the Recording Industry Association of America (RIAA), and the Digital Media Association (DMA) which established a compulsory statutory rate for both tethered downloads and on-demand streams. For this reason, royalty payments for these two formats resemble each other.

Types of DSPs

The royalty depends on the exact type of service offered by a DSP. Below is a list of DSPs which pertain specifically to limited downloading.

types of DSPs graph

In addition, a number of variables influence the calculation of these royalties, including:

  • actual revenue of the DSP
  • number of subscribers (if applicable)
  • performance rights license fees paid to the PROs
  • aggregate number of plays of all songs during the accounting period
  • cost of content on the DSP

To the Record Label / Recording Artists

The major and minor record labels of the U.S. negotiate individual agreements with digital service providers to determine everything from royalty rates to delivery methods. The process for limited downloads closely mirrors the one used for on-demand streaming.

To the Music Publisher

The formula for royalties paid to a music publisher for use of the composition copyright will vary based on the type of digital service offered (see chart above).

According to the provisions specified by the Copyright Royalty Board, the formula for establishing the correct royalty rate due to publishers is as such:
royalties to the music publisher from DSPs

Royalties are calculated on a monthly basis and distributed by quarter to publishers based on the activity of each composition versus the activity of all other payable compositions downloaded from the DSP.

These calculations are in regards to downloads only from a DSP. The passage of the MMA has revamped the way that Streaming (non-downloads) are handled in the United States and as this process develops we will update our publications.

License Requests

Most often, license requests for limited downloads are sent to the music publisher via the Harry Fox Agency or Music Reports, or directly to the music publisher, in electronic form. Each license request will contain information specific to the composition and the type of use requested.

Metadata

Metadata in reference to the music industry is the information data attached to a particular digital audio file. In today’s music industry, metadata serves a valuable function for digital downloads. It can inform various licensors and licensees—including DSPs, record labels, music publishers, Harry Fox, SoundExchange, etc.—about:

  • name of the recording artist
  • name of the recording company
  • title of the composition
  • alternate titles the composition
  • name of the songwriter(s)
  • name of the publisher(s)
  • playing time of the recording
  • title of the album (if not a single)

This information, as well as other pieces of data pertaining to the composition or recording, allows for more accurate royalty reporting between entities in the music industry. Companies track the specific type of service used to access a download, the nature of the electronic device used (portable/non-portable), along with the number of permanent downloads, time-limited downloads, and use-limited downloads.

DPDs and the Controlled Composition Clause

When Congress allowed compulsory mechanical licenses for digital downloads in 1995, they also enforced a provision which states that a record label may not reduce the mechanical rate that a recording artist (who also wrote the songs) receives for DPDs. Recording contracts made after June 22, 1995 cannot apply controlled composition clauses to digital downloads, so a recording artist gets the full rate.

Sources

https://www.internetmedialaw.com/articles/digital-downloads-and-streaming-copyright-and-distribution-issues-new/
https://www.soundexchange.com/artist-copyright-owner/digital-royalties/
https://frostonline.miami.edu/articles/how-do-royalties-work.aspx
http://performermag.com/band-management/contracts-law/get-paid-your-digital-download-royalties/
https://iconcollective.com/how-music-royalties-work/
https://www.tunecore.com/blog/2012/10/how-were-getting-your-mechanicals-from-downloads.html
https://blog.songtrust.com/publishing-tips-2/the-2-types-of-digital-music-streams-how-you-can-collect-royalties-from-both
https://www.imusiciandigital.com/en/metadata-label-copy/
https://www.musicfeedpro.com/interview?ArticleName=Ask-Bernie-The-Attorney-How-Much-Does-A-Producer-Get-Paid-Per-Music-Stream
https://www.statista.com/topics/1386/digital-music/

Composed by Luke Evans, Mamie Davis, Jacob Wunderlich, Rene Merideth, Jeff Cvetkovski, & Aaron Davis

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