What is Your Favorite Song?

Take a moment to think about how you listen to music. Whether it’s on the radio, on vinyl, on an MP3 download, on a jukebox, on a Spotify playlist, in your car, in a restaurant, in a movie, or from a stage, you’re listening to a song.

A “song” is the best individual unit of organization to help conceptualize why the music business is structured the way that it is. You’re about to see why.

Two Copyrights: Composition & Sound Recording

In the United States, according to copyright law, a song consists of two distinct copyrights. One is known as the “composition,” and includes—in general terms—the things you can write down about a song: notes, lyrics, chords, melodies, phrasing, key changes, tempo, and harmonies.

The other copyright of a song is known as the “sound recording,” and includes—in general terms—the part of the song that you can hear.

Different recordings can share a single composition copyright, but each recording will have only one sound recording copyright associated with it. For example, “Hallelujah” recorded by Leonard Cohen and “Hallelujah” recorded by Jeff Buckley share the same composition copyright but do not share the same sound recording copyright.

two copyrights: composition and sound recording

Four Primary Stakeholders: Songwriters, Traditional Music Publishers, Recording Artists, & Traditional Record Labels

Stakeholders own some share in either the composition or the sound recording copyright of a song. Typically, songwriters create compositions and recording artists create sound recordings.

The songwriter may assign their stake in the composition to a music publisher. The recording artist may assign their stake in the sound recording to a record label. In exchange, each of these respective entities will exploit the copyright on behalf of its creator.

Depending on the specific terms of an agreement between a songwriter and their music publisher, or a recording artist and their record label, these entities will pay the creators a percentage of money, or royalties, earned as a result of the copyright’s exploitation.

Service companies offer a modern alternative to this by providing the traditional services of a music publisher and/or record label without requiring any transfer of rights.

four stakeholders: publishers, record labels, songwriters, recording artists

Metadata

Every copyright contains specific information related to it, which informs various parties in the music industry on who to pay and how much. For sound recordings, a format known as DDEX is commonly used to communicate metadata between recording artists, record labels, and royalty collection agencies. For compositions, a format known as CWR is commonly used to do the same between songwriters, music publishers, and royalty collection agencies.

Two very important pieces of metadata are ISWC codes and ISRC codes. ISWC codes refer to a specific code used by the industry to identify compositions. ISRC codes refer to a specific code used by the industry to identify sound recordings.

Here’s what the top of our diagram looks like now:

ISWCs and ISRCs

Six Exclusive Rights

Before we delve any further, let’s discuss your rights.

According to the Copyright Act of 1976, the owner of a copyright has the exclusive right to do, or to authorize to do, any of the following:

1.   To reproduce the copyrighted work in copies or phonorecords;

2.   To prepare derivative works based upon the copyrighted work;

3.   To distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending;

4. In the case of literary, musical, dramatic, choreographic works, pantomimes, motion pictures, and other audiovisual works, to perform the copyrighted work publicly;

5. In the case of literary, musical, dramatic, choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly;

6. In the case of sound recordings [ONLY], to perform the copyrighted work publicly by means of a digital audio transmission.

These six exclusive rights are absolutely foundational to the music industry. They determine how a copyright can be exploited to generate revenue. When someone besides the copyright owner wishes to do one of these six things, they must obtain a license.

Every monetizable use of music exploits one or more of the six exclusive rights.

six exclusive rights

Royalty Collection

When a song is licensed, it generates royalties which songwriters and recording artists—plus the entities (record labels and/or music publishers) that represent their copyrights—are owed.


Royalty collection agencies exist to facilitate the payment of royalties between entities licensed to use copyrights and the proper copyright recipients.  In the U.S., there are three basic types of royalty collection agencies, which correspond to two of the six exclusive rights, i.e. the right to perform publicly and the right to mechanically reproduce the song:

royalty collection

Please Note:

*In the United States, Performance Rights Organizations (PROs) pay out public performance royalties to songwriters and music publishers directly, split 50% for each.

**In the United States, the Harry Fox Agency and Music Reports pay mechanical royalties to music publishers, who then pay out to their songwriters.

***SoundExchange divides performance royalties for the sound recording between the owner of the sound recording copyright (50%), the recording artist (45%), and the non-featured recording artists/band (5%).

royalty collection and payment to stakeholders

Music Use

People and businesses alike use music in a lot of different ways. Music “use” in this case refers to any exploitation of a music copyright pertaining to one of the six exclusive rights mentioned above and therefore requiring a license along with some form of compensation.

The most common uses of music today can be broken down into four broad categories: public performance, mechanical, synchronization, and master use.

Public Performance Use

Public performance use happens when the work is communicated beyond one’s immediate circle of family and friends. For exact language on what is required for a use to be considered a public performance, see our guide on performance licensing.

The following uses of music are considered public performances:

·  On-Demand Streams (Spotify, TIDAL, etc.)

·  Non-Interactive Streams (Pandora Radio, SiriusXM, etc.)

·  Terrestrial Radio Plays (AM/FM)

·  Public Broadcasts

·  In Bars, Restaurants, Clubs, & Music Venues

·  YouTube Videos

·  TV & Ad Placements

Please Note:

*Non-interactive streaming, also known as webcasting or Internet radio, is the only type of public performance listed above that requires a payment of royalties for both the use of the composition copyright AND for the use of the sound recording copyright.


**All other performances listed above pay a royalty for use of the composition ONLY.

Synchronization Use

A synchronization use happens when a composition AND/OR sound recording gets used alongside a visual work such as a movie, commercial, or music video, i.e. when music is synced up with video content. For exact language on what is required for a use to be considered synchronization, see our guide on synchronization licensing.

The following uses of music are considered sync:

·      YouTube Videos (in the U.S.)

·      Film, TV, & Advertising Placements

Mechanical Use

A mechanical use generally refers to reproduction or distribution of the composition copyright in physical formats, digital downloads, and interactive streams. For exact language on what is required for a use to be considered mechanical, see our guide on mechanical licensing.

The following uses of music are considered mechanical uses:

·      Physical Purchases (CDs, Vinyl, etc.)

·      Digital Downloads (iTunes, Amazon, etc.)

·      On-Demand Streams (Spotify, TIDAL, etc.)

Master Use

Master-use is a term that refers to a type of license for particular uses of a copyrighted sound recording. Typically, licensees are companies seeking to offer the copyrighted sound recording in their repertoire of downloadable, purchasable, or streamable songs. For exact language on what constitutes a master use, see our guide on master-use licensing.

The following uses of music are considered master-use:

·      Physical Purchases (CDs, Vinyl, etc.)

·      Digital Downloads (iTunes, Amazon, etc.)

·      On-Demand Streams (Spotify, TIDAL, etc.)

Note that some uses of music (on-demand streams, non-interactive streams, YouTube videos, TV & ad placements, digital downloads, and physical purchases) apply to more than one category of licensing and therefore require more than one type of royalty.

music use

Connecting the Dots

It’s time to examine exactly how all of these pieces fit together.

Keep in mind this only applies for the United States.

connecting the dots

Show Me the Money

But wait, we’re missing something. We’ve shown you that various music uses require payment of royalties to copyright owners. And we’ve shown you how that money flows. But where does it come from? More specifically: how do on-demand music streaming companies, radio stations, record stores, digital download platforms, and more earn the royalties they pay out?

The short answer is: from you!

As a consumer of music, you generate royalties for copyright owners. When you purchase a Spotify subscription and play a song on demand, you generate performance and mechanical royalties for the composition copyright owner; master-use royalties for the sound recording owner. When you buy a digital download from iTunes, you generate mechanical royalties for the composition copyright owner; master-use royalties for the sound recording copyright owner.

Likewise, advertisers pay a lot of money to market to you through various music listening platforms such as YouTube and online radio stations. When you watch a YouTube video, you generate performance AND synchronization royalties for the composition copyright owner; synchronization royalties for the sound recording copyright owner. When you play a non-interactive online radio station, you generate performance royalties for the composition copyright owner; performance royalties for the sound recording copyright owner.

Investors also provide revenue to companies of all shapes and sizes who use music as an integral part of their business. These companies in turn pay out royalties.

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So, as you can see, the music industry is complicated, but not unintelligible.

Read the diagram below from either top to bottom or bottom to top. At the top, we begin with the most basic unit of organization, the song, and move downward based on copyright exploitation. From the bottom, we begin with sources of revenue and move up based on the transfer of money between various entities in the music business.

Here it is, a complete and accurate diagram of the modern music industry (for now)!

how the music industry works
A Complete Diagram of the Music Industry 2020

If you have any questions, concerns, or suggestions, please contact jacob.wunderlich@exploration.io.