Introduction
Do you have gaps in understanding how the music industry works — royalties and revenue streams like mechanicals, performance royalties, and sync licensing?
The best way to get a clear picture of the inner workings, is to explore each major technological advance and see how intellectual property laws evolved to shape and monetize the music industry.
In Part One we covered music publishers and songwriters collaborating to print music and collect public performance royalties.
Let’s dive into audio recording technology, mechanical royalties and radio.
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Songs in Audio Recordings
Early 1900s
The next significant technological advancement was the emergence of recording technology. Around 1900, player piano rolls and early gramophone records introduced a new way to reproduce songs "mechanically".
The player piano brought the audio recordings of popular songs into people's homes. Instead of spending years learning to play the piano, anyone could simply pedal away and let the piano play the tunes. Initially, each piano roll (the ‘recording’) was created individually by a pianist. This meant that producing 5,000 copies required recording each one 5,000 times!
This hopefully emphasizes the concept of mechanical royalties, where each mechanical reproduction and sale of a song generates a royalty for the songwriter. But it’s important to note that, at this stage in history, songwriters were not earning any money when their songs were sold in recorded formats.
Record Labels
Record labels initially emerged as departments within phonograph manufacturers (the first record players). Since there isn't much use in owning a record player without records to play, these departments were tasked with recording musicians to make the cylinders and discs that carried the audio recordings.
It's also worth noting, each playback system had different formats for transferring the sound. There wasn't a standardized disc format like 33 and 45 rpm vinyl which works on any record player. So the manufacturers competed to make sure recordings of popular songs and well known performers were available for their customers.
Demand for phonographs grew into a boom in the 1920s. Music consumers upgraded their in-home entertainment systems from the physically demanding player piano to the more compact phonograph (which conveniently played itself).
In response to the demand for more audio recordings, studios and labels (often the same business) started popping up to find and record new talent. Each label often focused on a particular audience or genre of music.
- Record labels paid musicians a combination of an upfront fee to make the recording, and ongoing royalties for each record sold (after costs are recouped).
- The companies that funded and produced the recordings typically owned the intellectual property (IP) in the audio.
- As the IP owner, the record label has the right to control and/or be compensated when their recordings are reproduced and sold.
- Labels license the recordings to other labels or distributors to represent in different territories (much like the music publishing business model).
Interestingly, Federal copyright protection for audio recordings was only granted 1972 after tape technology made it easier to ripoff and reproduce audio recordings.
What is an ISRC? Sound Recordings are issued International Standard Recording Codes by labels and music distributors to ensure sales revenue is attributed to the correct owner. Each ISRC should be matched with the ISWC of the underlying song. Unreleased music does not typically have, or require, an ISRC.
How Songs Generate Mechanical Royalties
As records began selling, songwriters were not receiving any compensation for the mechanical reproduction (and sale) of their songs.
- Publishers and songwriters lobbied the government for a mechanical royalty, which requires record labels to pay publishers for each song sold in a recorded format.
- Mechanical Collection Societies, like the Harry Fox Agency, MCPS, The MLC and AMCOS, manage these licenses.
- When an artist or label releases a new record, they request a mechanical license for the songs then report sales back to the mechanical society.
- The mechanical rate (9c per song under 5 minutes long in the USA) is paid to the song publishers.
- Most countries have mechanical societies that often work closely with the local PRO to ensure that publishers and songwriters receive royalties from record sales.
Songs in Radio Broadcast
1930s-1940s
Around 1930, radio broadcasts and in-home radio “crystal sets” began to transform how people experienced music.
- Early radio shows featured live performances in studio because the playback quality of early recordings was poor.
- Radio allowed audiences to enjoy live music from their homes, creating a new revenue stream for performers who could now reach listeners without touring or releasing records.
- Initially, record labels were concerned that radio would negatively impact their sales, however, as audio playback and radio broadcast quality improved, radio evolved into a powerful tool for promoting records.
- A new performing rights organization, The Society of European Stage Authors and Composers (SESAC), was formed in 1931 to represent European songwriters and publishers in the US market.
Radio Broadcast Performance Royalties
- Radio stations generate revenue through advertising to audiences who tune in to listen to the show (and music).
- Initially, songwriters were not (you guessed it) compensated for the use of their songs on the radio.
- In response, ASCAP began issuing broadcast performance licenses based on the radio station’s annual revenue.
- Radio stations reported the songs they broadcasted, and ASCAP distributed the licensing fees to the songwriters.
💡 Radio playlist reporting and accounting is not always precise and relies on estimates based on record sales. Popular songs tend to receive higher payouts based on the assumption that they are played more frequently.
Musicians vs Labels and a Shift in Popular Music
ASCAP continued to raise license fees throughout the 1930s, leading broadcasters to refuse to renew their ASCAP licenses. In response, the radio industry banded together to form their own performing rights organization, Broadcast Music Inc. (BMI). Consequently, the ASCAP repertoire of American songbook classics vanished from the airwaves. BMI signed a diverse range of unrepresented jazz, blues, country, and folk musicians, introducing fresh sounds to listeners.
As if the ASCAP/BMI dispute wasn’t enough to shift the landscape of popular music, the American Federation of Musicians (AFM) went on strike from 1942 to 1944, demanding that the recording industry pay royalties into a trust fund for out-of-work musicians. This strike prevented musicians from recording for any labels that refused to negotiate, although they could still perform live on radio and tour as long as their performances weren’t recorded.
The combination of the strike and the formation of BMI encouraged a shift away from popular big band music toward smaller bands and vocalists. During this time, bebop thrived, and rock and roll began to cultivate in the background, as singers increasingly took the spotlight from band leaders.
Neighboring Rights and Audio Recording Performance Income
Radio stations in many countries also pay performance royalties for audio recordings. These “performance rights” for recordings are known as neighboring rights.
- Terrestrial (AM/FM) stations in the USA are not required to pay for this type of performance license.
- In 2003 SoundExchange was formed to issue licenses and collect performance income for audio recordings from digital radio stations and oversees broadcast performance royalties.
- Phonographic Performance Limited (PPL) licenses UK broadcasters and collects royalties on behalf of recording artists and labels.
In Part Three of the series we jump into film and television music synchronization, then look at how digital music and streaming services combine everything we've discussed about copyright so far.