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 then look at 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. We looked at how PROs were formed, how performance royalties work, and the difference between a publisher and a PRO.

Let's pick up where we left off - with a new technology that was about to change everything the music industry had built around live performance and sheet music sales.

Early recording technology

By the late 1800s and early 1900s a series of new technologies were emerging that would fundamentally change how music was reproduced and consumed.

The player piano was the first to reach mass market. Rather than requiring years of musical training, anyone could insert a paper roll into the mechanism, pump the foot pedals, and the piano would play the song automatically. The rolls themselves were created by a pianist playing on a specially modified keyboard that punched holes in the paper as each key was pressed - one roll per performance. If you wanted five thousand copies of a roll, someone had to perform the song five thousand times.

This is worth pausing on for a moment, because it makes the concept of mechanical reproduction viscerally clear. Each roll was a physical reproduction of a musical performance - a copy that could be sold, duplicated, and played back without the original performer being present. The word mechanical in mechanical royalties comes directly from this era - the idea of music being reproduced by a machine rather than performed live.

The gramophone and phonograph followed, capturing sound on wax cylinders and later flat discs that could be mass produced more efficiently than piano rolls. The audio quality was poor by modern standards but the appeal was immediate - music in your home, played back by a machine, no musical training required. Demand grew quickly.

What none of this generated, at this stage in history, was any income for the songwriters whose songs were being reproduced and sold in these formats. The manufacturers were profiting. The distributors were profiting. The songwriters were getting nothing.

Record labels

Record labels didn't emerge as independent businesses initially - they grew out of the phonograph and gramophone manufacturers themselves. The logic was straightforward: there wasn't much use in selling a record player without records to play on it. The manufacturing companies set up recording departments to produce the cylinders and discs their customers needed.

Each manufacturer had its own playback format in the early days - the cylinders and discs from one company often didn't work on another company's equipment. So the manufacturers competed aggressively to ensure that recordings of popular songs and well known performers were available for their specific format. Getting the right music onto your format was a commercial necessity.

As demand for recorded music grew through the early 1900s, dedicated studios and labels began to emerge - businesses focused specifically on finding, recording, and selling music rather than manufacturing the equipment to play it. Each label typically focused on a particular genre or audience, developing relationships with performers and building catalogs.

The arrangement between labels and recording artists established patterns that persist in various forms today. Labels paid musicians a combination of an upfront fee to make the recording and ongoing royalties for each unit sold, calculated after the costs of recording and production had been recouped. The label typically owned the intellectual property in the sound recording - the master - as the entity that had financed its creation. In exchange for that ownership, the label had the right to control how the recording was reproduced, distributed, and licensed.

Labels also licensed recordings to other labels and distributors in different territories to represent locally - the same sub-publishing model that existed in music publishing, applied to recorded music.

💡 Federal copyright protection for sound recordings in the United States wasn't granted until 1972. For most of the recording industry's early history, the practical barrier to copying recordings - the expense and difficulty of duplicating physical formats - provided de facto protection. It wasn't until tape technology made copying genuinely accessible that formal legal protection became necessary.

What is an ISRC? Sound recordings are issued International Standard Recording Codes - ISRCs - by labels and music distributors. The ISRC is the unique identifier for a specific recording, used across every digital system that tracks music consumption and pays out royalties. Each ISRC should be matched with the ISWC of the underlying song, linking the recording to the composition it captures. Without an ISRC, a recording cannot be properly tracked or attributed in the digital royalty infrastructure.

The fight for mechanical royalties

As records began selling in significant numbers, the songwriters and publishers who had spent the previous decades building the performance royalty system found themselves in a familiar position - a new technology was commercially reproducing their songs and they were receiving nothing from it.

The publishers and songwriters lobbied the courts first, arguing that the mechanical reproduction of their songs on piano rolls and gramophone discs required compensation. They were initially denied - the courts ruled that copyright protection only applied to works that could be read by the human eye. A piano roll or a wax disc, whatever it contained, was not a readable text. The songs reproduced on them were exempt.

Eventually the lobbying moved to Congress and the argument was won. A law was written establishing a specific statutory rate that recording manufacturers were required to pay to publishers for each mechanically reproduced song - a set amount per copy sold, regardless of negotiation. This became known as the mechanical statutory rate.

By this point the National Music Publishers Association had been formed, and a man working there called Harry Fox took on the responsibility of issuing the new mechanical licenses. He tracked the sale of recordings, collected the royalties from the manufacturers, and paid them out to the publishers. The Harry Fox Agency was born from this work and still exists today as one of the primary mechanical licensing entities in the United States.

Mechanical collection societies now exist in most countries - MCPS in the UK, AMCOS in Australasia. The Mechanical Licensing Collective, known as the MLC, was formed in recent years specifically to administer blanket mechanical licenses between digital streaming services and pay out royalties to songwriters and publishers in the United States.

💡 Mechanical royalties are not split the same way as performance royalties. Where performance royalties are paid directly to the songwriter and publisher separately by the PRO, the publisher generally receives the full mechanical royalty from the collection society and then pays the songwriter their share according to their agreement.

The current mechanical statutory rate in the United States is 9.1 cents per song sold for recordings under five minutes. This rate applies to physical sales, digital downloads, and - in a more complex form - to streaming.

Enter radio

By the early 1930s radio had moved from a novelty to a mainstream technology. The Radio Corporation of America (RCA)had been mass producing home radio sets, and as broadcast quality improved, radio became the dominant form of in-home entertainment for millions of people.

The impact on the music industry was immediate and complicated.

For performers, radio was initially a liberation. They could reach audiences of thousands from a single studio performance, without touring between cities or depending on a record deal to distribute their music. Early radio featured live performances almost exclusively - the playback quality of recorded music wasn't good enough for broadcast in the early years, so bands performed live to air.

For record labels, radio was a threat. As audiences shifted their entertainment consumption to the radio, record sales dropped. Why buy a recording of a song when you could hear a live performance of it for free in your living room? Revenue fell and the labels were unhappy.

For songwriters and publishers, the situation was familiar. Their songs were being performed on radio stations that were generating significant advertising revenue - and once again, no royalty was flowing back to the people who had written the music.

Broadcast performance royalties

ASCAP's response was to extend the performance licensing model to radio. Just as venues paid an annual license fee to perform songs in public, radio stations would need to pay a broadcast performance license for the right to play songs from the ASCAP repertoire over the airwaves.

The license was structured as a percentage of the radio station's annual revenue - initially around three to five percent. Stations reported the songs they played and ASCAP distributed the collected fees to its songwriter and publisher members as broadcast performance royalties.

💡 Radio playlist reporting and accounting has never been a precise science. Tracking every song played on every station and attributing royalties accurately is an enormous administrative challenge. PROs have historically relied on estimates based on record sales, sample reporting, and other proxies. Popular songs tend to receive higher payouts on the assumption that they are played more frequently - which is broadly true but inevitably imprecise.

As with the performance royalty before it, the broadcast performance royalty followed the same basic logic: a business is generating revenue from the use of music, therefore the people who created that music should be compensated. Radio stations sold advertising to audiences who tuned in for the music. Without the music, the audience wouldn't be there. Without the audience, the advertising revenue wouldn't exist. The songwriters and publishers were entitled to a share.

The ASCAP and BMI dispute

Through the late 1930s ASCAP continued to raise its license fee rates, eventually pushing toward ten percent of annual revenue. The radio stations balked. Negotiations broke down and the broadcasters refused to renew their ASCAP licenses.

Rather than capitulate, the radio industry banded together and formed their own performing rights organization - Broadcast Music Inc., known as BMI - in 1939. When the ASCAP licenses expired, the ASCAP repertoire vanished from the airwaves. Every song in the American songbook that ASCAP members had written was suddenly unavailable to radio stations.

BMI moved quickly to fill the gap. They signed a wide range of artists and songwriters who had previously been excluded from or underserved by ASCAP - jazz musicians, blues artists, country and folk songwriters, Latin musicians. The repertoire BMI built was broader and more diverse than the American songbook catalog that had dominated ASCAP's membership, and it introduced radio audiences to sounds they hadn't heard prominently before.

The ASCAP dispute was eventually resolved and the two organizations have coexisted ever since, along with a third US PRO called SESAC which was founded in 1931 to represent European songwriters and publishers in the American market. The existence of multiple PROs in the United States is a direct consequence of the competitive dynamics of this period.

The cultural impact of the BMI formation was significant and somewhat ironic. By forcing the radio industry to build an alternative repertoire, ASCAP's overreach helped accelerate the mainstream exposure of jazz, blues, and country music - the genres that would feed directly into rock and roll and reshape popular music for the rest of the twentieth century.

The musicians strike

As if the ASCAP and BMI dispute wasn't enough disruption, the American Federation of Musicians went on strike from 1942 to 1944, demanding that the recording industry pay royalties into a trust fund for musicians who were being displaced by recorded music.

The strike prevented musicians from recording for any label that refused to negotiate - though they could still perform live and on radio as long as the performances weren't recorded. The result was a period in which the major labels couldn't add new recordings to their catalogs, while smaller independent labels that settled with the union earlier were able to keep recording.

Combined with the absence of the ASCAP repertoire from radio, the strike pushed the industry toward smaller ensembles and vocalists who could perform live without the full infrastructure of a big band. Bebop flourished in this environment. Singers stepped forward from behind the band. The conditions were being set, quietly, for rock and roll.

Neighboring rights and recording performance income

Performance royalties from radio - collected by PROs and paid to songwriters and publishers - are one side of the broadcast income picture. In many countries there is a second layer of performance income that applies specifically to sound recordings.

When a recording is broadcast on radio or television, the owner of that recording - the label or the recording artist - can also be entitled to a performance royalty for the use of their specific recording. This right is known as a neighboring right, and the income generated is called neighboring rights income.

The United States is a significant exception to this global norm. Terrestrial radio stations in the US - AM and FM broadcast radio - are not required to pay neighboring rights royalties to recording owners. Songwriters and publishers receive performance royalties through ASCAP, BMI, or SESAC. Recording artists and labels do not receive an equivalent payment from terrestrial radio in the US, which has been a point of contention in the industry for decades.

Digital radio is treated differently. SoundExchange was formed in 2003 to issue licenses and collect performance income for sound recordings from digital radio stations and streaming services - satellite radio, internet radio, and similar platforms. If you are a recording artist receiving airplay on digital radio platforms, registering with SoundExchange is essential to collecting that income.

For artists releasing music in the United States but receiving broadcast airplay in other countries, neighboring rights income from those territories can be significant. Joining a neighboring rights collection society - or working with a rights management company that handles neighboring rights - ensures that income finds its way back to you rather than sitting uncollected in a foreign territory.

💡 To summarize the royalty landscape so far: a song broadcast on radio generates a performance royalty for the songwriter and publisher through the local PRO. In most countries outside the US it also generates a neighboring right for the recording owner through a separate collection society. Two rights, two royalties, from the same broadcast.

Where things stood

By the mid-twentieth century the music industry had established two distinct and functioning revenue streams for songs - performance royalties from live venues and radio broadcasts, and mechanical royalties from the sale of recordings. Publishers and songwriters were organized, collecting societies existed, and the basic infrastructure for compensating creators was in place.

The recorded music industry had found its footing. Labels were signing artists, pressing records, and building catalogs. Radio was driving awareness and record sales were recovering from the early disruption. The relationship between radio and recorded music had shifted from adversarial to symbiotic - radio promoted records, records gave radio something to play, and both industries grew.

But a new technology was already developing that would create entirely new ways to reproduce and monetize music - and entirely new revenue streams for the people who created it.

In Part Three we move into film and television, the birth of sync licensing, and the rise of the music supervisor.