The first article in this series made use of an outstanding infographic from Information is Beautiful titled “Selling Out” to illustrate how little money independent musicians make from streaming their music. The situation is even worse for musicians who signed with a record label.

One thing that’s obvious immediately when you look at Selling Out is that musicians who signed with a record label make much less money from each stream or digital sale than musicians who are completely independent. The reason is simple, the labels are taking most of the money. To understand how they do this, it’s necessary to get a handle on the copyrights and royalties that are in play when a song is streamed.

There are two copyrights to consider.

1. PA (Performing Arts) copyright. This is the copyright for the musical composition itself. The PA copyright is split 50/50 between the songwriter and the music publisher. Musicians who are completely independent are often both the songwriter and the publisher of their songs so they end up with both the songwriter’s and the publisher’s portion of any revenue that is based on the PA copyright. Musicians who are signed to a label usually have assigned the publishing rights for their songs to someone else. This someone else could be their record label, a publishing house that may be a branch of the same company that owns their record label, or an independent publisher that negotiates the relationship between the musician and the label.

PA copyrights often end up in the hands of music companies because they buy the copyright for pitiful amounts from musicians who are broke, they demand the copyright as part of the deal when musicians sign with a record label the company owns, or they acquire them when big companies gobble up the smaller companies that initially got the copyright from the songwriter. For example, Warner Music claims to own the PA copyright for the song “Happy Birthday (to You)” from which they make an estimated $2 million a year.

2. SR (Sound Recording) copyright. This is the copyright for a recorded version of a song and is the source of income for most of the musicians who perform on a recording. If a band releases a concert album that includes live versions of songs they have previously recorded and released, the original version and the live version of a song will have the same PA copyright because it is the same composition and different SR copyrights because the original and live versions are two different recordings. Music companies usually hold the SR copyright.

One or both of the PA and the SR copyrights come into play whenever a song is purchased, streamed, played on the radio, or played through the sound system in a public place like a bar, a coffee shop, a store or a gym. Whenever any of these things happen, the owners of the PA and SR copyrights are supposed to collect royalties.

There are several different types of royalties. Here are three that pertain to streaming.

1. Mechanical royalties. Mechanical royalties are based on the PA copyright and are paid by the record label to the publisher for use of  the musical composition. The publisher splits the royalty 50/50 with the songwriter. At the time of this writing, mechanical royalties were fixed at $0.091 per song (whether streamed or on CD) for songs less than 5 minutes long. The mechanical royalty for songs over 5 minutes is $0.0175 per minute. The performer doesn’t see any of this money unless the performer is also the songwriter. Record labels can, and often do, negotiate reduced mechanical royalties with publishers as part of the contract when signing musicians to the label. It’s often the case that record labels are owned by a company that is the publisher for many of the songs that appear on the record label. When this happens one part of the music company (the label) is paying another part of the company (the publisher) half of the mechanical royalty.

The Beatles in the studio

2. Artist royalties. Artist royalties are based on the SR copyright and are paid by the record label to the musicians for use of their recorded performance. The rate at which artist royalties are paid is negotiated when the record label signs the musicians. Typically, any money the label invests in the musicians such as the cost of recording them, manufacturing their CDs, putting them out on tour etc., are paid back to the record label before the musicians see any money from artist royalties. Record labels strive to negotiate artist royalties at a rate that maximizes the chance that their investment in the musician will be paid back before the musician stops selling. If the label gets it just right, the musician will get little or nothing from artist royalties while the label will have all or most of its investment in the musician paid back. Songs or albums that break out and become hits can produce enough revenue from artist royalties to provide income for musicians and profits for record companies.

3. Performance royalties. Performance royalties are paid by music providers that play music for listeners. The providers could be streaming services like Spotify or Pandora, AM or FM radio stations, or businesses like bars, stores, or restaurants. Performance royalties cover both PA copyrights (the copyright for the composition) and SR copyrights (the copyright for the performance). The rate for the PA portion of the performance royalty is usually negotiated between the music provider and a performance rights organization like BMI, ASCAP, or SESAC which collects the royalty, takes a big cut, and then distributes what’s left to the publisher and songwriter who split it 50/50. The SR portion of the performance royalty is paid to the record label. The rate for the SR portion of the performance royalty is negotiated between the music provider and either individual record labels or large companies that own a number of record labels. The negotiations over the SR rate are tied to the way the song is played for the listener. For example, a streaming service like Pandora that does not allow the listener to choose the songs she will hear usually pays a lower rate than a service like Spotify that allows listeners to listen to whatever they want whenever they want. The label passes some of this money on to the musicians who performed the music at a rate that is based on the deal that was negotiated when the musicians signed with the label. Songs heard on the radio are a special case. The musicians who performed on the recording get nothing for songs played on AM or FM radio stations.

Here’s an infographic from Vox that sums all of this up along with a couple of extra wrinkles we haven’t discussed. Simple, right?

Here’s an alternate summary that focuses on where musicians get their money from streaming.

A songwriter who writes a song but does not perform on the recording gets paid from mechanical royalties. The amount of the royalty depends on the deal their publisher negotiated with the record label that signed the musicians who recorded the song. The songwriter gets whatever is left after the professional rights organizations and the publisher have taken their cuts.

A musician who performs on a recording but did not write the song gets paid from artist royalties and performance royalties. The amount of the artist royalty depends on the deal negotiated between the record label and the artist; the amount of the performance royalty depends on the deal negotiated between the record label and the streaming service. The musician usually doesn’t see any of the money generated by artist royalties until everything the label has invested in the musician has been paid back. The amount of the artist royalty paid to the musician after the record label has recouped its investment and the amount of the performance royalty passed on to the musician depend on the deal negotiated between the musician and the label.

Songwriters who perform on a recording of their own song get paid in both of these ways.

As you can see, the money flow from a song that is streamed to the musicians who wrote and/or recorded it is complicated.  While it’s easy to get lost in the details, there are two overriding factors to keep in mind. First, most musicians aren’t making very much money from streaming their music. According to Selling Out Google Play Music is the best streaming service for musicians signed to a label because they only (!) need to stream 172,206 songs a month to make minimum wage. On Spotify they need to stream 1, 117,026 songs per month to make minimum wage and Spotify is better for the musician than either Deezer (1,260,000 streams) or YouTube (4,200,000 streams).

The second thing to remember is something that was pointed out in the first article in this series. The record labels always make money and they always make more money than anyone else. All the rigamarole detailed here about copyrights and royalties is designed to maximize profits for the music companies at the expense of the musicians and sound engineers who actually create the music we listen to.

Right now the record labels are making more money than anyone else from streaming and they are complaining about it.  How much money are they making? Why are they complaining? We’ll look at these questions in the next article in the series.

(Full disclosure: I am a completely independent musician that makes, sells, and streams music under the name Parametric Monkey on Spotify, Google Play, iTunes, Deezer, Tidal, YouTube and many other streaming services such as Soundcloud that are not shown on Selling Out. I’m a member of ASCAP as both the publisher and the songwriter of the songs I release as Parametric Monkey. The aggregator I use to place my music with streaming services is Tunecore.)