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Royalties (sometimes, running royalties) are usage-based payments made by one party (the "licensee") to another (the "licensor") for ongoing use of an asset, sometimes an intellectual property (IP) right.
Royalties can be determined as a percentage of gross or net sales derived from use of the asset or a fixed price per unit sold. but there are also other modes and metrics of compensation. A royalty interest is the right to collect a stream of future royalty payments, often used in the oil industry and music industry to describe a percentage ownership of future production or revenues from a given leasehold, which may be divested from the original owner of the asset.
License agreements
A license agreement defines the terms under which a resource or property such as petroleum, minerals, patents, trademarks, and copyrights are licensed by one party to another, either without restriction or subject to a limitation on term, business or geographic territory, type of product, etc.
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Royalties (sometimes, running royalties) are usage-based payments made by one party (the "licensee") to another (the "licensor") for ongoing use of an asset, sometimes an intellectual property (IP) right.
Royalties can be determined as a percentage of gross or net sales derived from use of the asset or a fixed price per unit sold. but there are also other modes and metrics of compensation. A royalty interest is the right to collect a stream of future royalty payments, often used in the oil industry and music industry to describe a percentage ownership of future production or revenues from a given leasehold, which may be divested from the original owner of the asset.
License agreements
A license agreement defines the terms under which a resource or property such as petroleum, minerals, patents, trademarks, and copyrights are licensed by one party to another, either without restriction or subject to a limitation on term, business or geographic territory, type of product, etc. License agreements can be regulated, particularly where a government is the resource owner, or they can be private contracts that follow a general structure. However, certain types of franchise agreements have comparable provisions.
Non-renewable resource royalties
The owner of petroleum and mineral resources may licence a party to extract those resources, paying a resource rent, or a royalty on the value or the resultant profits. Where a government is the owner of the resource the terms of the licence and the royalty rate are typically legislated or regulated. An example from Canada's North is the federal Frontier Lands petroleum royalty regime. The royalty rate is determined as an incremental rate from 1-5 percent of gross revenues until costs have been recovered, at which point the royalty rate increases to 30 percent of net revenues or 5 percent of gross revenues. In this manner risks and profits are shared between the government of Canada (as resource owner) and the petroleum developer. This attractive royalty rate is intended to encourage oil and gas exploration in the remote Canadian frontier lands where costs and risks are higher than other locations.
Patent royalties
A patent gives the owner an exclusive right to prevent others from practicing the patented technology in the country issuing the patent for the term of the patent. The right may be enforced in a lawsuit for monetary damages or to prohibit use of the patent and/or inprisonment. In a patent license, royalties are paid to the patent owner in exchange for a license to practice one or more of the four basic patent rights: to manufacture, use, sale, or advertise for sale, a patented technology.
Patent rights may be divided and licensed out in various ways, on an exclusive or nonexclusive basis. The license may be subject to limitations as to time or territory. A license may encompass an entire technology or it may involve a mere component or improvement on a technology. In the United States, "reasonable" royalties may be imposed, both after-the-fact and prospectively, by a court as a remedy for infringement.
Know-how royalties
In addition to licensing the applicable patents, a company may need to learn how to manufacture a product. This knowledge, standing alone or together with a patent license, may be obtained through a know-how license. Know-how is trade secret information in combination with data, techniques, or human and intellectual expertise, that helps a company exploit a licensed technology. Know-how may help a company achieve better operational efficiency, manufacturing productivity, or product/system quality. Know-how royalties may be stated as distinct from patent royalties since their periods of validity vary. The rates vary widely.
Trademark royalties
Trademarks are words, logos, slogans, sounds, or other distinctive expressions that distinguish the source, origin, or sponsorship of a good or service (in which they are generally known as service marks). Trademarks offer the public a means of identifying and assuring themselves of the quality of the good or service. They may bring consumers a sense of security, integrity, belonging, and a variety of intangible appeals. The value that inures to a trademark in terms of public recognition and acceptance is known as goodwill.
A trademark right is an exclusive right to sell or market under that mark within a geographic territory. The rights may be licensed to allow a company other than the owner to sell goods or services under the mark. A company may seek to license a trademark it did not create in order to achieve instant name recognition rather than accepting the cost and risk of entering the market under its own brand that the public does not necessarily know or accept. Licensing a trademark allows the company to take advantage of already-established goodwill and brand identification.
Like patent royalties, trademark royalties may be assessed and divided in a variety of different ways, and are expressed as a percentage of sales volume or income, or a fixed fee per unit sold. When negotiating rates, one way companies value a trademark is to assess the additional profit they will make from increased sales and higher prices (sometimes known as the "relief from royalty") method.
Trademark rights and royalties are often tied up in a variety of other arrangements. Trademarks are often applied to an entire brand of products and not just a single one. Because trademark law has as a public interest goal the protection of a consumer, in terms of getting what they are paying for, trademark licenses are only effective if the company owning the trademark also obtains some assurance in return that the goods will meet its quality standards. When the rights of trademark are licensed along with a know-how, supplies, pooled advertising, etc., the result is often a franchise relationship. Franchise relationships may not specifically assign royalty payments to the trademark license, but may involve monthly fees and percentages of sales, among other payments.
Copyright royalties
Copyright law gives the owner the right to prevent others from copying, creating derivative works, or publicly performing their works. Copyrights, like patent rights, can be divided in many different ways, by the right implicated, by specific geographic or market territories, or by more specific criteria. Each may be the subject of a separate license and royalty arrangements.
Copyright royalties are often very specific to the nature of work and field of endeavor. With respect to music, royalties for performance rights in the United States are set by the Library of Congress' Copyright Royalty Board. Mechanical rights to recordings of a performance are usually managed by one of several performance rights organizations. Payments from these organizations to performing artists are known as residuals. Royalty free music provides more direct compensation to the artists. In 1999, recording artists formed the Recording Artists' Coalition to repeal supposedly "technical revisions" to American copyright statutes which would have classified all "sound recordings" as "works for hire," effectively assigning artists' copyrights to record labels.
Book authors may sell their copyright to the publisher. Alternately, they might receive as a royalty a certain amount per book sold. It is common in the UK for example, for authors to receive a 10% royalty on book sales.
Some photographers and musicians may choose to publish their works for a one-time payment. This is known as a royalty-free license.
Other royalty arrangements
The term 'royalty' also covers areas outside of IP and technology licensing, such as oil, gas, and mineral royalties paid to the owner of a property by a resources development company in exchange for the right to exploit the resource. In a business project the promoter, financier, LHS enabled the transaction but are no longer actively interested may have a royalty right to a portion of the income, or profits, of the business. This sort of royalty is often expressed as a contract right to receive money based on a royalty formula, rather than an actual ownership interest in the business. In some businesses this sort of royalty is sometimes called an override.
Other compensation modes
Royalties are only one among many ways of compensating owners for use of an asset. Others include:
In discussing the licensing of IP, the terms valuation and evaluation need to be appreciated.
Evaluation is the process of assessing a license in terms of the specific metrics of a particular negotiation, which may include its circumstances, the geographical spread of licensed rights, product range, market width, licensee competitiveness, growth prospects, etc.
On the other hand, valuation is the fair market value (FMV)of the asset - trademark, patent or know-how - at which it can be sold between a willing buyer and willing seller in the context of best awareness of circumstances. The FMV of the IP, where assessable, may itself be a metric for evaluation.
If an emerging company is listed on the stock market, the market value of its intellectual property can be estimated from the data of the balance sheet using the equivalence:
Market Capitalization = Net Working Capital + Net Fixed Assets + Routine Intangible Assets + IP
where the IP is the residual after deducting the other components from the market valuation of the stock. One of the most significant intangibles may be the work-force.
The method may be quite useful for valuing trademarks of a listed company if it is mainly or the only IP in play (franchising companies).
Approaches to royalty rate: intellectual property
The rate of royalty applied in a given case is determined by various factors, the most notable of which are:
- market drivers and demand structure
- territorial extent of rights
- exclusivity of rights
- level of innovation and stage of development (see The Technology Life Cycle)
- sustainability of the technology
- degree and competitive availability of other technologies
- inherent risk
- strategic need
- the portfolio of rights negotiated
- fundability
- deal-reward structure (negotiation strength)
To correctly gauge royalty rates, the following criteria must be taken into consideration:
- * the transaction is at "arms-length"
- * there is a willing buyer and a willing seller
- * the transaction is not under compulsion
Approaches to royalty: rate determination and illustrative royalties
There are three general approaches to assess the applicable royalty rate in the licensing of intellectual property. They are:
1. The Cost Approach
2. The Comparable Market Approach
3. The Income Approach
For a fair evaluation of the royalty rate, the relationship of the parties to the contract should:
- be at 'arms-length' (related parties such as the subsidiary and the parent company need to transact as though they were independent parties)
- be viewed as acting free and without compulsion
The cost approach
The Cost Approach considers all the elements of cost that have been employed to create the intellectual property and to seek a royalty rate that will recapture the expense of its development and obtain a return that is commensurate with its expected life. Costs considered could include R&D expenditures, pilot-plant and test-marketing costs, technology upgrading expenses, patent application expenditure and the like.
The method has limited utility since the technology is not priced competitively on 'what the market can bear' principles or in the context of the price of similar technologies. More importantly, by lacking optimization (through additional expense), it may earn below its potential.
However, the method may be appropriate when a technology is licensed out during its R&D phase as happens with venture capital investments or it is licensed out during one of the stages of clinical trials of a pharmaceutical.
In the former case, the venture capitalist obtains an equity position in the company (developing the technology) in exchange for financing a part of the development cost (recovering it, and obtaining an appropriate margin, when the company gets acquired or it goes public through the IPO route).
Recovery of costs, with opportunity of gain, is also feasible when development can be followed stage-wise as shown below for a pharmaceutical undergoing clinical trials (the licensee pays higher royalties for the product as it moves through the normal stages of its development):
Success State of development Royalty rates,% Nature
------------------------------------------- ----------------------
Pre-clinical success 0-5 in-vitro
Phase I (safety) 5-10100 healthy people
Phase II (efficacy) 8-15300 subjects
Phase III (effectiveness) 10-20several thousand patients
Launched product 20+ regulatory body approval
A similar approach is used when custom software is licensed (an in-license). The product is accepted on a royalty schedule depending on the software meeting set stage-wise specifications with acceptable error levels in performance tests.
The comparable market approach
Here the cost and the risk of development are disregarded. The royalty rate is determined from comparing competing or similar technologies in an industry, modified by considerations of useful 'remaining life' of the technology in that industry and contracting elements such as exclusivity provisions, front-end royalties, field of use restrictions, geographic limitations and the 'technology bundle' (the mix of patents, know-how, trade-mark rights, etc.) accompanying it.
Although widely used, the prime difficulty with this method is obtaining access to data on comparable technologies and the terms of the agreements that incorporate them. Fortunately, there are several recognized organizations, among them, RoyaltySource, Royaltystat, Knowledge Express, etc (see 'Royalty Rate Websites' listed at the end of this article) who have comprehensive information on both royalty rates and the principal terms of the agreements of which they are a part. There are also IP-related organizations, such as the Licensing Executives Society, which enable its members to access and share privately assembled data.
The two tables shown below are drawn, selectively, from information that is available with an IP-related organization and on-line. The first depicts the range and distribution of royalty rates in agreements. The second shows the royalty rate ranges in select technology sectors (latter data sourced from: Dan McGavock of IPC Group, Chicago, USA).
Royalty Distribution Analysis in Industry |
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| Industry | Licenses (nos.) | Min. Royalty,% | Max. Royalty,% | Average,% | Median,% |
|---|
| Automotive | 35 | 1.0 | 15.0 | 4.7 | 4.0 | | Computers | 68 | 0.2 | 15.0 | 5.2 | 4.0 | | Consumer Gds | 90 | 0.0 | 17.0 | 5.5 | 5.0 | | Electronics | 132 | 0.5 | 15.0 | 4.3 | 4.0 | | Healthcare | 280 | 0.1 | 77.0 | 5.8 | 4.8 | | Internet | 47 | 0.3 | 40.0 | 11.7 | 7.5 | | Mach.Tools. | 84 | 0.5 | 26 | 5.2 | 4.6 | | Pharma/Bio | 328 | 0.1 | 40.0 | 7.0 | 5.1 | | Software | 119 | 0.0 | 70.0 | 10.5 | 6.8 | |
Royalty Rate Segmentation in Some Technology Sectors |
|
| Industry | 0-2% | 2-5% | 5-10% | 10-15% | 15-20% | 20-25% |
|---|
| Aerospace | 50% | 50% | | | | | | Chemical | 16.5% | 58.1% | 24.3% | 0.8% | 0.4% | | | Computer | 62.5% | 31.3% | 6.3% | | | | | Electronics | | 50.0% | 25.0% | 25.0% | | | | Healthcare | 3.3% | 51.7% | 45.0% | | | | | Pharmaceuticals | 23.6% | 32.1% | 29.3% | 12.5% | 1.1% | 0.7% | | Telecom | 40.0% | 37.3% | 23.6% | | | | |
Commercial sources also provide information that is invaluable for making comparisons. The following table provides typical information that is obtainable, for instance, from Royaltystat:
- Sample License Parameters
Reference: 7787 Effective Date: 10/01/1998
SIC Code: 2870 SEC Filed Date: 07/26/2005
SEC Filer: Eden Bioscience Corp Royalty Rate: 2.000 (%)
SEC Filing: 10-Q Royalty Base: Net Sales
Agreement Type: Patent Exclusive: Yes
Licensor: Cornell Research Foundation, Inc.
Licensee: Eden Bioscience Corp.
Lump-Sum Pay: Research support is $150,000 for 1 year.
Duration: 17 year(s)
Territory: Worldwide
Coverage : Exclusive patent license to make, have made, use and sell products incorporating biological materials, including genes, proteins and peptide fragments, expression systems, cells, and antibodies, for the field of plant disease
The comparability between transactions requires a comparison of the significant economic conditions that may affect the contracting parties:
- similarity of geographies
- relevant date
- same industry
- market size and its economic development;
contracting or expanding markets
- market activity: whether wholesale, retail, other
- relative market shares of contracting entities
- location-specific costs of production and distribution
- competitive environment in each geography
- fair alternatives to contracting parties
The income approach
The Income approach focuses on Todd the licensor estimating the profits generated by the licensee and obtaining an appropriate share of the generated profit. It is unrelated to costs of technology development or the costs of competing technologies.
The approach requires the licensee (or licensor): (a) to generate a cash-flow projection of incomes and expenses over the life-span of the license under an agreed scenario of incomes and costs (b) determining the Net Present Value, NPV of the profit stream, based on a selected discount factor, and c) negotiating the division of such profit between the licensor and the licensee.
The NPV of a future income is always lower than its current value because an income in the future is attended by risk. In other words, an income in the future needs to be discounted, in some manner, to obtain its present equivalent. The factor by which a future income is reduced is known as the 'discount rate'. Thus, $1.00 received a year from now is worth $0.9091 at a 10% discount rate, and its discounted value will be still lower two years down the line.
The actual discount factor used depends on the risk assumed by the principal gainer in the transaction. For instance, a mature technology worked in different geographies, will carry a lower risk of non-performance (thus, a lower discount rate) than a technology being applied for the first time. A similar situation arises when there is the option of working the technology in one of two different regions; the risk elements in each region would be different.
The method is treated in greater detail, using illustrative data, in Royalty Assessment.
The licensor's share of the income is usually set by the '25% rule of thumb', which is said to be even used by tax authorities in the US and Europe for arms-length transactions. The share is on the operating profit of the licensee firm. Even where such division is held contentious, the rule can still be the starting point of negotiations.
Three aspects to the profit of the enterprise must be noted:
the profit that accrues to the licensee may not arise solely through the engine of the technology. There are returns from the mix of assets it employs such as fixed and working capital and the returns from intangible assets such as distribution systems, trained workforce, etc. Allowances need to be made for them.
- (b) profits are also generated by thrusts in the general economy, gains from infrastructure, and the basket of licensed rights - patents, trademark, know-how. A lower royalty rate may apply in an advanced country where large market volumes can be commanded, or where protection to the technology is more secure than in an emerging economy (or perhaps, for other reasons, the inverse).
the royalty rate is only one aspect of the negotiation. Contractual provisions such as an exclusive license, rights to sub-license, warranties on the performance of technology etc may enhance the advantages to the licensee, which is not compensated by the 25% metric.
The basic advantage of this approach, which is perhaps the most widely applied, is that the royalty rate can be negotiated without comparative data on how other agreements have been transacted. In fact, it is almost ideal for a case where precedent does not exist.
It is, perhaps, relevant to note that the IRS also uses these three methods, in modified form, to assess the attributable income, or division of income, from a royalty-based transaction between a US company and its foreign subsidiary. (since US law requires that a foreign subsidiary pay an appropriate royalty to the parent company).
Patent royalty rates
Patent royalty rates are influenced by the importance of the patent and its value to the products. Some realms of business have conventions regarding royalty rates and other license terms. Royalties are often computed as a percentage of the value of the finished product made by using the patent. To illustrate, the following are prevalent rates within the United States pharmaceutical industry:
- a pending patent on a strong business plan, royalties of the order of 1%
- issued patent, 1%+ to 2%
- the pharmaceutical with pre-clinical testing, 2-3%
- with clinical trials, 3-4%
- proven drug with US FDA approval, 5-7%
- drug with market share, 8-10%
Royalty rates may also be affected by whether a patent is strong (i.e. broadly written, seemingly valid) or weak; whether it is a fundamental patent or merely a slight improvement on a known technology; whether substitute technologies are available or an ability to work around the patent; the extent of the contribution of the patented technology to the value of the final product and whether there are other patents that must also be licensed (in which case there is a practical limit on how much royalty can be paid to license each).
With regards to the actual rates of royalty payments in the industry, the Licensing Economics Review , , reported in 2002 that in a review of 458 license agreements, over a 16-year period, it found that an average royalty rate of 7.0%. However, the range extended from zero percent to 50 percent. All of these agreements may not have been at 'arms length'.
Trademark royalty rates
In a long-running dispute involving the valuation of the DHL trademark of DHL Corporation, it was reported that experts employed by the IRS surveyed a wide range of businesses and found a broad range of royalties for trademark use from a low of 0.7% to a high of 15%.
Music royalties
Unlike other forms of intellectual property, music royalties have a strong linkage to individuals - composers (score), songwriters (lyrics) and writers of musical plays - in that they can own the exclusive copyright to created music and can license it for performance independent of corporates. Recording companies and the performing artists that create a 'sound recording' of the music enjoy a separate set of copyrights and royalties from the sale of recordings and from their digital transmission (depending on national laws).
With the advent of pop music and major innovations in technology in the communication and presentations of media, the subject of music royalties has become a complex field with considerable change in the making.
A musical composition obtains protection in copyright law immediate to its reduction to tangible form - a score on paper or a taping; but it is not protected from infringed use unless registered with the copyright authority; for instance, the Copyright Office in the United States, administered by the Library of Congress. No person or entity, other than the copyright owner, can use or employ the music for gain without obtaining a license from the composer/songwriter.
Inherently, as copyright, it confers on its owner, a distinctive 'bundle' of five exclusive rights:
- (a) to make copies of the songs through print or recordings
- (b) to distribute them to the public for profit
- (c) to the 'public performance right'; live or through a recording
- (d) to create a derivative work to include elements of the original music; and
- (e) to 'display' it (not very relevant in context).
Where the score and the lyric of a composition are contributions of different persons, each of them is an equal owner of such rights.
These exclusivities have led to the evolution of distinct commercial terminology used in the music industry.
They take four forms:
- (1) royalties from 'print rights'
- (2) mechanical royalties from the recording of composed music on, CDs and tape
- (3) performance royalties from the performance of the compositions/songs on stage or television through artists and bands, and
- (4) synch (for synchronization) royalties from using or adapting the musical score in the movies, television advertisements, etc. and
With the advent of the internet, an additional set of royalties has come into play : the digital rights from simulcasting, webcasting, streaming, downloading, and online "on-demand service".
In the following the terms 'composer' and 'songwriter' (either lyric or score) are synonymous.
Print rights in music
Brief history
While the focus here is on royalty rates pertaining to music marketed in the print form or ‘sheet music, its discussion is a prelude to the much more important and larger sources of royalty income today from music sold in media such as CDs, television and the internet.
Sheet music is the first form of music to which royalties were applied, which was then gradually extended to other formats. It should be noted that any performance of music by singers or bands requires that it be first reduced to its written sheet form from which the ‘song’ (score) and its lyric are read. Otherwise, the authenticity of its origin, essential for copyright claims will be lost as has been the case with folk songs and American 'westerns' propagated by the aural tradition.
The ability to print music arises from a series of technological developments in print and art histories over a long space of time (from the 11th to the 18th century) of which two will be highlighted.
The first, and commercially successful, invention was the development of the ‘movable type’ printing press, the Gutenberg press in the 15th century. It was used to print the well-known Gutenberg bible and later the printing system enabled printed music. Printed music, till then, tended to be one line chants. The difficulty in using movable type for music is that all the elements must line up - the note head must be properly aligned with the staff, or else it means something other than it should.
Musical notation was, however, well developed by then, It originates around 1025. Guido d'Arezzo developed a system of pitch notation using lines and spaces. Until this time, only two lines had been used. Guido expanded this system to four lines, and initiated the idea of ledger lines by adding lines above or below these lines as needed. He used square notes called neumes. This system eliminated any uncertainty of pitch, which had existed at that time. Guido also developed a system of clefs, which became the basis for our clef system: bass clef, treble clef, and so on. (Co-existing civilizations used other forms of notation).
In Europe, the major ‘consumers’ of printed music in the 17th and 18th centuries were the Royal courts for both solemn and festive occasions. Music was also employed for entertainment, both by the Courts and the nobility. Composers made their living from commissioned work, and work as conductors, performers, tutors of music or through appointments to the Courts. To a certain extent, music publishers also paid composers for rights to print music, but this was not royalty as it is generally understood today.
The European Church was also a large user of music, both religious and secular. However, performances were largely based on hand-written music or aural training.
The American contribution
The Origins of Music Copyright and Royalties
Till the mid-1700s American popular music largely consisted of English and Irish songs, whose lyric and score were available, if that, in engraved prints. Mass production of music was not possible till the movable type was introduced. Music with this type was first printed in the US in 1750 . At the beginning the type consisted of the notehead, stem and staff which were combined into a single font. Later the fonts were made up of the notehead, stems and flags attached to the staff line. Prints till that time existed only on engraved plates.
The first federal law on copyright was enacted in the US (Copyright Act of 1790) late in the 18th century making it possible to give protection to original scores and lyrics.
America's most prominent contribution is jazz and all the music styles which preceded and co-exist with it - its variations on church music, African-American work songs, ‘cornfield hollers’, wind bands in funeral procession, blues, rag, etc - and of innovations in church music, rhythmic variations, stamping, tapping of feet, strutting, shuffling, wailing, laments and spiritual ecstasy.
Until its recent sophistication, jazz was not amenable to written form, and thus copywritable, due to its large improvising element and the fact that many of the geniuses who created this form of music could not read or write music . It was its precursor, minstrelsy which came to be written and royalties were paid for the use of popular music.
Blackface minstrelsy, in which white men parodied black music of the day with blackened faces was the first distinctly theatrical form. In the 1830s and 1840s, it was at the core of the rise of an American music industry. For several decades it provided the means through which white America saw black America. It had strong racist aspects to it but it also provided the means by which white Americans became acquainted with black folk culture.
The blackfaces, who called themselves ‘Ethiopian delineators’ and ‘Ethiopian Serenaders‘ were not products of the American South but first prevailed in the midwest and the north, first in low-level white establishments buy then moved to even classy theaters. White, working-class northerners could identify with the characters portrayed in early performances with images of 'white slavery' and 'wage slavery' .
In 1845, the blackfaces purged their shows of low humor. Christy's Minstrels, formed by C.F. Christy, among the major minstrels of that time, was to epitomize the songs of its most renknowned composer, Stephen Foster.
Stephen Foster is the father of American popular music. He was the pre-eminent songwriter in the United States of that time. His songs, such as "Oh! Susanna", "Camptown Races", "My Old Kentucky Home", "Beautiful Dreamer" and Swanee River) remain popular even 150 years after their composition and have worldwide appreciation. (The score and some digital versions of these songs can be sampled at http://www.sibeliusmusic.com/cgi-bin/show_score.pl?scoreid=127497)
Foster had little formal music training. While he was able to publish several songs before he was twenty his sophistication came from Henry Kleber, a classically trained German immigrant, and a popular blackface performer, Dan Rice, who befriended him. But it was his joining the Christy Minstrels - which made him and his songs, America’s favorites.
W.C. Peters was the first major publisher of Foster’s works but Foster saw very little of the profits which his works generated for the publisher or for Christy Minstrels. "Oh, Susanna" was an overnight success and a Goldrush favorite but Foster received just $100 for it from his publisher, in part due to his disinterest in money and the free gifts of music he gave to him. His first love lay in writing music and its success. But Foster did later contract with Christy, with $15 each for 'Old Folks at Home' and 'Farewell my Lilly Dear'. "Oh, Susanna" also led Stephen Foster to two New York publishers, Firth, Pond and Co. and F.D. Benson who contracted with him to pay royalty at 2 cents for every printed copy sold by them.
Minstrelsy slowly gave way to songs generated by the American Civil War, followed by the rise of Tin Pan Alley and Parlour music (also see http://parlorsongs.com/insearch/printing/printing.php ), both of which led to an explosion of sheet music, greatly aided by the emergence of the player piano. While the player piano was to make inroads deep into the 20th century, more and more music was reproduced through the radio and the phonograph, leading to new forms of royalty payments, which further discussion will elaborate but which also lead to the decline of sheet music.
American innovations in church music also provide a stream of royalties to its creators. While Stephen Foster is often credited as the originator of print music in America, William Billings is the real father of American music. In 1782, of the 264 music compositions in print, 226 were his church-related compositions. Similarly, Billings was the composer of a quarter of the 200 anthems published till 1810. He, or his family, saw no royalties although the Copyright Law was in place by then.
Church music plays a significant part in American print royalties. It is to be noted that when the Lutheran Church split from the Catholic Church in the 1500s, more than religion changed. Martin Luther wanted all of his congregation to take part in the music of his services, not just the choir. This new chorale style finds its way in both present church music and jazz.
Print royalties
The royalty rate for printing a book, or its download, (a novel, lyrics or music) for sale varies from 8-20% of the suggested retail sales value, typically 12-14%, for a new writer. The payment is made by the publisher and corresponds to the agreement (license) between the writer and the publisher as with other music royalties. The agreement is typically non-exclusive to the publisher and the term of the license may vary from 3-5 years. Established writers favor certain publishers and usually receive higher royalties.
All of the royalty does not accrue to the writer.It is shared with the publisher on of book sales income on a 50:50 basis. Publishing encompasses the whole area of administering, exploiting and promotion of the musical work, not just the print rights; in forms as piano and vocal arrangements, as folios, movies and obtaining foreign publication, etc.
If a book involved is a play, then maybe it will be dramatized. The right to dramatize is a separate right – known as a Grand Right. This income is shared by the many personalities and organizations who come together to offer the play; that is the playwright, composer of the music played, producer, director of the play , etc. There is no convention to the royalties paid for Grand Rights and it is freely negotiated with the publisher and the mentioned participants.
If the writer’s work is only part of a publication, then the royalty paid is pro-rata, a facet which is more often met in a book of lyrics or in a book of hymns and sometimes in an anthology.
Church music – that is, music that is based on written work - is important particularly in the Americas and in some other countries of Europe. Examples are hymns, anthems and songbooks. Unlike novels and plays, hymns are sung with regularity. Very often, the hymns and songs are sung from lyrics in a book, or more common nowadays, from the work projected on computer screen.
When the lyrics from a song are so projected, the same copyright laws apply as if sheet music or the hymn books have been purchased. A lyric reprint license is required by Federal copyright law to compensate the songwriter for using their work. By license the author exempts the songs sung in worship; however, songs sung (even in worship) from reproductions as photocopies or from projections are subject to license. In the US, the CCLI (Christian Copyright Licensing Incorporated ( http://www.ccli.com) is the collection agency for royalties but song or hymn writers have to be registered with them and the songs identified.
Foreign Publishing
Foreign Publishing involves two basic types of publishing – subpublishing and co-publishing occurrences in one or more territories outside that of basic origin. Subpublishing, itself, is one of two forms: subpublishers who merely license out the original work or those which make and sell the products which are the subject of the license, such as print books and records (with local artists performing the work).
Subpublishers who produce and market a product retain 10-15% of the marked retail price and remit the balance to the main publisher with whom they have the copyright license. Those subpublishers who merely license out the work earn between 15-25%. ( The Language of the Music Business, By Alan S. Bergman, http://www.alanbergman.com/musicbusinesslanguage.pdf ).
Co-Publishing takes place when there is more than one publisher and it arises usually when there is more than one writer on a work. Each writer then has his or her own publishing company who together then become Co-Publishers.
Mechanical royalties
The term 'mechanical' and mechanical license has its origins in the 'piano rolls' on which music was recorded in the early part of the 20th Century. Although its concept is now primarily oriented to royalty income from sale of CDs, its scope is wider and covers any copyrighted audio composition that is rendered mechanically, i.e. without human performers:
*tape recordings
*music videos
*ringtones
*MIDI files
*downloaded tracks
*DVDs, VHS, UMDs
*computer games
*musical toys etc.
The United States treatment of mechanical royalties is in sharp contrast to international practice.
In the United States, while the right to use copyrighted music for making records for public distribution (for private use) is an exclusive right of the composer, the Copyright Act provides that once the music is so recorded, anyone else can record the composition/song without a negotiated license but on the payment of the statutory compulsory royalty. Thus, its use by different artists could lead to several separately-owned copyrighted 'sound recordings'.
The following is a partial segment of the compulsory rates as they have applied from 1998 to 2007 in the United States . The royalty rates in the table comprise of two elements: (i) a minimum rate applies for a duration equivalent to 5 minutes, or less, of a musical composition/song and (ii) a per-minute rate if the composition exceeds it, whichever is greater.
Compulsory Mechanical Royalty Rates - United States| Period | Royalty Rate | | 01-01-1998 - 12-31-1999 | 7.10 cents or 1.35 cents/min | | 01-01-2000 - 12-31-2001 | 7.55 cents or 1.43 cents/min | | 01-01-2002 - 12-31-2003 | 8.00 cents or 1.55 cents/min | | 01-01-2004 - 12-31-2005 | 8.50 cents or 1.65 cents/min | | 01-01-2006 - 12-31-2007 | 9.10 cents or 1.75 cents/min | |
In the predominant case, the composer assigns the song copyright to a publishing company under a 'co-publishing agreement' which makes the publisher a co-owner of the composition (the composer may also be the publisher). The publisher's role is to promote the music by extending the written music to recordings of vocal, instrumental and orchestral arrangements and to administer the collection of royalties (which, as will shortly be seen, is in reality done by specialized companies). The publisher also licenses 'subpublishers' in other countries to similarly promote the music and administer the collection of royalties.
Normally, of every 100 units of currency that flows to the publisher gets divided as follows: 50 units go to the songwriter and 50 units to the publisher. However, the music writer obtains a further 25 units from the publisher's share (as a co-publisher). In effect, the co-publishing agreement is a 75/25 share of royalties in favor of the songwriter if administrative costs of publishing are disregarded. This is near international practice.
When a company (recording label) records the composed music, say, on a CD master, it obtains a distinctly separate copyright to the sound recording, with all the exclusivities that flow to such copyright. The main obligation of the recording label to the songwriter and her publisher is to pay the contracted royalties on the license received.
While the compulsory rates remain unaffected, recording companies, in the US, will, typically, negotiate to pay not more than 75% of the compulsory rate where the songwriter is also the recording artist . and will further (in the US) extend that to a maximum of 10 songs, even though the marketed recording may carry more than that number. This 'reduced rate' results from the incorporation of a "controlled composition" clause in the licensing contract since the composer as recording artist is seen to control the content of the recording.
Mechanical royalties for music produced outside of the United States are negotiated - there being no compulsory licensing - and royalty payments to the composer and her publisher for recordings are based on the wholesale, retail, or 'suggested retail value' of the marketed CDs.
Recording artists earn royalties only from the sale of CDs and tapes and, as will be seen later, from sales arising from digital rights. Where the song-writer is also the recording artist, royalties from CD sales add to those from the recording contract.
In the US, recording artists earn royalties amounting to 10%-25% (of the suggested retail price of the recording (http://www.ascap.com/musicbiz/money-recording.html) depending on their popularity but such is before deductions for 'packaging', 'breakage','promotion sales' and holdback for 'returns', which act to significantly reduce net royalty incomes.
In the US, the Harry Fox Agency, HFA, is the predominant licensor, collector and distributor for mechanical royalties, although there are several small competing organizations. For its operations, it charges about 6% as commission. HFA, like its counterparts in other countries, is a state-approved quasi-monopoly and is expected to act in the interests of the composers/song-writers - and thus obtains the right to audit record company sales.
In the U.K. the Mechanical-Copyright Protection Society, MCPS (now in alliance with PRS), acts to collect (and distribute) royalties to composers, songwriters and publishers for CDs and for digital formats. It is a not-for-profit organization which funds its work through a commissions on aggregate revenues. The royalty rate for licensing tracks is 6.5 per cent of retail price (or 8.5 per cent of the published wholesale price.
In Europe, the major licensing and mechanical royalty collection societies are:
- SACEM in France (http://www.sacem.fr/portailSacem/jsp/ep/home.do?tabId=0)
- GEMA (http://www.gema.de/) in Germany, and
- SFA in Italy (http://www.scfitalia.it/webnew/).
SACEM acts collectively for 'francophone' countries in Africa. The UK society also has strong links with English-speaking African countries.
Mechanical societies for other countries can be found at:
- http://www.bemuso.com/musicbiz/collectionsocieties.html#themainnationalcollectionsocieties
The mechanical royalty rate paid to the publisher in Europe is about 6.5% on the PPD (Published Price to Dealers.
Record companies are responsible for paying royalties to those artists who have performed for a recording based on for the sale of CDs sold through stores and on-line.
Performance royalties
‘Performance’ in the music industry can include any of the following:
- *a performance of a song or composition — live, recorded or broadcast
- *a live performance by any musician
- *a performance by any musician through a recording on physical media
- *performance through the playing of recorded music
- *music performed through the web (digital transmissions)
It is useful to treat these royalties under two classifications:
those associated with conventional forms of music distribution which have prevailed for most part of the 20th Century, and
those from emerging 'digital rights' associated with newer forms of communication, entertainment and media technologies (from 'ring tones' to 'downloads' to 'live internet streaming'.
Conventional forms of royalty payment
In the conventional context, royalties are paid to composers and publishers and record labels for public performances of their music on vehicles such as the jukebox, stage, radio or TV. Users of music need to obtain a ‘performing rights license’ from music societies - as will be explained shortly - to use the music. Performing rights extend both to live and recorded music played in such diverse areas as cafés, skating rinks, etc.
Licensing is generally done by music societies called ‘Performing Rights Organizations’ (PROs), some of which are government-approved or government-owned, to which the composer, the publisher, performer (in some cases) or the record label have subscribed.
The diagram on the right titled 'The Performance Rights Complex' (Courtesy http://www.bemuso.com) shows the general sequences by which a song or a composition gets to be titled a 'performance' and which brings royalties to song-writers/publishers, performing artists and record labels. How, and to whom, royalties are paid is different in the United States from what it is, for example, in the UK. Most countries have practices more in common with the UK than the US.
In the United Kingdom there are three principal organizations:
PPL (for Phonographic Performance Ltd)
PRS (for Performing Rights Society), and
MCPS (for Mechanical Copyright Protection Society)
who license music (to music-users) and act as royalty collection and distribution agencies for their members.
PPL(http://www.ppluk.com/) - claimed to be the largest in the world - issues performance licenses to all UK radio, TV and broadcast stations, as also to such diverse users as clubs and bars who employ sound recordings (tapes, CDs), in entertaining the public and collects and distributes royalties to the record label for the sound recording and to featured UK performers in the recording. Performers do not earn from sound recordings on video and film.
PRS, which is now in alliance with MCPS, (http://www.mcps-prs-alliance.co.uk/Pages/default.aspx) collects royalties from music-users and distributes them directly to song-writers and publishers whose works are performed live, radio or on TV on a 50:50 basis. MCPS licenses music for broadcast in the range 3– 5.25% of net advertising revenues
MCPS also collects and disburses mechanical royalties to writers and publishers in a manner similar to PRS. Although allied, they serve, for now, as separate organizations for membership.
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