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What are mechanical royalties and how

do I earn them?
Isaac Shepard February 23, 2017 Manufacturing, Music Royalties No Comments

In short, mechanical royalties are what you get when your composition is
manufactured on a CD, downloaded from an online music store like iTunes, or
streamed on an online music service like Spotify. There are lots of different types of
royalties, but right now were just talking about mechanical royalties. If you want to see
where mechanical royalties fit into scheme of things, check out my overview about how
the music business works.

Friendly Word of Caution: you might want some coffee before you proceed. And I
wouldnt recommend trying to get through this when there are crying babies or

construction workers nearby!

Lets dig into the details!

A composition is different than a sound recording.

Take a look at this little diagram. It shows how a writer creates a composition and then an
artist (often the same person as the writer) creates a sound recording (also called
a master) from it. To do this, the artist must acquire a mechanical license to publish the
sound recording. I talk about mechanical licenses specifically in another post. But Ill try
to stay on topic and continue with mechanical royalties. In this simple case, the writer
owns the composition copyright and the artist owns the sound recording copyright.

A writer may choose to sign with a Publisher to help him manage and exploit (in a good
way) his compositions. To do this, the Publisher usually owns the corresponding
composition copyright. Likewise, an artist may choose to sign with a Record Label to
help him manage and exploit his sound recordings. To do this, the Record Label usually
owns the corresponding sound recording copyright. In this case, the diagram would look
like this, but the idea is the same.

If you are a solo artist writing your own material, that means you basically act as your
own Publisher and your own Record Label. You therefore own both the composition
copyright and the sound recording copyright and get 100% of everything. If you signed
with a Publisher, generally they would split the mechanical royalties with you.

It still makes sense to pay mechanical royalties.

As you can see in the diagrams, either way the sound recording is a direct result of the
composition. So, then, it makes sense that when the sound recording is used, the people
who own the composition should be compensated appropriately, right? Right. Note that
were talking here about a composition that was recorded, rather than performed live.

So what do I mean when the sound recording is used? Well that is the interesting part
and leads us to the part about where the term mechanical came from.

Mechanical royalties and what they mean today.


Apparently, in days of old, when a
composer created some music, it could be manufactured as a piano roll that could be
used on a player piano. People could play the music over and over using the piano roll,
sort of like how you can play a CD with a song over and over again. Thus, a mechanical
royalty was paid to the owner of the composition when the piano roll was physically
created.

As technology changed over time to digital, the mechanical part of the story became
less apparent, but the basic idea remained.

Physical CDs: mechanical royalties are due to the Publisher (owner of the
composition) when each CD is manufactured.
o Notice that I didnt say when the CD is sold. So, if someone presses 1,000
CDs of your song, they owe you mechanical royalties for 1,000 copies of
the CD, even though they havent been sold yet. It makes sense if you
think about it the Publisher should still get paid if someone distributes a
CD with their work to others, whether or not they choose to give the CD
away for free or sell it for $100.
o Once a CD is created and the mechanical royalty is paid, and a user
receives or purchases the CD, it doesnt matter how many times the user
plays the music from his CD player for personal use no more
mechanical royalties are owed to the Publisher.
Digital downloads: mechanical royalties are due to the Publisher when a user
downloads the sound recording.
o Notice that I didnt say when the user purchases the digital download. Just
like with the CD example, the Publishers should still get paid even when
the Record Label (owner of the sound recording) decides to give away the
sound recording for free. Thats why it is a big no, no to do a cover song
and post it online for people to download for free! You technically owe a
mechanical royalty to the Publisher for each download, even if it is free to
the user!
o Once a user receives or purchases a digital download, the user can play the
music for personal use for as many times as he wants without causing any
more mechanical royalties to be owed to the Publisher.
o Stores like iTunes and Bandcamp are good examples where digital
downloads can be purchased.
Online interactive or on-demand streaming: mechanical royalties are due to
the Publisher every time a user streams the sound recording.
o This ones a bit trickier, but the concept is the same.
o Services like Spotify, Apple Music, and TIDAL are good examples of
platforms that offer interactive streaming.

Although terrestrial radio, and online radio such as Pandora (the non-interactive version),
do generate other types of royalties, they do not need to pay mechanical royalties.

Who pays the mechanical royalties?

This one is really interesting to me. Youd think that its simple and the Record Label
(owner of the sound recording) would pay mechanical royalties to the Publisher (owner
of the composition). Like this:

But its not that simple. In todays world, with so many publishers out there, it turns out
that the Record Label usually pays the mechanical royalties when they manufacture CDs
and when they sell a digital download BUT, although they can pay it directly to the
Publisher like it shows in the diagram above, most people go through a 3rd-party service
such as Harry Fox Agencys SongFile or Loudr to acquire the mechanical licenses and
pay the royalties for physical CDs and digital downloads in the US (see below). Most of
those third-party sites require that you indicate how many CDs youre going to
manufacture and to guesstimate how many downloads youre going to sell in the US. If
you end up needing to create more CDs, or if you end up selling more downloads in the
US than expected, youll have to use the service again to pay your mechanical royalties.
Check out the page dedicated to mechanical licenses for more information.
NOTE: Digital downloads outside the US operate differently: services outside the US
withhold the mechanical royalty portion for the Publisher (see the international section
below) from the sales price. In other words, you dont pay or prepay for those mechanical
royalties directly.

Online interactive streaming is yet another mess. Although the Record Label can use a
service like SongFile to pay the required interactive streaming mechanical royalties at an
ultra-crazy rate of $0.01 per play (if you did this youd quickly go into debt when your
song is played), it just so happens that they dont usually need to do that unless theyre
using uncommon or custom services to stream the music. The big boys like Spotify and
Apple Music actually take care of the mechanical royalties for you, paid for by
withholding a portion of your royalty and giving you the rest! Thats right, the Record
Label doesnt have to directly pay mechanical royalties for online streaming for the major
players. This is true for both in the US and internationally.

Those interactive streaming companies like Spotify usually pay the mechanical royalties
to a third-party mechanical license service of their choice like Harry Fox Agency (HFA)
or Music Reports. Those two companies are competitors with pretty different business
structures check out my article about HFA and Music Reports.

Heres what the diagram now looks like when we include all of the above (to keep it
clean and understandable, I didnt include direct payments from Record Labels and
Interactive Services to Publishers):
How much are mechanical royalties?

The rate for mechanical royalties is set by the government and is $0.091 per CD and
digital download. Thats 9.1 cents to the composition owners every time the sound
recording is pressed to a CD or downloaded from an online store.

The mechanical royalty calculation for interactive streams on services such as Spotify is
unfortunately complex, but its roughly the same percent of overall cost: 8-10%. The
average blended rate is usually around $0.0007-$0.0008 per play. For those decimally-
challenged, that means 1,000 plays would generate about $0.70 of mechanical royalties.

What about international mechanical royalties?

Every time a digital download is sold or your music is streamed in a foreign country, it
also generates mechanical royalties for you in that country. Remember, you dont
directly pay or prepay mechanical royalties for digital downloads or interactive streams
that occur outside the US. Instead, the service in that country withholds the mechanical
royalty portion and pays the mechanical royalty to its local collection agency. And even
in the US, interactive streaming services reserve the mechanical royalty portion of the
stream to pass on to the Publisher via HFA or Music Reports. So how do you get at
international mechanical royalties that were collected for you?

This is where services such as CD Baby Pro (an add-on feature in CD Baby) and
TuneCore Music Publishing Administration come to the aid of us little indie artists. They
do the leg work for you for a percent of everything they find for you. In order to collect
mechanical royalties around the world, an indie artist would need to work with each
corresponding mechanical licensing service like HFA and Music Reports in each country.
That would be a nightmare!

It turns out that its not as grim as it seems, though, since HFA has reciprocal agreements
with around 90 territories around the world, which ultimately means that they are able to
collect the mechanical royalties in those countries. Its really up to each artist to decide
how to collect on those royalties. Music Reports, however, only collects US mechanical
royalties but they do send out those royalties to publishers without the publishers
needing to do a thing!

On a personal note, I used CD Baby Pro, but then discovered that the bulk of
my international mechanical royalties that they collected came from HFA, and the cost of
using CD Baby Pro was more than I netted in return. So, I ended up canceling CD Baby
Pro and registering with HFA directly. Maybe in the future Ill use their service again, if I
start generating lots of international mechanical royalties to make it worth it. Dont get
me wrong, CD Baby Pro and similar definitely have a place and it really depends on the
situation, distribution, and fan base of each artist whether or not it is the right type of
service to use.

WARNING: HFAs services are unfortunately very cumbersome to use, overly complex,
and hard to understand. If you decide to go with HFA directly, be prepared to spend a lot
of time trying to wrap your head around and use their services. Also, HFA doesnt have
reciprocal agreements everywhere in the world, which means that services like CD Baby
Pro and TuneCore Music Publishing Administration would potentially be able to collect
more for you.

How do I actually get and deposit the mechanical royalties into my bank
account?

Ah thats the million dollar question (pun intended)! Actually, I should have said

thats the few dollar question! The point Im getting at is that its important to
keep mechanical royalties in perspective to everything else. Without complicating things
(yet), mechanical royalties account for roughly 8-10% of your total earnings for a sale,
download, or stream.
Remember how I said that the online streaming companies like Spotify can choose which
mechanical licensing service to use (aka report and pay the mechanical royalties to)?
Well, in the US there are two main players:

Harry Fox Agency (HFA)


o Fees: They take a % of the mechanical royalties as a processing fee.
o Getting the money: Unless the Publisher creates an account directly with
HFA, the mechanical royalties will sit there and remain uncollected (and I
assume eventually be lost for good but from personal experience, I can
tell you I was able to collect mechanical royalties from Spotify through
HFA that occurred 6 years before I signed up for HFA)! As an
independent artist, your choice is to try to act like a bonafide Publisher and
sign up directly with HFA, or to use a service like CD Baby Pro or
TuneCore Music Publishing Administration. Otherwise, you wont see any
of those mechanical royalties!
o Major services that report to HFA: Spotify and Apple Music
Music Reports
o Fees: None. They pass on 100% of the mechanical royalties directly to
publishers.
o Getting the money: They search out and pay publishers by mail without
publishers needing to create an account with them. They do, of course,
also offer an online portal for publishers in order to download reports and
such. Once they start getting reports and money for a publisher, theyll
contact that publisher by mail with their first check as well as with
information about how to sign up online to use their reporting tools (I
highly recommend doing that!).
o Major services that report to Music Reports: Pandora (the new
interactive streaming part), Amazon Music Unlimited, TIDAL, Groove,
Deezer, and SoundCloud

To make things even more confusing (sorry!), if you are acting as the Publisher and the
Record Label of your music, youre basically paying yourself a mechanical royalty to use
your own composition. In this case, in the US and Mexico, stores like iTunes will bundle
your own mechanical royalty with the download sale and pass it back to your distributor
(like CD Baby or TuneCore). Youll end up getting that mechanical royalty bundled with
your payment from your distributor. In other countries, those same stores will send
your mechanical royalty portion to the mechanical licensing service in that country (as
described earlier). In other words, if you sell your own recording of a song you wrote,
your own mechanical royalties you pay yourself to use your own composition will be
kept by those international collection agencies, instead of being passed back to you
through your distributor. Isnt this all so crazy and complicated?!

So, if youre based in the US, that means that you are already getting back your
mechanical royalty portion bundled with your distributor income for any digital
download sales of your own music in the US. For all other royalties, including interactive
streaming in and outside the US, they are sent to collection agencies around the world.
Unless the service in question is in the US and pays your mechanical royalties to Music
Reports (who gives 100% straight to you), or you sign up with HFA directly, youd be
missing out on all your mechanical royalties (even your own mechanical royalties for
using your own composition) that are withheld in all countries.

Therefore, since youre already getting some of your mechanical royalties, that 8-10%
number I mentioned earlier is probably more like 3-5% or less of uncollected
mechanical royalties.

Where does that leave you? Well, here are your options:

Just forget it all!


o Pros: Super easy in fact, congratulations, youre done!
o Cons: Youre missing out on around 3-10% of your CD, download, and
streaming earnings, depending on your situation and international fan
base.
OR, use a service like CD Baby Pro or TuneCore Music Publishing
Administration.
o Pros: Its relatively easy. You just need to provide them with your
information and theyll do the rest for you.
o Cons: Quite a few.
Most charge a hefty setup fee
Most take around 15% percent of everything they find.
Most require that they also become your publishing administrator
for your PRO, such as BMI or ASCAP. This means that if you
were already signed up with say BMI and making say $100 per
quarter for your publishing side of things, then you would
suddenly no longer receive any money from BMI for your
publishing. Instead, the service would collect it, take their fee, and
give you the remaining $85 for that quarter another 1-3 months
after you would have received the full $100 from BMI if you
didnt use their service. Also, be aware that you can only have one
publishing administrator. Some music libraries that place your
music in TV, film, etc. require that they are the publishing
administrator.
The money they find might not even pay for itself (or it might be a
huge bundle!). Your mileage may vary.
Most lock you in with a contract for 1-3 years.
OR, do it all yourself.
o Pros: Depending which agencies you affiliate with, youll get a large
portion of your mechanical royalties.
o Cons: A considerable amount of work, maintenance, and confusion!
Dont believe me? Simply try to find the right page and the right form to
use to sign up with HFA (no cheating by using the link I gave you above!).

And thats just the tip of the iceberg. You wont be able to affiliate
with some agencies internationally either they wont let you, or you
wont understand their language. Although youll probably get the lions
share of your mechanical royalties, youll likely still be missing out on at
least some mechanical royalties somewhere.

This is a big mess!

Well see what happens, but there is a new company that just started out that will
hopefully clean up this entire mess: AMRA. One of their goals is to provide an
international online service for collecting mechanical royalties. The idea is that all music
services and stores in all countries would simply report their mechanical royalties to
AMRA, and then publishers could create a single account with them to get all of their
worldwide mechanical royalties in one place. Boom! Done. Hopefully, either AMRA or
another service like that takes off and makes this whole process simple.

What are mechanical licenses?

In order to legally publish and distribute a sound recording of a composition that you do
not own, youll need a mechanical license. Head on over to the page about mechanical
licenses to learn more.

Congratulations, you deserve a cookie!

If you made it this far, congratulations, you deserve some yummy cookies! Here you go!

Have any success stories you would like to share, or helpful information that could
benefit other musicians trying to wrap their heads around this? Then, please leave an
awesome comment below. Thanks!