Record Companies
Record companies are in the business of making bets. Every band they sign requires an outlay of cash. If it’s a major label or a major-owned indie, it could be anywhere from $200,000 to $2,000,000 per act. If it’s an independent, the tab is usually no more than $50,000. In essence, record companies are really banks that specialize in lending money to musicians. The idea that a record company gives an artist money is the most common misconception among new artists. In reality, record companies loan the artist money.
When you read about an artist getting a one-million-dollar recording contract, it means that the record company offered to loan that artist up to a million dollars over the course of the contract. The artist is expected to pay it back out of the royalties that their record earns.
Aside from loaning money, record companies offer promotional and distribution services to a recording artist. These services can range from merely supporting distribution for an already finished record, usually for about 25% of the artist’s profit, all the way to the other end of the spectrum of financing the recording of the record and then promoting and supporting its distribution. For this, the take is generally up around 90% of the proceeds from record sales.
Production Companies
These operate in one similar way as record companies – they invest in talent – and one vital way that they do not, in that they do not have a specific distribution contract with a distributor to get their recordings into a retail environment. This is no small exception – if you can’t get the records in front of customers, you usually can’t sell very many of them.
Production companies, which I sometimes call “vanity labels” or “three-deep labels,” are usually owned by producers or recording studios. They sign artists and produce demos and shop them in hopes of getting the artist a record deal.
Many production companies dream of being record companies and often seek an affiliation with a major label or distributor to handle their product. But don’t be fooled. Unless the production company has secured a distribution contract with a legitimate distributor or has found a way to independently release their recordings, they are no more capable of selling records en masse than you or I.
Publishing Companies
The role of the publishing company is easy to comprehend, even if publishing deals themselves are not. Simply put, publishing companies control and safeguard the copyright by dealing with the complex renewal regulations, and they collect the money that is due to the songwriters whose copyrights they acquire. They also litigate on behalf of their authors in case of infringement, and they shop your songs to various other companies to use in movies, commercials, TV shows, and so on.
In exchange for these services writers agree to hand over the copyright of their songs and receive a percentage of whatever the songs earn – usually about 50%.
If you’ve written a song that is going to be released on a major record label, you are going to make money. Because the Copyright Act of 1976 requires record companies to pay for the use of a song on a record. The rate labels have agreed to pay is called the “compulsory rate” (sometimes called the “statutory rate”). It is paid to each author who writes a song that’s on any record they distribute. As of January 2006 the rate is 9.1¢ per song for each record distributed.
The one type of revenue that publishing companies and copyright administration companies let others collect for them are performance royalties – that is, the royalty that the writer/publisher of a song gets each time that song is performed publicly on media like radio or network TV.
Performing Rights Organizations
Enter the PROs, that is, the performing rights organizations: ASCAP, BMI, and SESAC. (Also called “Societies.”) In the United States, they represent the writers, the little guy out there trying to make a buck in the super-duper Big Brother environment of the broadcast industry.
These three companies monitor clubs, venues, theaters, and the airwaves and keep track of who plays what and how many times. They collect performance fees (which vary according to the approximate listenership of each station or size of each venue) and distribute this money to the writers who are registered with them. Because the costs of negotiating millions of transactions would be prohibitive, a system has evolved using these societies in similar ways that unions represent laborers with collective bargaining. Each society negotiates a “blanket license” (kind of like a set annual payment) that permits broadcasters and venues to play music by its members.
Since you cannot belong to more than one PRO at a time, and since hit songs earn a ton of cash, these organizations compete fiercely for membership. The rivalry between ASCAP and BMI has filled the pages of several other books, all worth reading before you venture into joining either. To attract members, each sometimes offers cash advances to a new artist/writer who just signed a big deal (although they “officially” deny this practice), and each also boasts about its unique monitoring system. BMI’s pitch is that they have the largest membership in the world.
But there is currently much debate over how fair the systems for ASCAP and BMI are because to some it seems as though the payouts favor certain writers or types of music. SESAC
There are other PROs in other countries. In fact, each European, Asian, and South American country has its own versions of ASCAP, BMI, and SESAC, but you need not concern yourself with them. For those with international hits originating in the U.S., the three main PROs mentioned above will attempt to collect from each of the smaller ones in the individual countries.
SoundExchange
Due to the internet, a new type of PRO designed strictly for collecting the performance royalties for digitally streamed sound recordings has been created. These days “digital streaming” means through the Internet and over satellite radio. Why is this new? Well, in the U.S., sound recordings were never paid a royalty when publicly “performed.” That means, in simple terms, when a song played on the radio, the songwriter made a royalty, but the people who own the sound recording of that song made zilch. This includes the record company and the artist who performs the song. Hard to believe, but true. (In Europe and Australia both the song and the sound recording of the song are subject to performance royalties).
However, a new statute that allows for the collection of royalties from “digital sources” has opened up a fresh revenue stream for artists and their labels. This royalty is supposed to be split between the artist, the label, and the collective other musicians who played on the record in a 50%/45%/5% split, respectively. (The musician’s share actually gets paid to the musician’s union, the AFM, which supposedly distributes it to members using its own formulas.
While it’s true that so far the only sources for earning “digital sound recording performance royalties” are things like Internet steaming/downloads and Internet and satellite radio, it’s a given that in the not-too-distant future many forms of transmissions (and distribution) will be digital, and thus we will see artists making additional money from these “performances” of their records. Examples might be the digitally “beaming in” of music to restaurants and stadiums, as well as cell phone ringtones and many other mediums.
Source: Discmakers
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