The decline of mechanical royalties & the new age of streaming
Mechanical Royalties are a key revenue stream for songwriters and composers.
These Royalties used to be a major cornerstone in the music industry, but the increase of technology advancements, the changes in the consumption of music, and new licensing practices have abruptly changed that.
Changes in music royalties started in the late 1990’s when the first MP3 Players and online music libraries came about. These changes caused album sales to drop significantly.
Streaming services like Spotify and Apple Music have changed the way people listen to music by giving them access to huge libraries of music like never before.
Digital royalties often mean that artists get paid less per unit than they would from the traditional physical sales.
This has brought about ongoing debates about the need for more fair pay structures in the digital age. On the contrary though, while pay per unit is less than in the physical era of decades past, streaming has expanded the longevity of royalties for artists and musicians from top to bottom.
This debate is not black and white, however. While there are less mechanical royalties, there are also more ways to make money.
Over the past decade, as U.S. recorded music revenue grew from $7 billion in 2014 to $17 billion in 2023, the combined market share of music sales and streaming controlled by the three major labels went from 64.9% in 2014 to 64.3% in 2023, Billboard estimates.
To understand Mechanical Royalties, Mechanical Royalties are derived from the reproduction of a composition.
For every recording, there are two copyrights: one for the actual song; i.e., the chords, melody, rhythm, etc. and one for the recording of that song. This is because multiple people can record their own version of a song. In that case, there would be several sound recording copyrights; one for each new recording, but only one composition copyright.
Mechanical royalties are generated whenever a song/composition is streamed, digitally downloaded, or reproduced in a physical format (e.g., a copy is made on CD so it can be sold). It falls within the category of publishing.
While streaming has grown to dominate the industry, the payout structure for songwriters and publishers is significantly lower compared to traditional formats.
Streaming platforms currently calculate the mechanical royalties based on fractions of a cent per stream for Spotify.
As of January 1 2024, the statutory mechanical rate for physical goods and permanent downloads has been updated to the greater of 12.4 cents per unit for recordings under five minutes in length, or 2.38 cents per minute for recordings over five minutes. This update builds upon the rate of $0.12 per song and 2.1 cents per minute set on January 1, 2023, and introduces an annual adjustment tied to the Consumer Price Index for the next four years.
Consumers now have more access than ever to independent releases that are on the same app services and playlists as releases that are on labels.
This is important, because the major labels take cuts of royalties earned.
Last year, the three major labels made separate deals with Spotify, as well as with Deezer, on new licensing terms for recordings, to which all other rights holders on those platforms have to agree. The new agreements changed the policy on when a stream of a recording can generate a royalty, and in some cases the amount earned.
Deezer now applies a royalty multiplier to tracks by artists that have at least 1,000 streams per month from 500 unique listeners, a policy that generally benefits major label artists, who tend to be more popular with listeners.
Under Spotify’s new deal terms, royalties that previously would have been paid out on recordings with fewer than 1,000 streams over the course of the prior 12 months are now essentially reallocated to recordings that streamed more than 1,000 times over that same time period. And since the majors control fewer recordings that stream less than 1,000 times compared to the vast number controlled by DIY creators and independent labels, those royalties will overall go disproportionately to them.
These new terms requiring artists to have at least 1,000 streams a month from 500 unique listeners directly damages the huge amount of smaller independent artists on the streaming app.
Not only is it damaging for the artists, it also hurts the independent labels that have no affiliation with the three major labels.
Additionally, Spotify is to pay songwriters about $150 Million less in 2025, because of the changes in the family, duo, and premium plans.
By adding books to plans, Spotify says it qualifies for rate discounts. Billboard estimates this will slash U.S. mechanical royalties by nine figures in its first year. By adding audiobooks into Spotify’s premium tier, the streaming service now claims it qualifies to pay a discounted “bundle” rate to songwriters for premium streams, given Spotify now has to pay licensing for both books and music from the same price tag; which will only be a dollar higher than when music was the only premium offering.
Additionally, Spotify will reclassify its duo and family subscription plans as bundles as well. This will cause a monumental decrease in royalties given to songwriters and composers.
Long story short, the music royalty system today is very different from what it was about 30 years ago.
The new digital streaming age has brought us a lot of new perspectives and changes to the industry.
More laws have been enacted, more protections have been enabled, and more facets of monetization of artist’s music and compositions are available. This simultaneously improved and harmed the music industry at the same time.
Over the next decade, predictions suggest that consumers will continue to turn their attention to a wider selection of DIY and independent artists. Under these policies, however, some of the revenue generated by their work will be disproportionately paid to the major labels and publishers instead of to the artists and songwriters who earned them. This is such a bittersweet time for the industry.
There is more creative freedom than ever, and more listeners than ever. But, the question raises if major labels are becoming (or have been) too greedy, taking from the creativity of others and taking money from independent artists.
There is hope that physical music sales will continue to increase, and more support for independent artists will come about.
The industry needs a breath of fresh air from the technology driven, greedy atmosphere.
Written by Shaughnessy Hoefer