We have learned how labels report to artists and how they report to producers. There is one more important party involved in the music creation process who will participate in the earnings of this music: the writers. Writers will earn a royalty every time a recording of their song is reproduced, performed or synced. Much of this process is handled outside of the label’s scope; in fact an entire music publishing industry is built around this process to which we have dedicated a separate course: Royalties 101 for Music Publishing. Labels are involved in part of this process, however, most notably when the label reproduces the song in a physical format or reproduces the song as a digital download in certain territories. The royalty that is derived from such reproductions are called mechanicals. In this chapter we will discuss all the mechanical liabilities a label may need to consider.
In general, anyone who is in the business of reproducing recorded music (and in doing so, reproducing the underlying song) to the public must pay mechanical royalties. So who actually pays them? The answer may be very different depending on the type of reproduction and the territory’s legislation.
As a master rights holder (whether you are a record label or an independent artist), it is your responsibility to pay these mechanical royalties for all physical releases (CD, vinyl, etc), either through the local mechanical society, or, if the publisher is not affiliated with a mechanical society, directly with the publisher.
The pricing is determined by the territory’s legislation. In Europe it is most commonly calculated as a percentage of the PPD or Retail Price. In North America a fixed value per reproduction is applied, more on that later. Societies may offer you the option to either report a mechanical royalty for all copies upon manufacturing of the audio carrier or the option to report a mechanical royalty for every actual sale. Additionally, local societies may charge a mechanical import royalty when a label ships stock to an overseas warehouse for distribution. In such an instance, you may be exempt from paying a mechanical royalty to your local society. As a record label looking to press or sell physical audio carriers, you should always check with your local mechanical society to make sure that your mechanical liabilities are covered. When shipping stock overseas, you should also check with the local mechanical society to confirm whether an import mechanical may be due.
For example, in the United Kingdom, the MCPS is the local mechanical society. The mechanical royalty for physical releases is calculated as a set percentage of the Published Price to the Dealer (PPD) or Retail Price. The PPD is the price that the retailers purchase the record at (also sometimes referred to as the Wholesale Price), whereas the Retail Price is the end price for the consumer. For example, in the UK the mechanical royalty rate is set at 8.5% of PPD or (if unavailable) 6.5% of the Retail Price. So if a record store pays £8 for a CD, the mechanical royalty due to the publishers is equal to 8.5% of £8 or 68p per CD. It is the responsibility of the master rights holder to make the payment to the collection society.
It is possible for the record labels to have a deal with their physical distributor to handle the mechanical liability on their behalf. In the case where the record label also owns the publishing rights, it is possible that the local society exempts you from their mechanical process. This does not mean the label is exempt from the mechanical liability, but means they can internally arrange to report mechanicals from their label side of the business to their publishing arm.
A mechanical royalty is also due when a digital release is downloaded (since the release is reproduced in a digital format such as mp3) or when a recording is streamed (since a copy of this recording is held in cache on the streamer’s device). For these digital sales, most commonly, the responsibility lies with the individual DSPs (Apple, Spotify, Deezer, etc) to ensure they have a blanket licence agreement in place with their local mechanical society for usage within their territory. The DSPs pay mechanical royalties to the mechanical societies, who then flow that money through to the publishers and songwriters based, in part, on usage and market share.
In some territories, however, local legislation doesn’t mandate download platforms to have a mechanical licence agreement with the mechanical society. In this instance, the download platform passes on the mechanical liability to the record label. One such territory is the United States, and we have chosen to dedicate a separate chapter to this, entirely.
In some countries, broadcasters, internet radio and background music providers are also required to pay mechanical royalties, via blanket licence agreements which they secure with the mechanical societies, as they are technically reproducing sound recordings onto their network drives to broadcast to the public. These blanket licence tariffs vary globally, and this is why it is important for providers of these services to check with the local mechanical societies. This process would be handled outside of the label’s scope.
Outside of it being a legal requirement, securing mechanical licences is a way to obtain permission from the underlying copyright holder of the song (the songwriters and publishers), to release their work for public consumption, and to ensure that those copyright holders are compensated for the use of their work. After all, without those songwriters writing the song in the first place, the sound recording could not exist.
When providers of reproduced sound recordings do not secure a mechanical licence, this would be considered a copyright infringement.
There are many variables that come into play with regards to mechanical royalty payments. So, as a master rights holder, I’m afraid that the short answer to this question is: it depends. It depends on multiple factors, such as format of release, and copyright ownership of the underlying work. We advise any label to get in touch with their local mechanical society to advise on which legislation may apply.
To recap, if you are releasing your music in a physical format (CD, vinyl, etc), it is the responsibility of the master rights holder (the record label or independent artist) to pay the mechanical royalties for those physical copies. When you are releasing your recordings in digital format, the likelihood is that it will be the responsibility of the DSPs to pay the mechanical royalties directly to their local mechanical society. But; exceptions apply on certain formats in certain territories, most notably downloads in the United States (more on this in the next chapter). Again, these “rules” can vary by territory, so you are always best to check with your local mechanical society.
We are fully aware of the complexities of this topic. So let’s dig into some examples of the variables that can come into play here, and what action needs to be taken for each scenario:
"I am an independent artist. I own my sound recordings, I wrote all of my songs, 100%, and I own my publishing rights. Do I need to pay mechanical royalties?"
When releasing your recordings digitally, you will not need a mechanical licence. Your mechanical royalties will automatically be enrolled in the mechanical reporting process in most territories. And in the United States, where labels need a mechanical licence for download sales, you are exempt as you own both master and publishing rights. When releasing your recordings physically, you may need to secure an exemption from your local mechanical society.
But let’s add another layer: "I wrote 4 out of the 5 songs myself, and the 5th song is a cover of “Hey Jude”, by The Beatles."
This changes things a little, as even though you own the master rights to your sound recording of “Hey Jude”, you do not own the publishing rights. When releasing this recording digitally, the mechanical licence is covered by the download and streaming platforms in most territories. However, you will need a mechanical licence with the mechanical society in the United States (or the publisher directly) to cover your mechanical liability for downloads in the United States. When releasing this recording in a physical format, you will need to get a mechanical licence with your local mechanical society.
"I own my master recordings and wrote my own songs, but I signed a publishing deal with a music publisher who now owns the songs that I am releasing. Do I need to pay mechanical royalties?"
Yes, you do! You are no longer the owner of the underlying copyright, so you will need to secure a mechanical licence for physical sales from your local mechanical society and a mechanical licence for US downloads with the mechanical society in the United States or from the publisher directly. The publisher will then, eventually, pay you, the writer, your share of mechanical royalties based on your publishing contract rates. That being said, you may be subject to a controlled rate, which is explained further in our Mechanical Royalties in North America chapter, the next lesson.
"I am releasing my master recordings, I co-wrote all my songs and I own my own publishing. Do I need to pay mechanical royalties?"
Yes. But ONLY for the shares that you did not write. So if a song share is split 50/50 between you and the other writer, you will only need a mechanical licence (for physical copies or US downloads) for your co-writer’s share and have to pay 50% of the mechanical royalty rate for those songs. For your own shares, you may still need to obtain an exemption from your local mechanical society.
"My record label is releasing an album. The label owns both the masters and the publishing for the artist (who is also a songwriter). Does the label need to pay mechanical royalties?"
Yes. If you are a label who also owns the publishing rights, you still have a mechanical royalty liability (for physical copies and US downloads). However, as a label, instead of paying the mechanical society you may be able to report directly to your publishing arm. You may need to apply for an exemption from your local mechanical society, or in certain territories this exemption may by default apply. You also have to secure mechanical licences and pay mechanical royalties to any other writers/publishers who are not the artist, also referred to as the non-controlled shares.
“My record label is releasing an album of cover songs. We own the artist’s publishing, but they did not write any of the songs they recorded. Do we need to pay mechanical royalties?”
Indeed you do! Even though you own the publishing rights for your artist, the only rights you have for this album are the master rights. As these are all songs written by other people, you must secure mechanical licences and pay mechanical royalties (for physical copies and US downloads) to the mechanical societies or directly to the publishers (if they are not a member of a mechanical society).
As we covered in the chapter “What is Copyright”, when a copyright enters Public Domain status it means that work is no longer protected by intellectual property laws. In other words, the term of copyright has expired and the work is no longer considered eligible to receive royalties. So when it comes to mechanical licensing and musical works in the public domain, you are not required to secure a licence or pay mechanical royalties for the use of those works.