Lesson 9: Mechanical Royalties in North America

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So we have found out about the different mechanical liabilities a label may have. In this chapter, you may have noticed our catchphrase “except for the United States”. Hereby, here is our chapter fully dedicated to the mechanical liability process in North America.

Exception #1: as we briefly touched upon in the previous chapter, download platforms in the United States are not mandated to secure a mechanical licence with a mechanical society and instead pass on this liability to the record label. The label will secure their mechanical licence via the Harry Fox Agency, or directly with the publisher in case the publisher is not a member of the Harry Fox Agency. And it will be the responsibility of the record label to calculate the mechanical royalty and send mechanical statements. Which brings us to our next exception: how these mechanical royalties are calculated.

Exception #2: whilst in most territories mechanical royalty rates are based on a percentage of sales revenue; in North America (United States & Canada), they do things a little differently. Here, the value of a mechanical royalty is decided by the Statutory Rate. Statutory rates are assigned penny rates per song determined by the Copyright Board in the United States and Canada respectively. These statutory rates are then multiplied by the number of units sold or manufactured, to determine the full mechanical royalty owed by the master rights owner to the mechanical society.

Since it’s any label’s responsibility to calculate and report these mechanical royalties based on the Statutory Rate for any downloads in the United States and physical copies manufactured in the United States, we are going to dive deeper into this calculation process.

What are Statutory Rates and how do they work?

Statutory rates are assigned penny rates per song payable per physical reproduction or digital download. To add to the complexity of these calculations, statutory rates are also subject to incremental increases based on the length of the sound recording. So any sound recording over 5 minutes in length will be tied to a higher penny rate, and again if it’s over 6 minutes in length and so on… (NB: These incremental penny rate increases can be avoided by the master rights owner, if their recording artist is subject to a controlled composition clause, which we will discuss shortly.)

These statutory penny rates also differ between the USA and Canada. In the USA, at the time of this writing, that statutory rate starts at 12.4c USD, for sound recordings of up to 5 minutes (5:00) in length. If longer than 5 minutes in length (5:01), the rate is then calculated at 2.39c USD per minute, rounded up to the nearest minute. In Canada, where they manage a similar statutory rate system (but remember, where download platforms take on the mechanical liability and are licensed with the local society), for that same sound recording the statutory rate is 8.3c CAD, with an incremental increase of 1.66c CAD per additional minute (or part thereof). Note that the currencies for these rates are different too, which is why these royalty calculations can get a little complicated when dealing with worldwide releases.

As a master rights holder it is also worth noting that mechanical royalties in North America are reported to publishers based on their respective participation in the song. The publishers then flow that revenue through to their signed songwriters as per the terms of their songwriter agreement (if you are an unsigned/independent songwriter, you already own your publishing). So if 3 writers co-write a song together (⅓ each), and songwriters #1 and #2 are signed to the same publisher, you would pay that publisher ⅔ of the full mechanical royalty rate, while the remaining ⅓ would be paid to the publisher who represents songwriter #3.

The Controlled Composition Clauses - An Exception On Stat Rates

A clause commonly found in an artist’s contract is the controlled composition clause. This is a way for record labels to negotiate a reduced mechanical royalty rate for songs where the recording artist is also the songwriter (or at least one of the contributing songwriters) of that same sound recording. This is negotiated into the artist’s Recording Agreement, when they sign a record deal with a label. When a performing artist is also a writer of that sound recording, this writer is referred to as a controlled writer, hence the name “controlled” composition clause.

There are multiple terms that come into play with controlled composition clauses. The record label may choose to implement just one of these terms, or they might mix and match more than one. Some examples of terms used within a Controlled Composition Clause are as follows:

Minimum stat rate

This is relevant in North America, where penny rates are applied, based on the playing time of the sound recording. For example, in the USA, the stat rate starts at 12.4c but increases for recordings over 5 minutes. So if a minimum stat rate is referenced in the controlled composition clause, this means that the per song rate will be 12.4c, even if the recording is longer than 5 minutes… but ONLY for the controlled writer. Non-controlled writers will still get their share of “full stat”.

Track cap 

When a track cap is negotiated, this changes the calculation basis of the statutory rate. For example: when there is a track cap of 10 times the minimum stat rate, this means the maximum mechanical royalty a label will pay for a full album is 1.24 USD. Because the non-controlled writers are not part of the negotiations between the controlled writer and the label, they will still be paid the full share. This lowers the controlled writer’s share, who essentially gets paid whatever is ‘left’ of the track capped mechanical royalty after the non-controlled writers have been paid.

Percentage of Stat or Reduced Rate

The label negotiates to pay a percentage of the stat rate instead of the full rate to the controlled composer. For example, they negotiate they will pay 75% of the stat rate. 75% of 12.4c = 9.3c per track, 5 minutes or less.

In this case, unless specified otherwise, the per minute increments are maintained. So if the recording has a playing time of 5:32, your mechanical rate would be 75% of 14.79c for sales in the USA.

How to fulfil your mechanical liability in the United States?

For sound recordings released in the USA, the master rights holder is required to obtain mechanical licences, and pay mechanical royalties, for both physical sales and digital permanent downloads (tracks, albums and ringtones) of their sound recordings. It is important to note (especially for digital) that the mechanical royalty being calculated by the master rights holder is based on the territory of usage/sale, and not the country of residence of said master rights holder. So for example a label based outside of the US needs to report mechanical royalties for downloads in the United States, but a US based label does not need to report mechanical royalties for permanent downloads outside of the United States, as these downloads would be covered by the download stores’ mechanical licences. Similarly, a US based label reports mechanicals for physical copies that were manufactured and distributed in the United States, whilst an overseas label will report mechanicals for physical units that were imported and distributed in the United States. To avoid double-reporting, the local mechanical society of overseas labels may make labels exempt from units that were manufactured in their home territory but shipped overseas, but it is important for labels to check this with their local society. It is also worth noting that physical distributors may handle this liability on behalf of the label.

The label will need to report physical and US download mechanical royalties to the Harry Fox Agency, or directly to the publisher if they are not represented by the former.

The Harry Fox Agency offers 3 options to secure your mechanical licences:

  • HFA Songfile: Aimed at smaller labels, this is HFA’s version of the Pay As You Press service, where you pay upfront for the number of physical units manufactured (maximum 2,500), or up to a specified threshold of permanent downloads (maximum 10,000). Once you have breached those thresholds, you must apply for another Songfile licence.
  • HFA Licensing Account: By signing up for a Licensing Account with HFA, you will be required to submit individual licence requests for every publisher who has a share of each song, and for every format the song is released (CD, vinyl, digital). Once you have your licences, you must report your mechanical royalties to HFA on a quarterly basis, by calculating the number of units sold within the quarter, by the stat rate.
  • HFA Rumblefish: HFA’s administration service, where labels can pay a service fee to have Rumblefish identify and secure mechanical licences in bulk, on their behalf. Note that this service fee is NOT your mechanical royalty payment. This fee is only for implementation of the mechanical licences. You will still have to report your mechanical royalties to HFA directly, based on your quarterly unit sales.

How does the introduction of the Music Modernization Act & MLC affect the mechanical licensing process in the United States?

Keen followers of music business news outlets may have heard about a little something named the Music Modernization Act (MMA). The MMA came into effect in 2018, establishing new processes to streamline the flow of mechanical royalties from digital service providers (such as Spotify, Apple, Deezer…) to copyright holders (songwriters and publishers) for song use and digital reproduction in the USA. The Mechanical Licensing Collective (MLC) is a non-profit organisation, born out of the MMA, who is tasked with managing this operation. The MLC works directly with DSPs, on behalf of the underlying copyright holders, to secure blanket licences which cover mechanical royalties for streaming and for tethered downloads, a process which was previously managed by the Harry Fox Agency.

Whilst the MLC is legislated to also licence permanent download stores in the United States, In practice, however, many download platforms have pre-existing agreements with labels and distributors establishing the flow of mechanical royalties. So, in short, the newly implemented MMA, and the creation of the MLC, doesn’t really affect the mechanical licensing process for record labels and other master rights holders. As a master rights holder in North America, you are still obligated to pay mechanical royalties for permanent digital downloads and physical copies of your master recordings in the USA, regardless of where your business operates from. The main impact of the MMA is on the DSPs and the underlying copyright owners (songwriters and publishers).

How to fulfil your mechanical liability in Canada?

Canadian download and streaming platforms are fully licensed by the mechanical societies, so labels do not have a digital mechanical liability in Canada. But, like any other territory, labels are required to secure mechanical licences and pay mechanical royalties for physical reproductions of sound recordings (CDs, Vinyl, Cassettes & DVD/Bluray) manufactured and sold within Canada. Additionally, local mechanical societies require a mechanical licence for physical units that are imported and distributed in Canada. To avoid double-reporting, the local mechanical society of overseas labels may make labels exempt from units that were manufactured in their home territory but shipped overseas, but it is important for labels to check this with their local society. It is also worth noting that physical distributors may handle this liability on behalf of the label.

Canada has two MROs, offering various processes and mechanical royalty rates, so you can choose to secure your mechanical licence through either society, as long as the publishers in question are affiliated with that MRO.

CMRRA (Canadian Mechanical Reproduction Rights Agency)

CMRRA offers 2 options to secure your mechanical licence

  • Pay As You Press (PAYP): Definitely the preferred method for smaller and independent labels/master rights owners: PAYP allows you to pay your mechanical royalties in an up front lump sum, based on the number of physical units manufactured. Once you have sold out of that manufactured run, and if you wish to manufacture more, you will have to apply for another PAYP licence.
  • Sign into the MLA (Mechanical Licensing Agreement): The MLA is more geared towards larger and major labels, who manufacture and distribute large quantities of albums on a regular, ongoing basis. The terms of this agreement are quite complex, with regards to reporting and accounting. In the words of CMRRA themselves, “administering the MLA requires a high level of accounting expertise and a significant investment in personnel and systems.”

SOCAN (Society of Composers, Authors and Music Publishers of Canada)

Known primarily as a Performing Rights Organisation (PRO), SOCAN acquired the Quebec based reproduction rights society, SODRAC, in 2018, expanding their services to include reproduction rights management.

  • Pay As You Press (PAYP): Operates under the same principles as CMRRA, with regards to requiring a new licence for each manufacturing run. The forms are downloadable from the SOCAN website. 
  • Semi-annual reporting: Only an option if your record label uses a distributor.
  • ADISQ (Quebec Association of the Record, Entertainment and Video Industry) Membership: If you are a member of ADISQ, you will be alleviated from some of the heavy lifting that comes with mechanical royalty reporting, by granting permission to SOCAN to receive your sales reports directly from your distributor.

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