Taking a Glance at Other Income Streams in the Music Industry...2007

by Dina LaPolt, Esq.* - March

In addition to income generated from traditional record sales, music used in films and television, and sources from music publishing, there are other income streams (some new and some not so new) available to the music industry. Please note that although the information contained in this article has been updated, it may be obsolete in a few months time as the music industry is changing so rapidly that those of us who work in it can hardly keep up! However, the one fact that remains constant is that music is now available everywhere.

Today music is available through digital download services such as iTunes, eMusic, and Napster; streaming interactive subscription services such as Rhapsody and MusicNet as well as non-interactive subscription services via MusicChoice, Sirius, and XM Satellite; video games such as Grand Theft Auto and Madden Football as well as through your cell phone. In addition, there are many Internet destination sites that are music driven and visited by millions and millions of people everyday such as MySpace (who, incidentally, just announced that they are working with SnoCap to try and launch a music download service that would let musicians sell music directly from their profiles and their fans’ profiles).

In an effort to keep the confusion at a minimum, below are just a few of the descriptions for some of these formats and the breakdown of some of the income paid to artists and songwriters and others.


Digital DownloadsAccording to Billboard Magazine, U.S. album sales dropped to 588.2 million in 2006 which is a 5% decrease from the 619 million copies scanned in 2005 which is the first time since 1993 that the U.S. sales figure has slipped below the 600 million mark. However, as grim as the foregoing may seem, the increase in U.S. digital sales hit an all time high especially the week after Christmas 2006 with a whopping 30.1 million tracks sold according to Nielsen Soundscan (582 million downloads sold total for 2006). This is a 51% increase from the 19.9 million digital tracks sold during the last week of the year in 2005. In addition, Fergie’s popular hit single, “Fergalicious” also set a new record for the most tracks sold in a single week with 249,000 downloads.

Although there are numerous digital download services available throughout the world, the most prominent seems to be Apple’s iTunes. Through mass marketing campaigns that extend throughout the world which feature such globally recognized artists such as Eminem, U2, and the Black Eyed Peas, iTunes is offered via both PC and Mac computers which is then downloaded to a handheld device called an iPod. '

By September 2006, iTunes reported a total of 1.5 billion downloads sold. In addition, indie-only specialist, eMusic, announced they have just surpassed the 100 million mark at the end of 2006. Pursuant to the iTunes agreement with the record labels, the iTunes share of income is $0.29 cents out of each $0.99 download.

The following sets forth the way in which many of the record labels in the U.S. pay third parties with respect to each $0.99 download assuming that the recording agreement allocated the artist an “all in” royalty rate of 15% (i.e., which includes a producer royalty of 3%, leaving a “net artist” rate of 12%):

Artist iTunes Royalty (with wholesale markup) $0.99 download single song price to the consumer less $0.29 to Appleleft $0.70 x 130% (wholesale markup) x 12% (net artist net rate) = $0.1092 cents per download

Producer iTunes Royalty (with wholesale markup) $0.99 download single song price to the consumer less $0.29 to Appleleft $0.70 x 130% (wholesale markup) x 3% (producer rate) = $0.027cents per download.

Artist iTunes Royalty (without wholesale markup) $0.99 download single song price to the consumer less $0.29 to Appleleft $0.70 x 12% (net artist net rate) = $0.084 cents per download

Producer iTunes Royalty (without wholesale markup) $0.99 download single song price to the consumer less $0.29 to Appleleft $0.70 x 3% (producer rate) = $0.021cents per download.

Although not widely practiced, there are some labels that take this further by first deducting the mechanical royalty from the $0.70 cents prior to calculating the iTunes royalty which is then paid to the artist and the producer which results in a lower royalty rate as follows:

Artist iTunes Royalty (with wholesale markup) $0.99 download single song price to the consumerless $0.29 to Appleleft $0.70 less a digital mechanical royalty of $0.091 centsleft $0.609 x 130% ( wholesale markup) x 12% (net artist net rate) = $0.095 Artist

iTunes Royalty (without wholesale markup) $0.99 download single song price to the consumerless $0.29 to Appleleft $0.70 less a digital mechanical royalty of $0.091 centsleft $0.609 x 12% (net artist net rate) = $0.073

With respect to mechanical royalties paid for digital distributions of musical compositions, although this may change in the future, record companies in the U.S. have been using a notice of compulsory license when notifying music publishers of their intention to offer digital downloads of musical compositions.

This ‘notice’ usually lists the record company, the recording artist, the name of the musical composition, the identity of the songwriters and music publishers, and the expected distribution date of the ‘digital phonograph delivery’ of the song. These compulsory licenses are typically referred to as “DPD Licenses” and they are paid at the maximum statutory rate which is currently .091 cents for songs under 5 minutes or 1.65 cents per minute if the song is over 5 minutes.

For recordings produced pursuant to contracts entered after 1995, the law prohibits a controlled composition provision of the artists’ contract from discounting the compulsory DPD rate, so even if there is a controlled composition clause in the contract, the singer-songwriter should receive the entire .091 cents