The Royalties You Never Knew You Had

If you, or your band, are the primary artist on a recording that has been played on satellite radio, digital cable music channels, or internet radio, Sound Exchange may have money waiting for you. Likewise, if you sang, performed, or otherwise worked on a record that was in the Soundscan top 100 (or maybe even the top 150), cash could await you. The history of laws and cases surrounding these new royalties are complex, but noteworthy.

While many musicians have heard of the Digital Millennium Copyright Act, which deals with technology, most musicians have not heard of the Audio Home Recording Act of 1992 (“AHRA”) and the Digital Performance Right in Sound Recordings Act of 1995 (“Sound Recordings Act”). Recording artists and performing musicians, including producers and engineers, need to know about the AHRA and the Sound Recordings Act because those laws put money directly into their pockets. In fact, the money may already be theirs, waiting to be claimed.

The AHRA was enacted to compensate the music industry for losses due to home recording. It requires importers and manufacturers of digital audio recording devices to pay royalties based on device sales. Initially, income from AHRA royalties looked promising for artists. However, that potential income was seriously limited by RIAA v. Diamond Multimedia Systems Inc., a case establishing that MP3 players and computer hard drives do not fall under the Act. (Imagine the amount of revenue that would have been generated if every iPod and computer sale had to pay royalties!) Nevertheless, the AHRA brings royalties, divided into two distinct funds, to the music industry from importers and manufacturers of CD duplication machines and digital audio tape recorders, among other equipment.

The AHRA was the first act to mandate the way that royalties are allocated, but it accounts for far less revenue than the Sound Recordings Act. The Sound Recordings Act boldly changed copyright law by requiring the payment of royalties for certain public performances of sound recordings. Although the act does not require terrestrial radio, television, and most cable television operators to pay royalties to sound recordings, it covers new and emerging areas of public performances, such as satellite radio, internet radio (including webcasts from terrestrial radio), and digital music cable channels. The pool of money from the Sound Recordings Act is much larger than the AHRA because it includes about 7.5 percent of the gross income from satellite radio companies, XM and Sirius.

Like the AHRA, the royalties from the Sound Recordings Act are divided among different groups. The Copyright Office designated Sound Exchange, a non-profit organization, to collect royalties for Sound Recording Copyright Owners (SRCOs) and Featured Artists. Half of all of the royalties go to the SRCO, who is usually, but not always, a record label. The Featured Artist, who is the individual or group that is most prominently identified with the recording, receives 45 percent of the royalty.

The law is unclear on whether the royalty must go directly to the Featured Artist, or whether the SRCO receives the Featured Artist’s royalty under the terms of the Featured Artist’s recording contract. In fact, the legislative history for the act shows that the House of Representatives intended for the royalties to bypass the artists (featured and non-featured) and go directly to the SRCO under most circumstances, and that the Senate intended for the royalty to go directly to the artists, regardless of the terms of the artists’ contracts with the SRCO. As a practical matter, Sound Exchange pays Featured Artists directly, a practice that will likely continue until the policy is challenged by SRCOs in the future.

Non-featured musicians and non-featured vocalists split the remaining 5 percent of royalties under the Sound Recordings Act. This process is similar to the AHRA’s allocation of royalties. However, the Sound Recordings Act differs from the AHRA because it is slightly more favorable to non-featured vocalists. Royalties for non-featured performers under the Sound Recordings Act and the AHRA are determined by simply looking at the album credits on a CD jacket. Thus, receiving a performance credit on an album is not just a matter of principle — it has financial importance. Non-featured musicians and vocalists must register with the American Federation of Musicians and American Federation of Television and Radio Artists Fund to receive their royalties.

Despite the declining revenue (due to the Diamond case) from the AHRA fund, royalties from the Sound Recordings Act have continued to increase. The proliferation of internet radio, combined with the steady rise in satellite radio subscribers, has been the catalyst for that consistent growth. In 2007 alone, more than $141 million was collected by Sound Exchange for SRCOs and Featured Artists. This means that more than $63 million in royalties will be awarded to Featured Artists from 2007. For non-featured musicians and vocalists, the revenue is smaller, but will also continue to increase.

Keep your eye on Congress to extend the Sound Recording Act to terrestrial radio, television, and cable, something that the Obama Administration has hinted at supporting.