How Music Royalties get Distributed

Music royalties are a much misunderstood concept, not only in terms of how they are calculated, but also who is entitled to them. It is important to understand who the parties are that are entitled to music royalties, before we address how they are calculated. The Copyright Act defines various rights in music and the royalties that accrue in terms of these various rights accrue to specific people or entities. The purpose of this article is to explain the main types of music rights, who the rightsholders are and how the distributions are done.

Performing rights

These are the rights owned by creators or authors (composers and lyricists) of musical works. This bundle of rights entitles the right holders to compensation when their works are used by any other person or organization in a:

• broadcast,
• performance in public or a section thereof (this includes playing recorded background music), or
• a transmission via a diffusion service i.e. transmitted via cable from a central point to many receivers e.g. from the central point on a plane to the earphones at each seat.

The right to royalties becomes due to these parties when a broadcast, public performance or diffusion of any of their works occur. A publisher is another party that may also share in these royalties, if such publisher has entered into a contract with a composer or lyricist to publish and market the works.

Mechanical rights

As is the case with performing rights, this bundle of rights, also known as reproduction rights, are owned by creators or authors (composers and lyricists) of musical works. They entitle the right holder to compensation when their works are reproduced in any form by any other person or organization e.g. copying a work when producing a programme or an advert, copying a work in creating multiple CDs or DVDs for sale, copying a work from a CD onto a hard drive etc. Once again, a publisher is another party that may also share in these royalties, if such publisher has entered into a contract with a composer or lyricist to publish and market the works.

Needletime rights

These are the rights that accrue when a recorded work is performed in public or via a broadcast. These rights are enjoyed by the performers of the works, as well as the record companies who own the sound recordings.

Processing a Distribution

In order to process a distribution, various elements must be present:

•  money – the money to do distributions derives from license fees collected via the licensing of all persons or organizations that use musical works e.g. radio and television stations, venues that facilitate live performances, clubs, hotels, restaurants and any other organization that plays music in public.
• usage returns – usage returns are submitted by licensees e.g. broadcasters provide monthly returns of music played, cinema outlets provide information about films that have been screened, etc.
• repertoire – this is provided via a database of works that is maintained by SAMRO. The information in this database is obtained from the three main groups of rights holders, namely:
  • members who notify their works as they are written,
  • publishers who enter into agreements with composers to publish their musical works and who also notify their shares in the musical works, and
  • various foreign societies who provide information about foreign musical works that are reproduced or performed in public.

We need to know who are the owners of the musical works and what their share splits in the works are, in order to calculate the royalties due to them. Share splits are the portions of interest or percentage share that the persons notifying may have in the work. This often resembles the level of contribution in the creation of the work in a case of composers and lyricists. In the case of publishers, their share is negotiated with the creator or author, based on the agreed level of contribution in exposing the work for usage.

• rights holder information – personal information about right holders is required, such as bank account details for the crediting of royalties and contact information for the distribution of royalty statements. Similarly corporate information is required from publishers and affiliate societies.

Distributions are currently processed by SAMRO for both Performing and Mechanical rights, although they are done separately. The data required for each right is different as are the license fees. In addition, the shares in musical works owned by rightsholders are generally different for these different rights.

I will elaborate further on Performing Rights specifically, as these are the rights that SAMRO has administered since its inception and because they currently represent the majority of SAMRO’s earnings. Other rights will follow similar processes in “dividing up the cake” for distribution. Various distributions are performed during the year:

• Primary: these include Radio and General, Television, Film, and Non-royalty (interest earned on money invested until a distribution is declared)
• Secondary: this includes Foreign (royalties received for local members whose works were used in other countries)
• Supplementary: these include various distributions to correct errors and omissions in the primary and secondary distributions. These distributions occur for various reasons as follows:
  • to distribute royalties for musical works which were not notified at the time of the original distribution
  • to distribute royalties for musical works which could not be correctly identified at the time of the original distribution
  • to distribute royalties for works for which usage was anticipated, but was only provided after the primary distribution had been made
  • to correct the share splits which were previously incorrect, either being incorrectly notified or incorrectly captured

In order to do a distribution, the various elements required must all be present i.e. money, usage returns, repertoire and member information. An additional requirement for successful distributions is computing power (IT systems), given the number of rights holders, works and the units of seconds that have to be factored.

The main principle of the distribution is that it is equitable to all parties. In achieving equity however, consideration must be given to the source from where the money comes.  In this light, SAMRO uses the “follow the dollar” principle, which means that the money received from a particular source is used to pay the royalties for the musical works used by that source. In other words, various pools of money are created in order to fund the distributions for the musical works used in those pools e.g. money received from Ukhozi FM is used to compute and pay the royalties for the musical works used by Ukhozi FM and likewise for Radio 5, Radio Zibonele, Radio 702, eTV, M-Net, etc.

License fees are received from each of these sources and similarly, these licensees provide usage returns, detailing the musical works that have been performed. In the usage returns provided, details include names of the works, names of composers and/or artists, and time value of the works. The element of the time value is critical, as this is one of the main factors in the distribution. The greater the time value of a particular work in a pool, the bigger the share of royalties attributable to that work.

The total time value is calculated for each musical work (may be performed multiple times) in a revenue pool and the overall time value of the pool of all the musical works is calculated. A points value system is used, in that each second or units of seconds of music in a particular pool is attributed a points value, giving each musical work a total points value. The total revenue for the pool is spread across the total points value of the pool, thus determining the royalty attributable to each musical work in the pool.

Once the total royalty is determined for each musical work, the system then apportions the royalty for each musical work to the rightsholders of the works by referring to the repertoire database, which details the share of each rightsholder in a work. Once all the royalties have been calculated per rightsholder, the system generates a statement of account for each participating rights holder reflecting all the works attributable to that rights holder in the distribution.

Once a distribution has been completed, royalties are credited to a member’s royalty account and money is paid over to the member via an Electronic Funds Transfer (EFT). The distribution process also identifies all those musical works for which no notification has been received. These musical works remain undocumented until the composers notify SAMRO of their interest or share in the works.

By way of example (all names used are fictitious and for example purposes only), there are two composers, Amos and Michael. Both are members of SAMRO and both have written a musical work. Amos is more disciplined than Michael and notifies his work to SAMRO. Michael on the other hand is not interested in notifying his work and just wants to enjoy performing his work.

The notified musical work is captured into SAMRO’s repertoire system, identifying all the parties who have an interest in the work. At the same time, SAMRO also receives usage information from various licensees about the musical works used by them. The distribution is run at the designated time and royalties are calculated as described earlier. Amos’ royalty account is credited with the royalties his work has earned and thereafter the money is paid into his bank account via EFT. Michael’s work was also played on the radio and was submitted to SAMRO as part of the radio station’s usage returns and participates in the distribution process, but he receives no money. This is because he has not notified his work, so SAMRO does not know who the work belongs to. Instead, this work remains undocumented until the member notifies the work.

These undocumented musical works are researched by SAMRO to identify the rightsholders. Various correspondences in the form of letters, quarterly member magazines, annual general meeting, annual report etc. all address this critical issue with members, in encouraging them to ensure that they notify their works.

In summary, SAMRO performs various distributions during the year for various types of usages of musical works viz. radio and general (which includes live performances and big shows), television, film, foreign, non-royalty etc. These distributions are spread across the year to enable the collection of monies from licensees, the notification of musical works by members, the documentation of the musical works and the calculation of the royalties. If a member’s musical works are used in all of the media, then the member will participate and earn royalties in each distribution

It is important for members to ensure that they notify SAMRO about any works which they compose. If SAMRO is unable to document the work (i.e. record the ownership details), then the member will not be paid any royalties for that work, even though it may participate in a distribution. Although such a work will share in a distribution if it is reported by a radio station or other user, it remains undocumented until the member provides information about the work. Royalties are allocated to the work, but the member cannot be paid until the work becomes documented, when the work will be flagged for inclusion in the next distribution, at which point the royalties will be released. Royalties in respect of undocumented works are retained for a period of 3 years following the distribution, during which time SAMRO continuously communicates with its members via various media to encourage them to notify their works. If notification of the musical work is not received in the three year window period, then the royalty amount is added back into the distribution pool for the current year. This is in line with international practice and also with South African laws of prescription.

In closing, SAMRO adheres and abides by professional rules and resolutions as dictated by CISAC (International Confederation of Societies of Authors and Composers), the mother body of music societies worldwide; as well as its own business and distribution rules which have been determined over many years and approved by the members. Our distribution rules compare favourably with other societies, but may vary slightly, due largely to the different legal regimes in each country.

Originally published on www.mio.co.za