Overview
As a musician or songwriter, you earn money by licensing your songs for various uses, and collecting royalties from whoever is selling your music rights for you. While some musicians control their own licensing, many more work with record labels to market and promote their music.

This factsheet explains how royalties and licenses work and details some of the factors to consider when negotiating royalty and licensing agreements.

The difference between royalties and licenses

Royalties
These are the monies paid to you by whoever is selling your music rights for you. In a ‘traditional’ record deal you will be advanced a sum of money by a record company for the rights to distribute the recordings of your songs. Within part of that deal you will negotiate a royalty rate. This is what you get paid for every copy of your music that is sold.

Licenses
These are the contracts that give somebody a specific use of your copyright, in return for money. Licenses state exactly what is licensed, for which purpose (i.e. music for a commercial, film music, public performance, merchandising or printed music), in which geographical areas and for which time period. A licensing agreement is a legal document and as such should always be checked by a specialist lawyer before you sign it.

Royalties
The principal of royalties is that you get an advance of money at the start of your contract, which will be deducted at a later stage when your records start selling. However, in the real world things are not quite that simple. There are numerous factors to take into consideration, such as:

• If you have been advanced a sum of money you will have to recoup (make that money back for the record company) before you get any additional royalty money. This can sometimes take years, and if your records are never released you will not get anything on top of your advances. Advances are mostly irrevocable i.e. you do not have to pay this money back
• The royalty rate will be based on the dealer price. This is the price that your record company gets paid for your release by the record store, not the price the store sells it for
• Your royalty rate may be significantly reduced with expenses, i.e. if your record company is advertising your music on TV, use of production facilities, or the marketing and packaging of your release (including free goods). Make sure that you understand exactly what is being deducted and how the royalty rate is being calculated
• Make sure that you know when and how often you will receive the royalty statements, when you will receive actual payment, and in which currency. In your contract it should also be stated that you or your accountant could have access to the financial administration in case you do not trust the information given to you

Increasingly there are variants on a standard advance/royalty deal being signed. Recently Robbie Williams and his management did a deal that included a split of other revenues outside of record sales royalties, such as merchandising. Also digital distribution is an area where a whole new set of royalty agreements is being developed.

You must make sure that you use a recommended specialist lawyer when it comes to royalty agreements. These legal agreements can be hard to understand, and their implications can be far reaching. A good lawyer will explain in plain English the contract to you, and will also be able to negotiate the best deal on your behalf.

Licensing
The main groups of people who want to license their music are either musicians or record labels working on behalf of musicians. (Assuming that you as a musician are the copyright owner of your songs, you should be aware that there are generally considered to be two types of copyright covering a music recording: the copyright in the song itself, and the copyright in the recording of that song. Make sure that you have a basic understanding of music copyright law if you are a recording musician.)

Licensing as a musician
As a musician it is most likely that you will be licensing your music to a record label. In the past a label would advance musicians a sum of money to record music that the label would then own the copyright and other rights to for a number of years. But it has become increasingly popular for musicians to try to license their music to a label for a fixed term thereby keeping the rights to their music and retaining a greater amount of control over their master, production and distribution than was previously possible.

This change has been brought about by the desire for musicians to retain greater control over their music and the lowering in price/increase in quality of ‘home’ recording hardware and software. The latter has allowed musicians to record music of a ‘releasable’ quality without the need to approach record labels for money to fund their recording.

Check the small print on some of the more recent additions to your music collection and see how many have the phrase similar to ‘a xxxx recording licensed to xxxx records’. This will more than likely indicate that the artist (or the artist in conjunction with their management or production company) owns the music and has licensed the rights to release it to the record label.

Licensing as a record label
As a record label, whether you have licensed the rights to music or whether you own the masters to that music, you can license that music to a wider variety of clients and purposes than a musician. These could include:

• Film companies for inclusion in film soundtracks
• TV companies for inclusion in programme soundtracks
• Advertising agencies for use in an ad campaign
• Digital games companies for use as the soundtrack to their games
• Various digital uses such as mobile phone ring tones
• Other record labels for inclusion on compilations
• Other record labels to release in their (international) territories
• Record distributors to release in their (international) territories

The licensing agreement
Each situation and client relationship will be different, so each require a separate and unique legal agreement. But when negotiating a licensing agreement from either a musician or label’s perspective there are a few points that are always included:

• Rights granted. What are the purposes that potential licensees request a license for?
• The term. What is the length of time that the licensee wants to license your music for? Timeframes vary with every agreement but as a musician it would probably not be advisable to license your music to someone else for a decade! However if you want the licensee to work your music to its full potential anything less than three to five years may prove to be restrictive
• Options. Does the licensee have an option to renew the license at any stage during the term? For example, a record company may commit to record one album of an artist and have the option to require an additional six albums, each one at the record company’s discretion
• The territory. Which geographical area is the licensee looking to license for? Is it the label’s own home territory? Do they have the marketing knowledge and set up to represent your music outside of their own territory? Will you be able to secure higher amounts of money and better sales by licensing to individual territories or is it worth your while doing a bigger deal for the world or for larger territories? If you are a label negotiating a license for an advertising campaign check if it is for just one territory or the world?
• The advance. Is the licensee offering you an advance for the rights to license your music? They should be. Is that advance offset against future royalties? All advances should be non repayable in the event that there is no recoupment. For example if you are advanced £10,000 and your licensee only makes £7,500 over the term that does not mean you have to repay £2,500. This risk is with the licensee
• The royalty. What royalty rate or percentage is being offered on sales of your music through that licensee? How is this being calculated and which expenses will be deducted or will need to be paid from this amount?

There are a myriad of permutations on licensing agreements but your lawyer should be able to advise you on them. A good specialist lawyer will be able to do most of the negotiations for you.

It is worth spending the money on a lawyer to check any agreement for you as there are various sub-categories that will need to be considered. It might initially be costly, but could save you thousands in the long run. The music industry is full of musicians who signed away their rights without checking what they were signing.

Merchandising
This is a very important additional income for successful artists and includes selling t-shirts, calendars and other products with your logo and name on it.

This is another area where you can get paid an advance and a royalty similar to a recording deal. Ensure that you own the copyright to whatever is appearing on your merchandise. You will need to buy out the rights from the designer or agree a royalty split with them.

Summary
Royalties and licensing your music and merchandise are a major income for recording and touring musicians. You need to make sure that you have a basic understanding of copyright law and to appoint a professional specialist lawyer to get the best deal. There are many different permutations from the basic advance/royalty deal, which are rapidly changing due to the digital revolution in production and distribution.

Further information

British Academy of Composers and Songwriters (BACS)
British Music Rights
Performing Artists’ Media Rights Association
The Performing Rights Society

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