Mechanical Royalties
Definition
Mechanical royalties compensate songwriters and publishers for the reproduction and distribution of musical compositions—manufacturing CDs, pressing vinyl, enabling downloads, and streaming reproductions. US statutory rates: physical sales/permanent downloads $0.091 per song under 5 minutes (or 1.75¢ per minute if longer), streaming $0.0006-$0.0015 per stream allocated to mechanical rights (65-70% of total composition royalty). The Mechanical Licensing Collective (MLC) administers blanket mechanical licenses for streaming services since January 2021 under the Music Modernization Act, collecting royalties from Spotify, Apple Music, YouTube Music and distributing to publishers and self-administered songwriters monthly.
Why it matters
Mechanical royalties are the largest composition income source for streaming-era catalogs, representing 50-70% of total publishing income (eclipsing performance and sync). A catalog generating 500M annual streams earns $300K-750K in mechanical royalties versus $100K-250K in performance royalties from the same streams. The 2021 shift to MLC administration dramatically improved collection efficiency—previously, streaming services licensed mechanicals through Harry Fox Agency or directly with publishers creating 30-40% uncollected mechanicals. Post-MLC, collection rates exceed 90% for registered works. However, mechanical rates remain contentious—Copyright Royalty Board sets rates through adversarial proceedings where publishers/songwriters push for increases while streaming services push for decreases. Recent rate determinations increased streaming mechanicals 30% (2018-2022 period) driving catalog valuations higher, but services appealed creating ongoing uncertainty.
Common misconceptions
- •Mechanicals aren't just for physical sales—streaming generates mechanical royalties for each reproduction (song encoded into stream). Digital mechanicals now 90%+ of total mechanical income.
- •Statutory rates aren't voluntary—labels/services must pay minimums set by Copyright Royalty Board. Cannot negotiate lower except through direct licensing outside compulsory license framework (rare).
- •MLC registration isn't automatic—publishers/songwriters must register works with MLC and claim unmatched royalties. Failure to register = royalties held in 'black box' redistributed to registered works after 3 years.
Technical details
Statutory rate history and rate-setting process
Physical/download rate evolution: $0.02 per song in 1909 when statute created. Increased to $0.055 in 1978, $0.091 in 2006. Rate unchanged 2006-2023 despite inflation (33% real value erosion). 2023 increase to $0.12 effective 2024-2027. Rate reviews occur every 5 years through Copyright Royalty Board (CRB) proceedings with testimony from labels, publishers, economists.
Streaming rate framework: CRB sets rates every 5 years through 'Phonorecords' proceedings (Phono IV covered 2023-2027). Rates calculated as greater of: (1) percentage of revenue (currently 15.1% of service revenue), (2) percentage of total content cost (26.2% of what service pays labels), (3) per-subscriber minimum ($1.10/subscriber for premium, $0.22 for ad-supported). Services pay whichever formula yields highest royalty pool.
Rate determination factors: CRB weighs: willing buyer/willing seller rates for comparable licenses, market conditions, public interest in music availability, relative contribution of composers vs performers, and services' ability to pay. Publishers argue composers undercompensated vs recording artists. Services argue rate increases threaten business viability. Proceedings cost $5-15M+ in legal fees, expert witnesses, economic analysis.
Direct licensing option: Services can negotiate direct licenses with publishers outside statutory framework. Avoided historically due to transaction costs (negotiate with thousands of publishers). Post-MLC, direct licensing emerging for largest publishers (Sony, Universal, Warner) potentially earning 10-20% premiums above statutory rates through direct deals. Creates two-tier system: major publishers with negotiating leverage earn more, indie publishers rely on statutory minimums.
MLC administration and distribution
Blanket license mechanics: Streaming services report total streams monthly to MLC with metadata (song, artist, ISRC, duration, subscriber type). MLC matches reports to registered musical works database (40M+ songs). Services pay royalties calculated per CRB formula. MLC distributes to publishers/songwriters based on matched streams. Administrative fee: currently 8% of collections ($50-60M annually on $700M collections).
Matching and data quality: MLC uses proprietary matching algorithm comparing service-reported data (ISRC, artist, title) to publisher-submitted work registrations (ISWC, songwriter, splits). Match rate: 92-95% by payment value, 85-90% by stream count (popular songs match better). Unmatched streams accumulate as 'black box' royalties totaling $100-200M. Unmatched royalties distributed proportionally to matched streams after 3 years (benefits high-stream songs).
Registration requirements: Publishers must register songs with MLC providing: ISWC (if available), songwriter names, ownership percentages, contact information. Registration free and unlimited. Failure to register = no payment even if song streamed millions of times. Independent songwriters without publishers must register individually claiming 100% ownership. Once registered, MLC prioritizes matching those works in subsequent monthly distributions.
Payment timing and reporting: MLC distributes monthly (faster than quarterly PRO distributions). Streams in January paid to publishers in April (90-day lag for matching and processing). Publishers can view stream-by-stream data online—transparency far exceeding legacy Harry Fox Agency system. Quarterly statements show: total streams by service, mechanical royalties earned, adjustments for previous mismatches, unmatched royalties potential claim.
Physical and download mechanical licensing
Harry Fox Agency (HFA) role: While MLC handles streaming, HFA continues administering mechanical licenses for physical sales and permanent downloads. Publishers register catalogs with HFA. Labels use HFA 'Songfile' system to license individual songs or catalogs. HFA collects from labels, distributes to publishers quarterly minus 8.5% commission. HFA represents 30K+ publishers owning 5M+ songs.
Compulsory license mechanics: Once song commercially recorded and distributed, anyone can create 'cover version' by obtaining compulsory mechanical license. Must pay statutory rate ($0.091/$0.12). Must follow arrangement closely (cannot change lyrics or fundamental character). File Notice of Intention with copyright owner. Cannot require permission—hence 'compulsory.' Enables tribute albums, remastering, and competitive versions without publisher approval.
Controlled composition clauses: Record labels insert 'controlled composition' clauses in artist contracts reducing mechanical royalties on artist-written songs from statutory $0.091 to $0.068-$0.075 (25% haircut). Labels argue standard industry practice compensating for artist advances. Affects artist/songwriter economics but not pure catalog investments (buyers purchase publishing at full statutory rates).
Physical vs digital volume trends: Physical sales (CD, vinyl) declined from 785M units (2000) to 50M units (2023)—93% decline. Permanent downloads declined from 1.4B (2012) to 200M (2023)—86% decline. Combined physical+download mechanicals fell from $1.2B (2006) to $150M (2023). Streaming mechanicals grew from zero (2010) to $700M (2023). Portfolio shift from $0.091/unit to $0.001/stream requires 90x more consumption to generate equivalent royalties.
International mechanical licensing variations
Europe collective licensing: Most European countries use collective management organizations (CMOs) administering both mechanical and performance rights together. GEMA (Germany), SACEM (France), PRS (UK) collect mechanicals and performances in single license. Statutory rates vary: EU directive sets 8-10% of retail price for physical, streaming rates negotiated locally. UK: 6.5% of streaming revenue. Germany: 9.1% of streaming revenue. Creates geographic rate arbitrage where services favor lower-rate territories.
Controlled composition internationally: Less prevalent outside US. European labels generally pay full statutory mechanicals without haircuts. Australian/Canadian labels sometimes apply 75-85% of statutory (smaller haircut than US 75%). Japanese market pays full statutory. Global catalog deals must account for geographic variations in effective mechanical rates—can vary 30-50% despite similar consumption patterns.
Cross-border collection challenges: US songwriter with song popular in Germany receives mechanicals through GEMA → US CMO/publisher → songwriter chain. Each intermediary takes 8-15% fee. Net realization: 65-75% of gross German mechanical royalties. Large publishers with local collection entities (Sony Germany, Universal France) capture additional 10-20% through direct collection avoiding intermediary fees.
Emerging markets: Many developing countries lack mechanical licensing infrastructure entirely. India, China, Brazil, Southeast Asia have minimal mechanical collection despite large streaming populations. Publishers assign zero mechanical value to these territories in catalog valuations until collection mechanisms established. As local CMOs develop and enforcement improves, represents upside optionality for global catalogs.