One must confess about the subject of royalties, no matter how many times it was explained over and over to this writer, the concept of earning royalties just never truly hit home! This was down to the fact that seeing value in the “unseen” is a difficult concept to grasp for people who are not investors.
With music, the impact of one’s works is not something tangible or physical. For instance, how would something as subjective and experientially based as music be measured in quantifiable terms? Perhaps to fellow right brain thinkers, royalties are simply a good thing because it means more revenue streams for the artist. It is nice to know that you can earn money from making music, depending on how much an album sells or how often the radio and television stations play your songs. However the justification of why and how much is due to you is one that requires much deduction. This is again where financial literacy comes in and understanding all the aspects and perspectives, that would best explain the justification of royalties and different forms of them.
Your musical compositions in the financial sense are deemed as intellectual property and an asset (intangible in nature). The concept of an asset is derived from principles of accountancy. It is very hard to determine how much your music is worth, unless you peg it to how much your time is worth as an hourly rate (in unit currency) as an initial base point. After that you would factor in other inputs like expenses and how much profit you would like to make from your music, which would then give you the final selling price. However, this is only just the beginning of it.
Royalties would then come when you decide to distribute your product. At this stage your intellectual property/intangible is converted into a physical product or an asset. This is the infrastructure and machinery of works that allows to you establish your music economy, that makes the conversion of input into an output possible; such as putting your music onto CDs to be resold at a later stage. This is where the concept of mechanical royalties is derived from – your assets (machinery). Your music being intellectual property such as a song wholly composed by you in its entirety, would mean the song belongs to you (the composer) in it’s entirety. In a business company situation one would know that owning shares would entail a split in profits (losses in the worst case). The concept of how profits are allocated, is in the form of dividends that are predetermined on the amount of interest or shares you own in a company. A set percentage would be allocated to each share and ultimately determine what is due to the shareholder. That’s the principle of mechanical royalties, where if one were to sell a certain amount of units of CDs, the record label would give the artist a certain percentage of each album/single unit sold.
The principle is also the same with needle-time/performance royalties (per click) where the number of plays you get grants you a set percentage of earnings on the radio or on TV. Even on the internet due to streaming and paid subscriptions. The justification for Needle-time Royalties is that media outlets generally earn money through subscriptions or advertising revenue, due to them needing to entertain their audience through 3rd party music sources. They would then have to split proceeds with the owners of the music, depending on how much and long they would use the song for.
The term royalties in itself is to reiterate your status as an entrepreneur, in that you are a owner and heir to the estate and the empire you are building. The produce of your machinery of works should therefore only create more wealth for you. During the industrial revolution, innovators who created technologies and mechanical equipment would continue to earn royalties due to usage of their creations. It is with this long-term generation of income that is the utmost importance of why an artist should understand why royalties are important.