How do music producers get paid from digital performance royalties?

Producers, mixers and engineers can earn from a record in two ways: whatever the producer agreement pays, such as a fee and a royalty expressed in points, and a share of the digital performance royalties that recordings earn from internet radio and similar services. The second stream runs through a statutory system with its own rules. This page explains how a producer gets paid from it, the special rule for older recordings, and what to put in writing. For producer deals generally, see the producer section of our entertainment law page.

How a producer gets paid from digital performance royalties, step by step

1. The deal is signed. The producer agreement sets the fee and the points, and it should also commit the artist or label to sign a letter of direction for a stated percentage.
2. The record is played. Noninteractive services such as internet radio perform the recording under the statutory license and pay the collective designated by the Copyright Royalty Judges, which the Copyright Office describes as currently SoundExchange (Copyright Office, MMA FAQ).
3. The payee signs the letter. The featured artist, or the owner of the recording's digital performance right, instructs the collective in writing to pay part of that payee's share to the producer, mixer or engineer (17 U.S.C. 114(g)(5)(A)).
4. The collective accepts it. The statute requires the collective to adopt and reasonably implement a policy for accepting letters "in circumstances determined by the collective to be appropriate" (114(g)(5)(A)).
5. The producer is paid directly. While the letter is in effect and carried out, the producer is treated as the owner of the right to that payment, and the payee who signed has no interest in it (114(g)(5)(B)).
6. Older records have a fallback. For recordings fixed before November 1, 1995, a qualifying producer who cannot get a letter can ask for 2% of the receipts out of the featured artist's share, after a certification and notice process (114(g)(6)), set out in the table below.

Congress added both routes in the Allocation for Music Producers Act, Title III of the Music Modernization Act of October 11, 2018, which gave producers, mixers and engineers a path to section 114 royalties they were not receiving by statute (Copyright Office, MMA FAQ).

Where does the money come from?

When a recording is performed by digital audio transmission under the statutory license, the collective designated by the Copyright Royalty Judges, SoundExchange for webcasting (37 CFR 380.2), splits the receipts by statute: 50% to the owner of the recording's digital performance right, 45% to the featured artist or artists, and 2.5% each to funds for nonfeatured musicians and vocalists (17 U.S.C. 114(g)(2)). Producers are not named in that split. Their route is to be paid out of the artist's or the owner's share, at the payee's direction. Our page on how artists get paid from digital performance royalties explains the split in more detail.

Over-the-air AM and FM broadcasts pay nothing for the recording, as our page on why radio does not pay recording artists explains, so a letter of direction never reaches that money.

What is a letter of direction?

It is a written instruction from a payee, meaning the featured artist or the owner of the recording's performance right, telling the collective to pay part of that payee's share to someone else. The statute requires the collective to adopt and reasonably implement a policy for accepting these letters when they direct payment to "a producer, mixer, or sound engineer who was part of the creative process that created a sound recording" (17 U.S.C. 114(g)(5)(A)).

Once the collective accepts a letter, the producer is treated for all purposes as the owner of the right to receive that payment for as long as the letter is in effect, and the artist is treated as having no interest in it (17 U.S.C. 114(g)(5)(B)). The collective then pays that share to the producer.

What if the recording was made before November 1, 1995?

For older recordings, the statute provides a path even when the artist cannot be reached. The collective must have a policy for deducting 2% of the receipts for a recording fixed before November 1, 1995, out of the featured artist's share, and paying it to a qualifying producer, mixer or engineer when no letter of direction exists (17 U.S.C. 114(g)(6)). The conditions are strict:

The person asking must also give the collective a written certification, under penalty of perjury, that they meet these requirements, together with a true copy of the contract (114(g)(6)(B)(iv)).

How does this relate to points in the producer agreement?

They are separate. Points in a producer agreement are a contract right, calculated on the royalty base the agreement sets. The digital performance share is statutory income that the collective distributes under 17 U.S.C. 114(g). A well-drafted producer agreement deals with both: the points, and whether the artist will sign a letter of direction for a stated share of the artist's digital performance royalties. If the agreement is silent on the letter, the producer has no contract term to point to when asking the artist to sign one.

Producers can also be authors of the recording itself. The Copyright Office explains that the author of a sound recording is the featured performer, the producer who captured, manipulated or edited the sounds in the final recording, or both, unless the recording was made for hire (Copyright Office Circular 56A). Whether a producer shares in ownership, or is paid only through contract and letters of direction, should be settled in the agreement. Our post on the clauses that prevent disputes in personal service contracts covers drafting points that apply here too.

A music video built on the track is a separate work with its own ownership rules; see who owns a music video.

What changes the answer

• The date the recording was fixed. The 2% fallback exists only for recordings fixed before November 1, 1995 (17 U.S.C. 114(g)(6)(A)). For anything later, the letter of direction is the only statutory route.
• Whose share the letter comes from. Either payee can sign: the featured artist, from the 45% share, or the recording's owner, from the 50% share (114(g)(5)(A), referring to 114(g)(2)(A) and (D)). A deal with a label can therefore point to the owner's share instead of the artist's.
• Whether the play was licensed directly. On-demand services and other direct deals fall outside the statutory split; a featured artist is paid by the owner under the artist's contract (114(g)(1)), so the producer's share of that money depends entirely on the producer agreement.
• More than one qualifying producer. When several producers, mixers or engineers meet the 2% requirements for the same recording, the collective divides the 2% equally among them (114(g)(6)(C)).
• An artist's objection. The collective must stop 2% payments within 10 business days after receiving the artist payee's written objection, but payments already made stay with the producer (114(g)(6)(D)). Where there are several artist payees, one payee's objection affects only that payee's share (114(g)(6)(F)).
• Pre-1972 recordings. When a service directly licenses a recording fixed before February 15, 1972 for a qualifying transmission, under a license made on or after October 11, 2018, it pays 50% of the performance royalties to the collective, which distributes them under the same rules, including letters of direction and the 2% rule (17 U.S.C. 1401(d)(2), (3)). Our page on protection for pre-1972 recordings explains that system.
• Ownership of the recording. Copyright vests initially in the authors, and the authors of a joint work are co-owners (17 U.S.C. 201(a)). A transfer of ownership is valid only in a writing signed by the owner (17 U.S.C. 204(a)), so a producer who is an author keeps a share unless the work was made for hire or a signed document transfers it.

A worked example

Common mistakes

• Treating points as if they cover digital performance income. The statutory share is paid by the collective and needs its own letter of direction.
• Leaving the letter of direction for "later". The statute gives a producer no route to a post-1995 recording's statutory royalties without a letter, and an artist who has moved on may not sign one.
• Not saying whose share the letter comes from, or what percentage. The letter can come from the artist's share or the owner's share, and vague wording invites a dispute.
• Trying the 2% rule without a written contract. The producer must hold a written contract with the record company or the featured artist that entitles them to royalties payable from the artist's royalties (114(g)(6)(B)(ii)).
• Starting the 120-day contact period without records. The certification is made under penalty of perjury, so dated proof of each attempt matters.
• Ignoring ownership. Whether the producer's contribution is a work made for hire, an assignment or a retained share of the recording should be in a signed writing, not assumed.

What to do this week

1. List every recording you produced, mixed or engineered, with the year each was recorded; the 2% rule turns on November 1, 1995.
2. Pull your signed producer agreements and mark which ones promise a letter of direction, for what percentage, and from whose share.
3. Ask each artist or label that promised a letter to sign it now, using the form the agreement names. Our post on what makes a personal service contract enforceable explains why the written terms matter.
4. Gather proof of your creative contribution to each recording, such as session notes, credits and correspondence, because the 2% rule requires a creative contribution (114(g)(6)(B)(iii)).
5. For a pre-1995 recording with no letter, start a dated log of your efforts to reach the artist, and keep it for the full 120 days and beyond.
6. Settle authorship and ownership of the recording in writing, and register it if you are an owner; see how to register a song's composition and recording.
7. If you are working with collaborators now, agree splits and credits the day of the session; our post on music copyright ownership disputes shows what happens when that conversation waits.

Frequently asked questions

Can a mixer or a recording engineer use a letter of direction?

Yes. The statute covers "a producer, mixer, or sound engineer who was part of the creative process that created a sound recording" (17 U.S.C. 114(g)(5)(A)). The same three roles can qualify for the 2% rule on older recordings.

How long does a letter of direction last?

The statute ties the producer's ownership of the payment to the period in which the letter is in effect and carried out by the collective (114(g)(5)(B)). The letter's own terms, and the producer agreement behind it, decide how long that is, which is why both should say so.

What if the artist objects to the 2% payment?

The collective must stop further payments within 10 business days after it receives the artist payee's written objection (114(g)(6)(D)). Distributions already made before then remain the producer's.

Who sets the royalty rates the producer's share is based on?

The Copyright Royalty Judges, for 5-year periods, unless services and recording owners agree their own terms (17 U.S.C. 114(f)). Our guide to how music royalty rates are set explains the proceedings.

Do plays in other countries pay through a letter of direction?

The statutory split and letters of direction are part of U.S. law under section 114. Plays abroad depend on the law of each country, which our page on collecting performance royalties for recordings from other countries discusses.

Zala IP Law drafts and negotiates producer agreements and advises on royalty paperwork for producers, artists and labels. If you are owed digital performance income, or about to sign a producer deal, request a consultation or call 404-313-1701. For the wider publishing picture, see collective rights management and music publishing. Atlanta producers can also read our page on intellectual property and entertainment law in Atlanta.