Ain’t Nothing But A Reel Thing; Create Passive Income from Intellectual Property Sales, Licenses, and Royalties

Intellectual Property

There is another kind of property — which is not real estate, but which is property nonetheless — and that is called intellectual property. This category of investment is generated by human creativity – a mechanical invention, a computer program, a song, a book, a screenplay, a movie, a photograph. You can profit from your ideas, as long as you can get them into product form, and place the product onto a platform, where it can be easily purchased.

With the sale of an intellectual product, there is an ease of communication in the modern era that allows for a high volume of sales. How easy is it to buy a digital book, stream a song, purchase that same song through download, buy or subscribe to a sample library of music sounds, or purchase an online course? It’s easy. You find the digital product you want on the internet, put in your credit card, press the buy button, and the digital product magically appears on your computer. The author need only create the product once, put it on the internet in digital format, attach it to an online store, and get money from the sales.

In contrast, a product that is not digital intellectual property — for example, a car — has to be repeatedly made, in order to make money from the sale of the car. With intellectual property, it is made digitally once and repeatedly sold, without being made again. In the technological age, it is easier to make something that can be sold in a digital format, because the web is an international distribution system. The system is ever evolving. In fact, you can get a percentage of the sales of someone else’s product through affiliate programs. Your computer is now a cash register. You can get sales from the internet for any number of intellectual ideas. You are reading one right now.

The importance of intellectual property, however, is that it doesn’t just throw off sales. It throws off royalties as well.
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Sales, Licenses, and Royalties

Introduction To Intellectual Property — through the Lens of Music

Composition Copyright and Sound Recording Copyright

As a general matter, music can generate a surprising number of income streams, as will be fully demonstrated below. Before one can discuss the types of income streams, however, there are four basic factors that have to be understood to grasp the money workings behind music.

There are four factors involved in the monetization of music. The first aspect is the song itself. The song involves two copyrights: the composition copyright and the recording copyright. When a song is written, the composer or songwriter owns the composition copyright, for making the song come into existence. If the song is then recorded, then a second copyright comes into being for the recording of the song. These are two entirely different copyrights.

Once a song is introduced to the marketplace under the first sale doctrine, anyone can make a recorded version of that song thereafter. All the next artist has to do is to pay the statutory (legal) royalty to the owner of composition copyright and then that next artist can record that song. That is the statutory composition copyright royalty, but that is not the end of it.

There is no limit to the number of artists that can then do their own recorded version of that song, which is called “covering” a song. If an artist’s cover recording becomes successful, they can make a large sum from the sales, licensing, and royalties from their cover version. But that artist is limited to the money generated by their version of the song. Each artist that covers a song is entitled to and limited to the money generated by their version of that song under the sound recording copyright.

However, every statutory (required by law) income stream generated by that artist cover must reflect payment back to the original writer of the song. That is the way the composition copyright works. This is why the composition copyright is so powerful. The original writer(s) continue to make money from the income streams, by every artist , who records that song, by way of the composition copyright.

The composition copyright is extremely long. The composition copyright is for the life of the original writer, plus seventy years. If a writer writes a song at 10 years old, and lives to be 90, the duration of the copyright would be 80 years (life of the author, for creating the song), plus 70 (years), making the composition copyright in that case, 150 years long. After that, the song enters into the public domain, and then everyone can cover the song without having to obtain a license to cover the song. However, statutory royalties continue to flow to the writer’s estate for use of the composition.

Those are two entirely separate copyrights — composition and sound recording, which each generate their own kinds of income streams and work in the manner described.

The Writer’s Share and the Publisher’s Share

Then there is a second set of dualities. This is the writer and publisher share of the monies generated by a composition and a sound recording. On the financial side of things, the artist, who writes the song, is entitled to the writer’s share of the money generated from the uses of the song. The publisher, the entity who goes out and finds uses for the song, is entitled to the publisher’s share of the money generated by the song.

The writer who finds uses for his or her own songs is publisher, as well. Many writers cannot do both, write and do the financial part of getting the song out to the marketplace. But where a writer has both the skills of an artist and the skills of placement and the financial acumen to get payment for placement, then s/he is both the writer and the publisher. But a vast percentage of writers find publishers who will pitch their music for various projects and platforms. These four factors: composition copyright, recording copyright, writer’s share, and publisher’s share are paramount in the monetization of music.

Sales

A sale is where you create the product and someone buys it; that is as straight forward a business transaction as can be imagined. There are different ways in which a piece of music can be bought. The most obvious example is through sheet music. Sheet music arose in the early twentieth century ( it caught a market in roughly 1920s). Sheet music began in the context of piano rolls, which were paper, punched with holes that represented musical notes, such that a piano could automatically play a song by the mechanical mechanism inside the piano.

As the recorded music industry grew, and people were able to hear recorded versions of songs, the market for sheet music exploded. Sheet music continues to be a vibrant market. People want to hear live or recorded versions of music, and the band needs accurate sheet music in order to play the song correctly. Popular songs find new generations of people and every generation has its own artists that would like to perform that song. Thus, sheet music always has a market. Sheet music is also needed on a large scale, such as for the military and for schools. All of the technological changes introduced by the computer have not altered this fundamental market for music. In fact, the computer broadened the market for sheet music, by creating the digital version of sheet music.

The next type of sale for music is the digital download. At the turn of the twenty first century, the computer greatly upended the recorded music industry by the bit torrent protocol. As explained by Kraken.com, “rather than downloading or uploading files to a single server, users joined a network of computers running a software enabling them to exchange files and data with each other.”

This meant record labels no longer had any means to control the distribution of their music products. Indeed, the record labels were flummoxed by the youngsters’ ability to share music files with thousands of people. They were placed in the unenviable position of having to send cease and desist letters to kids and thereby alienated their most profitable customers, en mass. People no longer had to pay for music because a technological advance allowed music to be freely transferred without compensation.

Over time, the legal concepts were ironed out, and courts decided that the technological advance made no difference; music had to be purchased. Apple was able to monetize the market by creating legal downloads of individual songs on iTunes. In time, Apple began offering the subscription service, which allows the consumer to listen to any number of songs, for a single monthly price. The subscription format has begun to replace the single song or album download. But the fundamental mechanism of the purchase of the music, for the right to own and listen to the music, for an unlimited time (forever), in a defined catalogue, remains as a good example of the sale of music.

Finally, a recorded piece of music can be purchased in physical product form, such as in vinyl, from a record store. This type of sale, the old fashioned purchase of a song on a 45, or in album form of the LP, has proved surprisingly resilient. People still buy vinyl records and stereo systems and swear the sound is warmer and sweeter. I completely agree. There is even a National Record Store Day now — April 20. Our local record store is always a good spot for date night. Head over there; it’s packed with artsy types.

The License

The primary difference between a sale and a license is the concept of manner of usage. In a sale of a piece of music, once you buy the download or purchase a subscription, you have the right to repeatedly listen to the song from the date of purchase, forever forward.

With a license, however, you buy the song only in limited circumstances. This concept is explained best through the film industry. If a song appears in a television show, the producers of the show have not purchased the song, they have licensed the song for a particular usage. The license will specify the television show and will carefully articulate all the aspects of that limited usage only for that show. The producers may not use that song for any other show, unless they license the song again for that next television show. Licenses are extremely valuable in that they throw off royalties every single time the song is used. This means that every time the television show appears on television, the writer and publisher of the song get a royalty payment. People retire on song royalties from television shows.

Royalties

A royalty is where the product is created one time but is paid for repeated use through a major communications utility. The major communication utility, which include television, radio, internet, and all other forms of communication broadcast systems, by which the intellectual property, appears and generates money for its usage.

It is for this reason that intellectual property is perhaps the best paid of all mediums. Royalties are evergreen; because they evolve. If a new technology is developed, the royalty system that has been developed follows that new communication utility. For example, when satellite became a viable utility for playing music, the satellite stations that played music had to immediately begin paying royalties to the creators — to the people who wrote the song and to the people who recorded a version of the song. So, in addition to the television show, satellite radio is now another completely separate royalty that must be paid to the writer and publisher of the song. But it does not end there. It is important to see how this category morphs in and out of different payment formats.

Two Kinds of Royalties: Statutory (By Law) and Contractual (By Agreement in a Contract)

There are two kinds of royalties — statutory and contractual. Statutory means that by law, (a statute), the creator must be paid when someone uses the intellectual property. Contractual is where there is no system of laws governing a royalty, but rather the market sets the conditions. The creator (licensor) enter into a contract with someone who wants to use the product (licensee), allowing them to use the intellectual property in a specified manner.

Let’s take the example of a song again to show the manner in which the song morphs in and out of statutory and contractual money formats. If you write a song, and people hear it and like it, they can buy the song. Those are sales of the song, set by the market conditions.

However, if the song plays on the radio, the radio station must pay a royalty, set by law, to the creator and publisher of the song, every time it plays on that station. There are different royalty rates that are set by law. FM radio has a different rate from internet radio.

A restaurant jukebox, however, is grounded in a contractual royalty which requires a license. The license is administered, with the writer being represented by a major clearinghouse, charged with the duties of collecting royalties. You would be shocked how many ways a song can find its way into your life on a daily basis in this way.

If the songwriter were to then license that same song for use in a film, the writer would enter into a contract with a movie studio, negotiating the cost of the license fee. This is a contractual royalty. However, if that movie ends up going to television, the royalties will become statutory yet again, for every time the movie plays on television. The songwriter will receive a royalty, set by law, regarding the amount that must be paid to the songwriter, when the movie, containing the song, plays on television. Again, the songwriter has to be paid every time the song plays on television or any other utility. In this manner, a song put in a television show received both a contractual initial license fee and then a statutory royalty from the television reruns.

This is one category of investment that will throw off an income stream without the repetition of labor, and it will do so in repeated formats. The more popular the piece, the more formats it will appear in (radio, streaming, movie, video, television, etc.) In more recent times, satellite radio and internet radio have been added to the radio formats. In even further developments, mobile phones created another royalty medium, one of which is the ringtone download. Each medium will throw off statutory royalties, contractual royalties, or both.

Performance Rights Organizations

You must by now be wondering how all these royalties are collected. It is very difficult for an individual artist or publisher to track down all the usages of a song. Radio plays across the world involve millions of different songs at all different times in an unceasing fashion. How does one track a single song’s play throughout the world? How does one track all the television shows across the world to find the usage for a single song? That is where the Performance Rights Organizations come in.

The three main societies for the collection of royalties are ASCAP, BMI, and SESAC. The best practice is to register with one society so that one society can keep track of your entire catalogue. The PRO is responsible for collecting the royalties around the world and thus both writer and publisher side needs to be registered with one same PRO to track the royalties that follow that song. Most writers have all their songs with one PRO. But publishers often are registered with all the PROs because they usually represent many artists, all of whom have registered with either ASCAP, BMI, or SESAC.

I am always amazed at the ease with which royalties are thrown off from intellectual products. Human creativity is endless. The technological advances are endless. Royalties can be endless.

Although this article is written through the lens of music, intellectual property follows this basic outline as a market. The list of creative products is endless. Do you have a creative product? Use your brain to make one. It can make you rich, without end.

And check out the book listed under Recommended Reading. “The Future of the Music Business” is an up to date handbook of the manner in which music royalties are identified and collected in the modern formats.