Mechanical royalties come from the composition copyright. Whenever an artist/record company releases the musical composition through their unique performance and sound recording (making it available to the public for profit), a mechanical license requiring payment of a mechanical royalty is owed to the music publisher and songwriter.
The reason this is called “mechanical” is because it originates to the time when songs were “mechanically” reproduced in piano rolls and vinyl records. Using the term in the digital age can cause confusion, but the same “reproduction” standard applies.
Traditionally, the artist/record company pays this royalty to the songwriter and music publisher for any audio reproduction and distribution of their song that they make. Think of the countless recordings and versions of classic holiday songs like “White Christmas” or “Let It Snow.” That’s big money for the songwriter and music publisher.
For most of the 20th century, this mechanical royalty applied to physical formats like vinyl, cassettes, and CD’s. Today, the mechanical royalty comes in new flavors: streaming and digital downloads. And the result has dramatically altered how mechanical royalties are paid and distributed (not to mention their earning potential for songwriters).
On-demand (or interactive) streaming is unique because it is primarily licensed and paid by the streaming services. These interactive streams pay fractions of a penny per stream to the songwriters and music publishers for two different royalties: public performance and mechanical. Depending on how you do the math (there are several options) the payments for streaming mechanicals land in the ballpark of about $0.06 per 100 on-demand streams.
To understand this figure: The average per-stream royalty for both the composition and recording on Spotify is around half a penny. The sound recording average is about $0.0038 per stream. That leaves $0.0012 to the composition, which is then split 50/50 between performance and mechanical royalties.
Using this figure, it would require approximately 1.6 million on-demand streams to earn $1,000 in streaming mechanical royalties.