|photo: Barry Mulling|
The cover song scenario. Typically, a performer who uses a compulsory license, retains all rights to the sound recording copyright (or the rights are retained by a record company or producer). Even when a performer seeks permission from the music publisher -- if for example, the lyrics are changed or a lower fee is negotiated -- the performer still usually retains the sound recording copyright. For example, if Weird Al parodied a song, he might have to give up his lyrics to the music publisher -- which is why the lyrics to "Eat It" are credited to Michael Jackson -- but not the rights to the sound recording. There would be a great disincentive to perform cover songs (Goodbye American Idol!) if the music publishers ended up owning the performances.
Your situation. Even if we're wrong and Kobalt is demanding the sound recording copyright, you can still retain rights. As you remember from our previous answer, we think some or all of the songs on Beck's Song Reader album are subject to compulsory license -- meaning that permission is not needed if you're willing to pay the fees and play by the compulsory license rules. (Limelight appears to be one of the licensing agents.) In that case, you can retain all rights.