How Do Record Labels Turn a Profit?

Simply stated, record labels make their money by selling records.  Of course, what was easy in years past, has become more difficult today.  With the advent of downloading music online, watching music videos and social networks like Myspace, the music industry has been turned upside down and record labels had to get creative in how to become a part of this ever-evolving industry. 

With over 90% of released recordings failing to make a profit, this is a high-risk business.  Independent labels as well as major labels are now very careful in where they put their money and what artists or bands they sign.  That being said, indie labels are able to promote their recordings for far less than the major labels, allowing them to turn a profit much easier.  This is the reason that there are so many start-up independent labels surfacing and major labels are signing fewer and fewer unknowns.

When an artist is signed to a record label, the label gives loans to artists (advances) for costs that will be associated with producing a CD and for promotion.  Major label artists can easily spend from $100,000 to nearly $1 million producing their album.  Independent artists and bands will not spend even half of that.  Many very successful artists never see a dime of their first and second albums, even if they are successful, because the label has to recoup the moneys spent before the artist gets their percentage of the profit. 

Obviously, the record label pays for manufacturing of the record, materials and packaging.  Most will pay approximately 50 cents per CD if they purchase more than 100,000 per year.  The cost rises dramatically for the independent label who purchases less than 10,000 units per year.  They have to pay over double what the major label pays which is $1.20 per unit.  Again, these costs are paid by the artist’s advance and are recouped by the label before the artist makes any money at all.

Add to all of the above royalties that have to be paid and sometimes you wonder how anyone can make any money in this business.  Two royalties have to be paid: first to the performing artist or band and the second is the mechanical royalties paid to the composers and the publisher.  The amount of percentages of who gets what is always spelled out clearly in the artist’s contract.

For major record labels, their promotion costs are about 20% of the total amount that is invested in each artist or band.  Independent labels spend about half that amount which is 10%.  This number includes press kits, music videos, radio and TV promotions, public relations, etc.  Again, paid by the artist’s advance but never recouped by the label if the artist doesn’t make any money.

So how in the world with all this money being spent, do labels turn a profit?  Record companies will make approximately $10.00 every CD that is sold.  If they are good at what they do, many of their artists will sell a million units which is $10 million.  When everything mentioned is paid, the record label stands to make nearly $6 million on that artist, who by the way, owes them their $1 million advance!