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How Do Record Labels Turn a Profit?

Have you ever wondered how record labels make money from music?

If you are interested in the academic “book report” answer to this question, click here.
But, if you want to know the inside answer from professional audio engineers and music producers, continue reading – or listen to their own words here:

Rick Camp, Recording Connection Mentor“Record labels make their money off of selling records, but there’s all kind of royalties that the record company collects when a record is played, and that’s how they make their money. When every time a record is played on the radio or sold in a record shop, or sold online now they get a percentage of it, the artist gets a percentage of it, the writer gets a percentage of it. ”

- Rick Camp, RC1 Productions & Master Mix Live – Las Vegas, NV
Credits: Jennifer Lopez, Beyoncé, Mary J. Blige, Kelly Clarkson, Usher, Dr. Dre, Earth Wind & Fire
How do Record Companies make money?
Record companies make money by marketing and investing heavily in their products – in this case, the product is the artist & their music.
Recording Costs
For smaller labels, recording costs average $15k per album. For large labels, the average can be from $100k to $500k and up. The artists bear this debt, which is repaid from royalties.
Manufacturing Costs
Large labels pay about $0.50 to $0.55 per CD on orders of 100,000 or more. Labels that buy less than 10,000 CDs per year pay approximately $1.20 per CD.
Royalty Costs
Record labels pay two royalties: one to artists, and another to composers & publishers. Artists can receive 10% – 15% of suggested album retail minus packaging costs. Composers and publishers receive 30% or more.

Cameell Hanna, Recording Connection Mentor“They make money the way they have for years . . . off of the exploitation of the recordings themselves, and there’s a million ways that is exploited. So, now they make money off of every aspect of an artist’s career. There’s a deal type that’s been around for a while called the 360 deal, which means that they participate in all aspects of an artist’s career, like touring, merchandising, etc.

“So, you, as a label, are now making money off of pretty much every action an artist takes that involves getting income. A 360 deal is sort of the standard operating understanding in most labels, when you’re talking about a major label. You are going over to Interscope, and you’re signing a deal, and you’re like, “I’m going to be the next Justin Bieber.” You’re going to be signing a deal like that, where they participate in everything, including every T-shirt you sell. They’re going to have their own piece of that. It’s a giant markup on merchandise. A lot of people have made more off of the things surrounding the music than the music itself.

“So, they . . . The labels have always figured out ways to get a piece and keep it moving.”

- Cameell Hanna, Serenity West Recording – Los Angeles, CA
Credits: Justin Timberlake, Adele, Florence & the Machine, Eva Simons, Wiz Khalifa, Snoop Dogg
Promotional Costs
Promotional costs include advertising, radio promotion, music videos, touring and more. Most of these costs are recouped from artists’ royalties, depending on contractual agreements.
Distribution Costs
Record companies decide on how much an album will cost, then they give a wholesale price to a seller. If an album sells for $16 retail, the distributor most likely paid about half the retail price.

Mike Johnson, Recording Connection Mentor“Record labels make their money on sales, touring, merchandise, anything they could sell that has the bands . . . the band or artists name on it.”

- Mike Johnson, Clear Track Recording Studios – Clearwater, FL
Credits: John Legend, Jeff Berlin, Boyz II Men, The Roots, Alice Cooper, U2, Madonna

 

Zach Phillips, Recording Connection Mentor“Here is an over simplified answer to a complicated question. Record labels make money when their music is purchased or licensed for use. When an artist gets signed to a label they get money, called an advance, to make a record. When the record is released the label keeps all the money until they have recouped their expenses, which includes the advance, recording costs, promotion and legal fees. After theses costs have been covered, the label then keeps a percentage of record sale profits. The increasingly popular 360 deal works quite a bit differently. In the 360 deal the signed artist and the label become “business partners” in all endeavors, meaning that the label gets a cut of any profits the artists make, even those not related to records sales.”

- Zach Phillips, Freq Lab Recording – San Francisco, CA
Credits: The Kooks, Talib Kweli, Dnae Beats, Jayleez, J-Banks, The Game, Alice Russell, Comedy Central

 

The Payoff
Record companies make around $10.00 profit per CD. Multiply that by thousands or even millions of album sales, and a record company can easily gross tens of millions of dollars from one album’s release.

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Here's the academic "book report" answer:

 

With the advent of downloading music online, watching music videos and social networks, the music industry has been turned upside down and record labels have had to get creative in how to market to this ever-evolving industry.

Considering over 90% of released recordings fail 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 gross approximately $10.00 for 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! In this example, the artist would pocket approximately $300,000.

 

© 2015 - James Petulla. All Rights Reserved.