How Do Record Labels Turn a Profit?
Have you ever wondered how record labels make money from music?
“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. 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, and the writer gets a percentage of it.”
Credits: Jennifer Lopez, Beyoncé, Mary J. Blige, Kelly Clarkson, Usher, Dr. Dre, Earth Wind & Fire
“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.”
Credits: Justin Timberlake, Adele, Florence & the Machine, Eva Simons, Wiz Khalifa, Snoop Dogg
“Record labels make their money on sales, touring, merchandise, anything they could sell that has the bands’ . . . the band or artist’s name on it.”
Credits: John Legend, Jeff Berlin, Boyz II Men, The Roots, Alice Cooper, U2, Madonna
“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 these 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.”
Credits: The Kooks, Talib Kweli, Dnae Beats, Jayleez, J-Banks, The Game, Alice Russell, Comedy Central
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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.
How to Start a Successful Record Label in the Digital Music Age
The two constants in music are the evolution of new music styles and the shifts in how music is monetized. Record labels as we used to know them have changed dramatically. No longer are they the only game in town when it comes to music distribution.
A few years ago, streaming was a lucrative source of revenue. Now it’s slowed considerably. Today, the dominant income revenue stream for music comes from sync licensing. Tomorrow, it will likely be something else.
This has opened the door for independent music labels and artists to record, promote, distribute and sell their own music—to, in effect, be their own record label. As in any endeavor, there are both risks and rewards to doing so. Done right, an independent record label can be lucrative and maintain control of your own music. Done wrong, and you could be on the receiving end of legal woes.
Interestingly enough, as much as music and the role of traditional music labels have changed over the past decade, the basic structure of a record label hasn’t changed. What has changed are the ways the tasks and duties of the record label are handled. Here’s a checklist of what’s involved in setting up your own successful record label.
- Business Structure of your Record Label
- Artists and Their Music
- Promotion and Distribution
Our advice is to set your record label up as an LLC. The music business is extremely litigious. You want to have some protection against both frivolous and merit-based law suits. If you adhere to all the requirements of an LLC, you will be afforded as least some insolation from adverse legal findings.
Artists and Their Music. Without music, a record label has nothing to sell. You can start out representing your own music, or sign up other artists and their music. One of the main things to realize is that there’s a world of difference between representing original music and music that uses samples or is a cover of an existing song. The record label is responsible for clearing (obtaining the rights) to all samples, or in the case of a cover, the rights to perform that song.
Legal. One of the most important things a record label does is handle all the legal work that is involved in the music industry. This starts with forming the business structure of your record label and grows exponentially thereafter. You will need contracts with every artist you represent. This includes contracts with the songwriter, the musicians, the recording studio, the performer and the distribution channels. It includes clearing rights to samples (if they are used in a song). The record label is also responsible for registering each song with BMI or ASCAP, copywriting the song, obtaining IRSC codes and everything in between. Steve Gordon
is a resource for legal info and has written numerous books, including “The 11 Contracts That Every Artist, Songwriter and Producer Should Know” on the legalities involved in the music business. The most important thing to know is that you should always get your contracts done before the music is done, not after the fact.
Distribution and Promotion.
We mentioned registering songs with BMI and ASCAP. One reason for this is that music must be registered with one of these organizations before any radio station will play it. Of course, radio play is just one avenue of promotion. YouTube is another (make sure you have sync licensing agreements with your artists.) SoundCloud is yet another. Obviously, there are hundreds of additional outlets to promote your music. When it comes to distributing your music (promotion is getting people to hear your music, distribution is getting people to pay for your music) there are also many options (iTunes, Google Play, Tune Core are just a few).
As we mentioned earlier, the most lucrative distribution market currently is in sync licensing (the use of music in a TV Show or Movie). There are two routes to go here. The first, and most lucrative but also the hardest to establish, is to develop a working relationship with a music supervisor (there the ones who’s job it is to find music for TV shows and movies.) NARIP is a good starting point for finding music supervisors in your area. You can also research music libraries and place your music with them.
In theory, the distribution channels you end of working with should send you quarterly or semi-annual statements of all the plays your music had during the period and the royalties that were collected are a due you. In reality, you will miss out on a lot of revenue this way. We recommend signing up with a Copyright Collection Agency. AMRA is one example. These agencies track all plays on all formats and platforms worldwide.
One final thought. We, in the United States, sometime tend to be a bit myopic. Don’t be. There’s a vast world out there beyond our borders. Many artists make substantially more money from foreign markets than they do from the United States market, without ever leaving the U.S.
© 2019 – James Petulla. All Rights Reserved.