Money in the Music Business

paulbd writes: "Electronic Musician has a good article on the economics of selling music on CDs. Its a sobering read that gives some of the hard numbers that do a little to counter the sense of record companies being vultures. Recommended for anyone who seriously imagines making a living from selling music."

Comments

Re:quick review

[TheReverand]

You didn't read the article. It's just that simple.

Compare to Albini's "The Problem With Music"

[no_such_user]

Compare this to Steve Albini's somewhat infamous "The Problem With Music" article which appeared in print a few years ago. Here are links to it: (note that these are links to the same article -- pick one at random)

http://www.mp3.com/news/222.html
http://www.musicalevolution.8k.com/albini.htm
http://www.negativland.com/albini.html
http://www.ram.org/ramblings/philosophy/fmp/albini .html
http://www.musicianassist.com/archive/article/ART/ a-1098-1.htm

Re:Compare to Albini's "The Problem With Music"

[paulbd]

the problem with Albini's analysis is that it doesn't mention that the obscene $710,000 profit the record company made has to be used to amortize all the losses it made on the new mariah carey cd. see, there's this problem: you're a successful musician, and the record company appears to be ripping you off. they probably are. but a large part of the apparent rip off is because they are also making lossy investments in new artists which never work out. now, you could choose to excuse yourself from this charade, like ani defranco and others have done, by working on your own - you win, then you win big, but if you lose, you lose everything you put in. however, as long as you choose to allow somebody else to help you with the initial costs, you need to deal with the fact that their losses on other artists need to be covered by their profits on you. in such a system, the artists are simultaneously screwed and simultaneously supported. of course, the record companies are making obscene profits on the backs of underpaid musicians. but don't assume that when you get those numbers down somehow that the inherent inequality in the relationship will go away. if someone if going to make a risky investment in several artists, the ones that succeed will need to pay for the ones that fail. do you want your success subsidizing your fellow artists failures? do you want your failure subsidized by your fellow artists? or put another way, do you feel lucky, punk ? :))

Not all record companies are evil

[ManInBlac]

I run a tiny bedroom indie record label, partially to release stuff by my own band (moonkat) but also to release stuff by other bands I like. The figures in the article, while more at the high-level end of the spectrum, are entirely plausible. So, for example, no-one makes any money out of selling singles - they cost about £1 to make, I sell them to the distributor at £1.23 and all of that 23p plus more besides gets spent on publicity.

As far as albums go, yes, I could make money because I sell them to the distributor at £5, but the promotion costs are also higher, and the album has to pay for all the money I lost on the singles. Besides which, they may turn out not to be popular at all, in which case I lose all the money I spent. The band themselves have already made more money than I will - through radioplay royalties.

So far, since starting a record label 6 months ago with £10000, I have made a loss of £6000, and a further £2000 is in the form of advances to bands (so they could buy equipment) which I will may well never recoup unless they suddenly become successful.

I don't advise anyone to start a record label unless they enjoy feeling like a glorified secretary to (often ungrateful) bands.

Business is business

[Walter Bell]

The record companies certainly get a bad rap on this site (and in many other circles as well). However, we need to separate the facts from the emotion here. Record companies run a risky, speculative business, and it is a well-known fact that most of the artists they sponsor do not succeed. It is a testament to their ingenuity that they are able to make such huge profits by developing a successful formula to minimize losses on crappy bands (the 95%) and maximize profits on good bands (the 5%). How many speculators in other industries (such as real estate) can you name who are able to achieve such a high return on such risky investments?

My personal argument is not with the record companies on the basis of profit. They should be allowed to sell their wares and make money; after all, this is a capitalist world. My beef with the RIAA members is that in their zeal to increase profits, they advocate the loss of basic freedoms for U.S. citizens, in the name of "stopping piracy." The DMCA and SSSCA, as well as their continued attempts to squash fair use, spy on computer users, and shut down BearShare users are an affront to freedom and do nothing but mobilize public opinion against the entire industry. It's unnecessary, relatively unprofitable, and the public won't stand for it for long. The Ford Motor Company used to have a lot of popular support in this country before "Unsafe at any Speed" came along. And it took them years to recover from it.

If the RIAA companies would just focus a bit more on producing quality music instead of trying to control every aspect of their products' use, they will get a lot farther and probably make a lot more money. Which is fine with me.

~wally

Some of your friends are already this fucked

[jkujawa]

This reminds me of this wonderful article that's popped up on JWZ's site several times about the economics of the music industry.

It really sucks.

http://www.arancidamoeba.com/mrr/

But the real money is made

[gillbates]

by the retailers. Most retailers expect a 100% markup on what they sell - that is, the retailer expects to pay $7.50 to $11.50 for a CD that will sell for $15 to $22. When it comes down to it, the record companies may be greedy, but not so much as the retailers, who skim larger profit margins from the sale of CD's than do the record companies.

Re:But the real money is made

[remande]

Most retailers expect a 100% markup on what they sell - that is, the retailer expects to pay $7.50 to $11.50 for a CD that will sell for $15 to $22. When it comes down to it, the record companies may be greedy, but not so much as the retailers, who skim larger profit margins from the sale of CD's than do the record companies.

Yup, but look at their expenses.

I used to work stock at a Caldor's (defunct discount store). They grossed about $20K per day. I have to guess that, at any time, they had no less than fifteen employees on duty--some at the checkout, some visible in certain departments, and some busy in the back loading stock. Assuming the store is open for 12 hours a day, that means that they have to pay for $600 in payroll. Assume $10.00 per hour (in paycheck, plus employer-side social security taxes, plus benefits packages), and you are spending $6K per day in payroll. With 100% markup, your $20K in sales cost you $10K in merchandise, so now you're down to $4K margin on the day.

From that $4K/day, subtract the advertising budget, PITI payments on over a million dollars of building, parking lot, and land, consider shrink (missing inventory--often theft from your employees), unsellable returns, and utility bills, and how much is left? Not bloody much.

Retailers take a lot of gross margin, but not a lot of net margin. When many hands touch the merchandise, all that money goes many ways.

The fact is, it took a lot of people to get you that CD you bought in the store. The artist, the studio techs, the CD burner people, the warehouse jockeys, the retail drones, a couple of OTR truckers--and they all have to eat. So everybody gets a little piece of the sale.

I'm not saying that one or two people in the supply chain don't get a large piece of the sale, but it's not always as large as you might think.

Re:Buggy Whip Thuggery

[paulbd]

as much as i dislike every aspect of the RIAA and its cohorts, i know from personal experience of starting a CD label that they are not "as [ir]relevant as buggy whip manufacturers". producing music has become vastly cheaper than it used to be, and the net offers some excellent possibilities for distributing compressed (lossy) audio. however, the net doesn't come within 10 miles of offering the marketing and publicity engines that the RIAA still know how to work (or maybe we should say control). its also a complete waste of time for people who want at least CD quality audio, though that will change as bandwidth increases over time. we spent about $5000 to do the production copy run on our first CD, and didn't have to pay for studio time since we own the studio. but this music isn't the kind of stuff that most people listen to, and the challenge of marketing it effectively is vastly more difficult and involved than running a website and having some MP3's available for preview. although their tactics and contracts suck, the truth is that its very, very hard to effectively market music without the involvement of major record labels. this is particularly true if the music you make isn't popular with the demographic that has made, say, ani defranco such a success.

Aw! Poow widdle people!

[Rogerborg]

God damn! A million dollars in recording costs? Half a million in marketing? Quarter of a million advance, most of which goes to management, lawyers and recording studios?

Bah. We've ended up at these insane levels of cost through a conscious choice to make products instead of music. And it's the big labels (that we're asked to pity) that have chosen to do this. That's why they're the Big Labels, you see? Smaller labels and artists (and authors and print publishers) can make a good living by selling actual art without million dollar videos and marketing campaigns.

Here's a synopsis of this article: big studios have big costs. Well, duh.

Stopping piracy

[mangu]

Whta the RIAA tries to confuse is the fact that there are two kinds of "piracy". One of them is companies that print bootleg copies of records, which are hard to distinguish from legitimate records. This is, usually, done in industries in Asia, using mass production methods.

The second kind of "piracy" is done at home, by consumers who make copies of cassettes and CDs for their personal use, or, sometimes, for friends.

I think there is little doubt that industrial-size piracy does hurt the legitimate recording business and the artists. Those illegal records may be sold to totally unsuspecting stores and consumers.

However, the home-copying thing is much more fuzzy. I may make a copy of a CD to listen in my car, while my wife listens to the same CD at home. But this does not mean I have cheated the industry of selling another CD. I may feel that forking out $15 for a second copy of that CD is too much. In that case, my "illegal" copy brings a benefit to me, while hurting no one, since not making that copy wouldn't make me buy a second copy of the CD.

And all of the "copy prevention" methods being used and proposed are meant only against making copies at home. Industrial-grade pirates have more resources and can circumvent copy protection quite easily. If the RIAA would divert all that effort against industrial espionage and piracy, they would get considerably more return for their investment, while preserving their public image.

Re:Stopping piracy

[dirk]

Whta the RIAA tries to confuse is the fact that there are two kinds of "piracy". One of them is companies that print bootleg copies of records, which are hard to distinguish from legitimate records. This is, usually, done in industries in Asia, using mass production methods.

The second kind of "piracy" is done at home, by consumers who make copies of cassettes and CDs for their personal use, or, sometimes, for friends.

I think there is little doubt that industrial-size piracy does hurt the legitimate recording business and the artists. Those illegal records may be sold to totally unsuspecting stores and consumers.

However, the home-copying thing is much more fuzzy. I may make a copy of a CD to listen in my car, while my wife listens to the same CD at home. But this does not mean I have cheated the industry of selling another CD. I may feel that forking out $15 for a second copy of that CD is too much. In that case, my "illegal" copy brings a benefit to me, while hurting no one, since not making that copy wouldn't make me buy a second copy of the CD.

And all of the "copy prevention" methods being used and proposed are meant only against making copies at home. Industrial-grade pirates have more resources and can circumvent copy protection quite easily. If the RIAA would divert all that effort against industrial espionage and piracy, they would get considerably more return for their investment, while preserving their public image.

I completely agree about the large-scale pirates, but they are continuously going after them. Everyone points to these pirates as if that makes a difference, but the record companies have been going after them for years and years.

You second kind of piracy is fairly innocent. I think most people would agree that it doesn't hurt the record companies that much. It is very small and innocent. What you leave out is the piracy they are really going after, and that is internet MP3 trading. This goes far beyond making a cd or 2 for a friend. It involves putting a cd (or songs, or whatever) on the net for anyone (potentially millions of people) to download. This is a much larger problem than making a cd for a friend.

There is no evidence pointing to the fact that Napster/Morpheus/etc have hurt or helped CD sales. It's impossible to tell, since there is no control group to compare it to. Some people say they bought more CDs since file-sharing became big (just ask around /., most people will say that). But the average user (IMHO) does just the opposite. They use file-sharing to avoid buying CDs. The evidence is just a quick look at what is available. For the most part, it is the commercially successful songs. These are songs people don't need to "test out" to see if they like an artist, these are songs almost everyone has heard. The majority of people like the concept of something for nothing. And this is what the record companies are going after. Unfortunately, when they go after the "something for nothing" crowd, they have to go after the "preview" crowd as well, since there is no way to distinguish between them.

"Consumers will eat what they're given"

[flacco]

Remember that statement? That pretty much says it all.

You have to remember (or realize) the dirty fact that the music business has almost nothing to do with music. It has to do with promotion. It makes about as much sense to complain about the music business ripping off the "musical artist" as it does to complain about the shock-absorber business ripping off the "drill-press artist" or the "rubber bushing #214A artist".

The music biz can pick, choose, or manufacture "artists" upon its whim, promote them with the guile that can only come from decades of dilligent mass manipulation - and truckloads of obedient kids will duly line up with money in hand, go shrieking to the concerts, and obliviously suck up every cross-promotional product without so much as a moment's reflection.

Please, once more for clarity: THE CONSUMER - AND ESPECIALLY THE TEENAGE / YOUNG ADULT CONSUMER - IS A FUCKING COW TO BE MILKED.

So don't be so upset that the music companies are taking all the money. They did the heavy lifting. They put out the ads. They put together the deals with Pepsi and Budweiser and AOL and Spin and Rolling Stone and MTV and the radio conglomerates to mind-fuck that band into your consciousness, and into the collective youth consciousness that virtually every teenager lives in terror of being excluded from.

So give credit where credit is due.

If you want real music, from un-exploited "artists", simply stop buying from the evil corporations. Leave the talentless, classless, unimaginative, over-produced, formulaic dreck on the shelves. Scour the net for independent work. Discover music your friends have never heard before. Find intriguing, mysterious music made by small outfits without massive distribution channels and focus-group-driven images. It takes some time to find them out there, but when you do, they are precious.

Then whip our your credit card and support them by purchasing their work. You'll get a a CD with a home-made liner inside a plain brown wrapper with your address hand-written on it. And you know what? The artist will probably get every cent you send.

The band may not even exist in a couple years, but you will always have that CD, and the music on it - a memento of your discovery.

Oh well, never mind - I think I hear them ringing the bell up at the barn. They're putting out the hay. Time for you to eat what you're given, and have the suction milkers attached to your teats.

Insane recoding budgets == pimping the Artists

[RNG]

Disclaimer: I'm not a professional musician and am not involved in the music industry. At the same time I don't think I'm 100% clueless about the music business.

Well, while a recording budget $500K - $1000K may be the "typical recording budget for an artist's first album" it seems rather high. While that may be true for the types of Britney Spears and your favorite boy band of the week (which really are just products rather than artists), you can record quality music for far less.

To give you an example: I listen to a lot of Heavy Metal. One of the more interesting bands I've come across over the past year or so has been "Children of Bodom" (for those who don't know them, they are a speed metal band from Finland and quite musically skilled; their live album puts most other bands to shame). Their first album, which admittedly was pretty rough, was recorded in 2 days. Their second album (Hatebreeder) is a wonderful symphony of high-speed power rock and melody which sounds good and was recorded in a week. While I don't know the recodring budget they had, I can assure that it wasn't anything in the $500K region.

Another example I can give is a local band here (2 of my friends play in it) which just recorded their first album. They had 4 days to do it and the studio cost them
My whole point is this: decent musicians can produce quality music on a much lower budget. You don't need 1/2 year of studio time to record your songs (provided you have written them prior to waking into the studio).

The story about music videos is similar. Artists are often required to do videos which basically puts them into more debt. So they are effectively owned by the record companies who are in effect pimping them; it's like indentured servitude.

Part of the problem is that the music industry requires expensive productions and videos as marketing tools. Where they should be more like reporters (ie: finding and covering the news rather than creating it) they have become the creators of bands which then require huge budgets to be pushed to popularity. It doesn't have to be like this.

I think I'll be putting on my asbestos suit ...

And why the hell does it COST so much?

[WhyteRabbyt]

A typical recording budget for an artist's first album is between $250,000 and $1 million.
You could build the artist their own recording studio for that, and minimise the production costs of their next album. Geez even 250 grand would be enough. Wanna guess why they don't do it that way?
But worse still, this presents the story as being awful hard on the record company. Bullshit. Lets rephrase the process...
"Yeah, you write this piece of software. We'll give you money to cover the costs of it now, and advertise and sell it for you. We call that an 'advance'.
But when we start to sell it, you'll pay us all that 'advance' back, out of your share of the profits (we call them 'royalties), and in addition to you repaying our outlay, we'll get at least three and a half times the profits you do.
If you don't cover the money you owe us, then we'll ask you to do another project, and the amount outstanding will have to come from the profits you make on -that- one. We'll also reduce your new advance, and the amount of advertising we do because you're obviously unprofitable."

It is unfortunate they are so stupis to be sure

[Zero__Kelvin]

" Unfortunately for them, the Napster unpleasantness has merely exacerbated that characterization."

Unfortunate for them? Yes ... I have a friend who recently poked his own eye out in hopes of winning a lawsuit. It was very unfortunate for him ;^}

Reduce costs with technology

[Sloppy]

A typical recording budget for an artist's first album is between $250,000 and $1 million. The record company will also spend approximately $250,000 to $500,000 to market a new artist to the public. A typical recording budget for an artist's first album is between $250,000 and $1 million. The record company will also spend approximately $250,000 to $500,000 to market a new artist to the public.

These are the numbers that need to be reduced to make music more profitable, and technology can help.

It's time to get rid of CDs. Vorbis (or, *sigh*, MP3) or even wav/aiff, combined with HTTP or FTP can do that. And by getting rid of the middlemen, You can either reduce the price (thereby increasing units sold) or make a greater profit per unit.

As for marketing, some music (e.g. heavy metal) is already getting by with virtually no marketing at all, so spending $0 here has become a proven strategy (though some of the musicians are unhappy about it ;-). Granted, that won't get you Big Bucks in sales, but it does work. One nice thing about the Internet is that messageboards, usenet, etc. allows word-of-mouth to travel a lot further and faster, so marketing gets replaced by just having better-informed and connected customers.

That leaves the production itself, and of course the musicians' time/labor. Personal computers can replace some of the once-expensive capital (my brother just mixed a friend's recording on his Mac). There's still some equipment and expense left here that can't be eliminated, I think. But it's a start...

Re:Buggy Whip Thuggery

[GlassUser]

. . . i know from personal experience of starting a CD label that they are not "as [ir]relevant as buggy whip manufacturers".

Only because they already control all channels of publicity (radio slots, major store shelf space, commercial slots). Otherwise, it would simply be an exercise of borrowing money, just like any other business.

If I ever need the services of that law firm...

[Dr. Awktagon]

Eric Leach is an intellectual property and business law attorney at the firm of Goodman and Leach.

Good Man or Leech? I think I'd like to talk to Mr. Good Man please!!

The truth is out there...

[thumbtack]

Suggested reading is Moses Avalon's "What the Reocrd Companies Don't Want You to Know" You can do a royalty calculation on his website. The Future of Music Coalition has an excellent document that analyzes the "standard contract" explaining how that 16% royalty turns into 6%. Both websites cut through the RIAA spin, and get to the underlying truths.

The truth is that the 90-95% of artists that don't recoup, don't recoup because of inflated expenses, the fact they don't get paid for "special" sales, such as overseas, and record club sales, and music taken out of the label catalog and not available for the public to purchase at any price. If the labels don't sell it, you can't make money off of it. In addition to this, you give up your copyrights to boot.

It took John Denver's Estate 5 years after his death to get a accurate total of his sales in which 19 MILLION more sales were "found". This Article on the RIAA website documents it. Talk about your "smoking gun".

I recently had a conversation with a member of a 60's group who had several top ten hits, his words explain it better than anything else I've ever heard. "If I were going to tell any group that is considering signing a major label contract any one thing it is, get as much money up front as you can, because you will never see another cent from royalties."

Grrrrrr. Filters, and why my post is a link.

[stonecypher]

Well, I was going to post, but I kept hitting the lameness filter for too many junk characters (don't know what character's throwing it, though, so of course I can't fix it. What characters trip the filter aren't in the FAQ, either. Guys: make it a ratio, not a count. Long posts get screwed. And make it tell you what character is getting tripped.)

A link to my rebuttal, and a hope that people will still respond.

Warning: that rebuttal is *long*.

Re:harder better faster stronger

[droleary]

"Hey, if it doesn't work out don't worry about it, we'll take the loss; but if it does work out, before we pay you your cut we want to get our investment back"

But that's not what the labels are saying. The money they offer is not some sort of gift or venture capital, it is a loan. They're really saying:

"We'll give you this loan and jack every possible dime you might see in profit until it is paid back, but you have to use our people at our prices to record and market it, and if our people can't do their job very well, you get to try paying back a million dollars by being a nobody working a dead-end job at Hardee's."

This is also much the same way the game industry works, however you don't hear nearly as much public outcry on how the developers get screwed even though they never get a share of the profits, typically get laid off after a game ships and for the most part get paid sub pare in comparison to there skills.

I have no real sympathy for anyone that signs bad contracts in full knowledge of what's involved, but you don't get to reverse the situation and expect me to now muster up sympathy for the record labels who simply cannot change their business model fast enough to keep making a profit. The record labels could drop off the face of the earth tomorrow and I could still get a lot of new music, but if the artists vanish both me and the record labels are screwed. The artists are the ones with all the power, and once they realize that and stop signing bad contracts on the empty promise of fame and fortune we'll all be a lot better off.

Double counting

[Viadd]

The article would have been more credible if it were honest.

E.g. It talks about the record company initially being out of pocket $500k ($250k production & propaganda, $250k advance royalties to artists). The company wholesales the record for $10 out of which come $2 for pressing, shipping, and mechanical rights, leaving $8. It then states that $2.25 goes to the artist as royalties so the record company gets only $5.75 to amortize its initial $500k, requiring the sales of 87k units before it breaks even.

Did you notice that? Pretty slippery. The artists don't get the $2.25, it goes directly to the record companies until the advance earns out. So the record company makes $8 in marginal profit on the first 111k of sales, and is in the black after 62.5k unit sales.

By the time the artists start earning royalties beyond the advance (111k units) the record company has made $390k in net profits. After that, the royalty-reduced $5.75 profit is acceptable if they can't find another way to gouge the artists.

This ignores the fact that the pressing and distribution costs go to companies that are probably related to the record company, and make profits of their own. It reminds me of Hollywood accounting, where if any movie, especially a blockbuster, makes a net profit (leading to money actually being paid to someone who has monkey points) it means that somebody didn't do their job right and will never work in this town again.

Of course, there always has to be a villain in the piece. OOOHHH THOSE SCUMMY SONGWRITERS!!! They're the reason music costs so much. Burn them!!!