CDs Want To Be Free

Dotnaught writes: "An article that I wrote about a new music promotion service called fightcloud.com and CD pricing in general has just gone up on Salon. And heeding the advice of Dave Winer, I also posted the full transcript of the interview on my Web log, Lot 49, for those curious about what got left on the cutting room floor." Rather than complaining that Big Recording's CDs are overpriced, it sounds like this company is simply demonstrating that music (even on physical media) just don't have to cost that much.

Comments

NOT FREE.....

[tiwason]

ugg.. I hate advertising...

If I have to pay $4.95 for shipping and you are making $2.64 "profit" from that $4.95, how the hell is the $4.95 "for shipping"..??

$4.95 != Free

Re:NOT FREE.....

[User 956]

OK, so that all costs some money, right? Well, that's NOTHING compared with the cost of food, travel, housing that many recording labels provide their artists while they are recording.

You know jack shit about the music industry, my friend. All those things are what are called RECOUPABLE EXPENSES.

When a record label advances money to an artist, or spends money in certain areas, to make, market or promote a record, the artist must pay back that money before the label begins to split the profits with the artist. Paying back that money out of record sales is called "recouping." If the record stiffs, even at the fault of the label, the artist of course owes nothing. But if the record sells some units, and the label decides to put out another record, the debt is NOT wiped clean if the artist is unrecouped. This nasty little fact is called "cross collateralization" and what that means is that if the artist makes Record Number Two for the label, but hasn't recouped from Record Number One yet, the back owed funds come out of the sales from the new record before the artist ever sees a dime from the new record. So you can see how difficult it is to get ahead...which is how a label (meaning Def Jam) would explain why Slick Rick is unrecouped after all these years and 5 albums later.

As an example, let's say the artist has an unrecouped balance of $200,000 on the day his record drops (his advance and recording budget were $150,000 and $100,000 was spent on the video for the first single, half of which is recoupable--that's $200,000). Let's say the label did its job properly and had a good four month set up on the album (set up is the amount of work that goes into a project to build awareness prior to its release), and the artist has a strong buzz in the marketplace. So pre-orders are looking good (the amount of records the retail stores ask for, based on the anticipation of sales for the release) and the label decides to ship 300,000 units initially. If the label is in the Universal family, for example, and offers a sales discount because it's a new artist, a $16.98 anticipated retail price will position this CD at $10.78 wholesale. So the label can anticipate an income initially of $3,234,000 (300,000 x $10.78). And by the way, the label feels as though it has already lost $189,000, because the full retail selling price of $17.98 would have brought the label $3,423,000 (300,000 x $11.41) and since they discounted the record one dollar, they're already losing money. Here's the ugly side of label accounting and recouping: the artist's contract stipulates that the artist's share of the back end is 12 points, which really means 12% of the retail price (less a whole bunch of stupid provisions for breakage, free goods, return reserves, and container charges, producer royalties, etc) which leaves the artist about $1 a record. That means that the artist's share of the income from one record sold at $16.98 is roughly $1. Recouping means that the artist has to pay back the money spent out of his share (which is $1 a record sold). So in order to pay back that $200,000 spent prior to the record even coming out, 200,000 units must sell.

After the initial order is shipped, the artist incurs promotional costs which the label advances to him. The independent radio promoters, video promoters, tour support, remixes, etc, are all shared expenses that come out of the artist's money. So you can see how easy it is for an artist to remain unrecouped. If he finishes his project two or three singles deep, it's easy to come into the next project already at a high negative balance. The artist is artificially unrecouped, however, because the label has made back the money it spent off the top. Let's look at our above example. Let's say the label gets paid (meaning every retail store sells every copy with no returns) for every copy of the initial 300,000 units it shipped at $10.78 a copy. And let's also assume they did not spend any additional money to sell those records (also highly unlikely). The label has made $3,234,000. The label has also recouped $200,000 from the artist for the expenses, so that $3,234,000 is almost pure profit (except for the unrecouped costs of running their business and the overhead of running their business). Meanwhile, the artist has made only $100,000 (less the artist's overhead costs). According to my calculator, that's only 3% of the share.

And the massive screwjob doesn't stop there, not by far. Labels pay royalties on 90% of sales which assumes 10% breakage, a holdover from the vinyl days. From that amount is deducted the advances and recoupable expenses such as studio time, engineers, producer, etc. However, a distributer is often given 15-30% of his albums free on which there is no royalty. Overseas sales and sales to military stores are at a greatly reduced royalty. Some Talent may be more popular overseas than in America which means they see very little royalties. If albums are returned and then sold at discount, Talent receives virtually no royalty on those sales.

Re:NOT FREE.....

[JHromadka]

Now, repeat after me: That's not what costs $18 per CD! What costs $18 per CD is the audio engineer that was paid to mix the tracks in the studio where the music was recorded; the rental time for that studio space and hi quality recording, mixing and sampling equipment; the designer that was paid to create the artwork you see on the jewel-case inserts and on the CD face; ...

Um, then why do tapes cost half as much. All the mumbo jumbo you mentioned is in the prep costs. CDs cost less than $1 each to make; tapes cost more than that. Now if tapes cost $20 when CDs cost $18, then your theory would make sense.

Re:NOT FREE.....

[elmegil]

I'm a musician, and I have friends who are not only musicians, but nationally distributed and known musicians (though not "stars"). I know those things go into the cost of a CD. Guess what? Most artists don't spend ($18 - $2.64) * # of cd's sold on all those things, or even close. The $18 is there because every middleman who touches the little plastic disk wants his cut. But the fact of the matter is, there is no need to have so many middlemen that it drives up the cost 500%!

So you either have:
1) way to damn many middlemen--in which case you need to improve your efficiency so that you can compete on price, or
2)a few people who are excessively greedy (and potentially fixing prices with the other labels, since everyone seems to have the same range of hyperinflated pricing).

Think hard: do the artists at fightcloud have no costs to record and engineer their music? Is it really likely that the costs of a good amateur production studio are so infinitesimally smaller than a professional studio? Do they have no gigging costs? No artwork costs? Keep in mind, the "professional" releases can spread their costs over millions of CDs whereas the amateurs are lucky to spread them over thousands--you'd expect the amateur productions to have those costs make up a BIGGER percentage of the per CD cost, even if the total costs are less.

Finally, you need to go re-read Courtney Love's essay about who bears the production costs with the majors--it comes out of the artist's royalties, which are a small fraction of that $18. That's true for big artists and small on the major labels; it's not like the label is paying that artist extra specially to stick around in most cases.

Re:NOT FREE.....

[Chris Johnson]

Oh, come on. The engineering may be covered by the label in the recording budget that's set- that may or may not come out of the artist's share (see 'recoupable'). Same with the graphics. Offset printing almost certainly is paid for by the label. Goodies FOR THE ARTIST come out of the ARTIST'S share, are you kidding? Promotion, including paying off independent promoters in an auction-like payola scheme to get tunes played on radio and stocked in Wal-Mart, does in fact get paid for by the label.

I'm indie: see URL above. I worked with Ampcast to help them set up their CD program and I have a pretty good idea of how much CDs really cost physically. Mine go for $12: that is with a color four-panel two-sided insert, a color but one-sided tray liner, Red Book uncompressed CD master from high-resolution originals: in other words, very very near to major-label technical quality, and in some ways (sound quality) substantially better than the average major label release. And that is why I set my price so a couple bucks go to the artist, rather than setting it so that I get nothing.

It'll cost you about 8$ to 10$ per CD to run a business that sustains itself producing CDs that are like major label releases. If you're good with having no artwork, or God forbid 'CDs' burned off mp3s and the like, you should be able to bring them in for much cheaper than that.

Note, however, that the RIAA releases tend to be mass production- even 1000 is in its way mass production- and it sure as hell costs them less than $8 to cover everything involved. There's a lot of people gobbling caviar and Chateau Lafite in that business. Many are label people. Some are artists. For the artists, it means they will never see a royalty check so long as they live- but so long as they're allowed, they'll live high as if they were going to get paid. It's relatively cheap to give an artist a limo ride rather than pay them what you REALLY owe them, and if you own the limo company, hey- even cheaper. The whole industry is a big con.

Re:NOT FREE.....

[subgeek]

The promotion work that is done when the artist goes on tour - that costs money: TV spots, banner ads, Ticketmaster kick-backs, deposits for venues, etc., etc.

Don't forget that concert tickets cover a lot of this expense. even after ticketmaster takes their cut, the remaining amount is more than the price of a new cd for most big-name artists. touring is great promotion because it usually makes money and encourages cd sales.

There's a significant cost involved in promoting new music ... now, should you have to pay for lots of bad artists to be able to release their music?!? Maybe not, but that's the breaks. You can't really weed out the good from the mediocre before you incur all those costs ...

promotional costs are the reason why some cds that bring in tens of millions of dollars still don't turn a profit. when the promotional budget is in the tens of millions of dollars, chances are this is more than the production costs.

now, about mediocre artists. why can't these costs be avoided? shouldn't the recording industry be spending a little more money trying to figure out if a band sucks or not? it is my opinion that they spend more time considering whether they have a *chance* at marketing it successfully. they excuse away an artist's shortcomings by arguing it doesn't matter because if they throw enough money into marketing people will buy it anyway. (often they are correct) even if the labels are gambling, i think they would do much better for themselves trying to get a little more quality. initial costs probably wouldn't increase if marketing budgets were reduced accordingly (followin a theory that it costs less to sell something people are more likely to want than it does to convince people it's what they want and then convince them to shell money out for it).

as someone else pointed out, tapes cost less than cds. people don't want them as much, so if they cost more, people wouldn't buy them. the costs get bundled onto what people will buy.

my complaint isn't that cds only cost .30 or .40 to press. my complaint is that the model for deciding how to spend money that causes a cd to cost 18.00 instead of about 10.00 is flawed. the only costs that are not one-time expenses are manufacturing and royalties. everything else is pay once. all of the expenses you mentioned could be covered if the hype machine were a little more efficient in deciding what and how to promote things.

we'd all end up with cheaper cds of higher quality.

Re:NOT FREE.....

[swillden]

And the massive screwjob doesn't stop there, not by far. Labels pay royalties on 90% of sales which assumes 10% breakage, a holdover from the vinyl days.

Actually breakage is a holdover from *shellac* days. A very long time ago, before vinyl was invented, records were made on shellac, which was very fragile. In the process of shipping a box of these shellac records to a retailer, inevitably a few would break. Since the record label didn't know how many would break, they just arbitrarily assumed that it would be around 10%. The record label gets paid for all of them, but they only pay the artist for 90% of them.

This deduction for breakage continued even when vinyl records, which are much more durable, were introduced, continued with 8 tracks, cassettes and now continues to be applied on CDs.

How many CDs do you think get broken in shipment?

It's a crock. OTOH, the labels will just say, "Well, yeah, but what really matters at the end of the day is that our books have to balance. If we didn't deduct all those things from the royalties, we'd just have to lower the artist's royalty percentage."

Whatever. It's an industry that is so rife with dishonesty and manipulation that they figure all of the lies wash out and leave them clean.

Hypocritcal....

[Anonymous Coward]

Hear me out here, I think I have a valid point. Lots of people here are programmers. Lots of people think CD's are overpriced. Well a CD is about 15 bucks give or take a few. How much is a video game these days? 40 or 50 bucks, a DRASTICALLY different number than 15. But guess what? You get a game , it comes on a CD. You get an album, it comes on a CD. What can we conclude from this? You're not paying for the CD at all, you're paying for what's on it! So why should we tolerate 50 dollar games without batting an eye, but a 15 dollar music collection is "way too much"?? I don't see the difference. Programmers put in tons of effort to create a game. Musicians put in tons of effort to create a CD. The time schedules are roughly similiar, no artist is cranking out CD's weekly or anything. So is there any reason we complain about music being too much, while games we don't? I think its because most people here are programmers, and think that because video games involve programming, they are inherently worth more.

Re:Hypocritcal....

[MoneyT]

For one, the value of the game is much higher than that of music because consumers get a better utility out of the game than out of the music. A game has huge reuse value as compared to a music CD. And there isn't just a demand for lower priced music, there's one for games too. Ever see those warez sites? Same thing. The major difference is that the gaming industry isn't trying to have burners and copies eliminated completely (yes there is copy protection, but it's more to discourage casual piracy rather than complete blockage). The RIAA want's burners to not work period. If the gaming industry did that, we would be up in arms just the same.

Also a game will go down in price over time, music does not.

Re:Hypocritcal....

[Saint Nobody]

ask yourself -- why is the price where it is? record companies, when explaining the price of cd's explain that much of the price of cd's is because of the budget required to promote albums. so why do you have to pay fifteen to twenty dollars for a CD that has no promotion? when you pay $20 for a cd by an actually talented musician, you're paying for the record companies to promote britney spears and n'sync. the drive to make a select few records into "hits" drives the promotions budget skywards.

meanwhile, joe consumer decides he doesn't like britney spears. he decides to shell out $18 for an old david bowie album instead.* this is one less britney spears cd sold, and so the record companies get annoyed that people aren't buying what they're supposed to be brainwashed into liking. and so they increase the promotions budget, and take it out of those david bowies cd's.

* did anybody else notice that three years ago, rykodisc charged, like $8 for bowie's back catalog? then virgin bought it. they cut the bonus tracks and more than doubled the price. there's no way any production costs warrant that kind of abuse of the consumer.

Hey, c'mon...

[vkg]

although calling something free and charging five bucks for it is kinda scummy, at least these folks are punching a hole through the perception that there's something expensive about producing a CD.

15 bucks is NOT reasonable, and was the price point initially agreed upon to finance the cost to convert to the new format (i.e. from vinyl). CDs were supposed to cost about eight bucks in stores.

wheres my $20 going?

[ejaw5]

In 2000, the average suggested list price of a CD was $14.02, according to the Recording Industry Association of American (RIAA). The CD itself costs about 32 cents in a large production run, according to Michael Pardo, V.P. of sales for CD duplicator Greenwood Solutions. Add packaging and the price goes to 54 cents. Add the cut for a new artist, somewhere between 10 and 50 cents,

CD+ Packaging + artist cut == $1.36
$20 - $1.36 == 18.64 RIAA

Re:wheres my $20 going?

[DragonMagic]

Incorrect assumption.

Don't forget that CDs never get from the production company to the retail store directly through magic.

Count in distributor, wholesaler, and chain, then the shipping/trucking costs between, and you'll see that the RIAA does not get what's left after packaging, CD cost and cut to artist.

Marketing, warehousing...

[jfengel]

A CD really does cost money to produce. The reason you (well, not you necessarily, but somebody) want the Mariah Carey CD is that somebody brought it to your attention. "Attention", as everybody on the Internet knows, costs money.

Physical stores cost money: clerks, rent, utilities, inventory overhead. Some of what Fightcloud is doing just matches the Amazon model of using the Internet to reduce many of those costs. Good for them; I applaud it.

Now comes the real question: will they have any CDs worth buying? And if they do, how will you know? Most CDs are crap. Even in a general area that you like, most CDs aren't worth the plastic they're printed on, at least to you. It's the job of marketing to match you with that CD, and that's expensive to do. We'll see if $4.95 gradually becomes $9.95. Still a better price than the RIAA wants you to pay, of course.

Born Free (plus shipping)

[donnacha]

From the Salon article:

Scalfani sells CDs for free. That is, if you don't count the $4.95 "shipping" charge

So, if I turn up at their offices in person, with a box, these CDs really will be free. As in free.

If I were the word free, I'd be feeling pretty raw and abused these days.

Re:"Free"?

[OwnedByTwoCats]

The blank CD-R, the case, and the mailing label. Paying someone to put the blank in the burner, take the blank out (and label it?), putting it into a jewel case, putting the jewel case into an envelope, and putting a label on it.

Capital costs on the CD burner and the Hard Drive to store the master on. Paying someone to "upload" the tracks onto the server.

I'm impressed. The artists get more per disk than with a major label. Customers get more music per dollar. If they can keep their costs down and remain an ongoing, growing concern, we're all better off.

Bad marketing choice

[proxima]

People hate hearing "free" when it means $4.95 shipping for something that's cheap to make and ship.

Instead, they should've said that the CDs were $4.95 with free shipping. Then we wouldn't feel like we're being lured in by "free", it'd just be a good deal.

It's just wording, I know, but it makes or breaks this company's "image".

all publishers are greedy!

[primus_sucks]

As a former game programmer I can tell you that it's very similar to the record industry. Normally in video game development you have a publisher, a development studio, and programmers/artists that work for the game studio. The publisher gets most of the money, then the game studio, then the programmers/artists get crap. In my experience game programmers make much less and work longer hours than people in other industries. Though game programming is much more challenging and fun!

Apples and oranges

[smallpaul]

I don't want to defend the RIAA but comparing these guys to a label is apples and oranges. Presumably in most or at least many cases, the label pays the studio costs and marketing costs. Think of how many $2.64 CDs an artist will have to sell to make the cost of the studio time, any hired musicians, marketing materials etc. The artists cannot even be breaking even unless they record in their homes using SoundBlasters.

Re:Apples and oranges

[autechre]

The linear notes for Nirvana's "Bleach" say that it was recorded for $400. Personally, it sounds pretty good to me; you can do a lot with a little equipment and a lot of knowledge and time. Many recording majors I know (at UMBC) use their studio project time to record their band. That means it cost them _nothing_, and they got to use some damn nice equipment. Plus, if they ever go back and decide the sound could use improvement, they've got the masters, and can go for it.

The Mountain Goat's "All Hail West Texas" is one singer/guitarist recorded on a _defective_ Marantz, which produces an interesting effect. The album is amazing, and it probably cost nothing to record; the value is in the songs.

RIAA and Advertisers.

[teamhasnoi]

Here's the beautiful thing.

The RIAA finds some girl w/ boobies. Some dude in Nashville writes her a song. Some guy in NYC comes up with a marketing campaign. Someone in Chicago stocks the shelves. Some dumb-ass pays $15+ for a manufactured image. THE MUSIC IS INCIDENTAL! This 'artist' doesn't write her own music. Doesn't come up with her own dance moves. Does not even dress herself. And people buy this. Alot of this. And I'm supposed to let advertisers interfere with my abillity to skip commercials when it's _this_ obvious that advertising and marketing works?

Lowest common denominator entertainment.

I wish the Lone Gunmen were here. *sniff*

Re:I guess the question to ask is....

[Binky The Oracle]

Assimilation would be the better of the two choices, although I don't think they'll do that either.

The majors have become less and less interested in artist development, and more and more interested in risk management. You need someone to wade through all the crap, and believe me, there's a whole lot of crap out there.

Labels are banks that loan money at really high interest rates. The benefit to the artist is that if you default on the loan (walk away from the deal or get dropped) there's not really any financial penalty - the label has taken all of the financial risk. You probably won't ever get another deal on any major, but you don't owe anybody any money. They've given you money in return for you signing away your copyrights, name, likeness, etc. For some people this is a good deal.

Unless you've been groomed by the Disney machine for stardom, you can't really even get a foot in the door unless you've already self-released at least one or two CDs, have an established fan base, and are more or less self-sufficient. An independent artist who has achieved this doesn't really need a label deal anymore unless they want a more widespread audience/fame and are willing to take a paycut (for 90% of them anyway) to get it.

So if there's a company willing to wade through the crap and can provide the labels with some hard numbers on sales, it makes the label's job that much easier and less risky. It also provides talented independents with a potentially good source of exposure and distribution which is, after the creation of quality works, probably the hardest part of any artist's job.

Remember that the majors no longer as interested in long-term sales as in increasing quarterly profits - they have stockholders and parent companies to keep happy, and let's face it - the majority of the top selling music today is disposable. There are a few standout tracks that might be popular 10 years from now, but those are getting fewer and farther between.

Assuming that this company can stay afloat, I think the majors will treat it as a semi-weeded flower bed. I know for a fact that mp3.com is surfed by several major A&R reps - think how happy they'll be if they can deal with a company that actually has some quality control going on.

The point of

[Asprin]

This is an absolutely, completely, totally ---[R0XX0RZ]--- Salon article. Why - because of outstanding analysis and information therein about RIAA price gouging? No. Because even though *we* are all aware of the problems with the RIAA's anti-p2p, pro-DRM positions, my wife isn't.

This article explains to HER that:

&gt $16 of the $18 she's spends on a CD is record company profit.

Prices on CDs should be going down, not up.

A $5 CD sold direct to the consumer makes almost double the profit for the artist.

The positions of the RIAA on P2P and DRM are likely motivated by greed, not survival.
In my view, it's a LOT more important *where* this article is than *what* it actually says.

I'd love to see a big name (Madonna, U2, N'Sync, etc.) use the net to direct-market a low cost original CD just to confirm for everyone that the RIAA is obsolete. Likely, however, it'll go the other way - one of these 'unknowns' is going to hit it big and promote the hell out of this approach.

The industry makes me so mad because I want to be

[dinotrac]

The thing, I think, that makes me maddest about the record industry is that I want to be sympathetic. I really do.

I understand that hiring the best engineers and studio musicians cost money
Honest, I understand that.

I understand that promoting new acts entails risk and that established acts help to buffer that.

I understand that marketing and distribution cost money.

I don't begrudge somebody turning an honest dollar doing all this stuff. Not one bit.

But $18.99 per CD?
Can you say exploitation?

$18.99 per CD then trying to make it so that I can't play it on my pc?
Can you say outrage?

$18.99 per CD to help you lobby to take away my rights with a little help from your friends Hollings and Feinstein?
Can you say I don't need your stinkin' CDs?

When you want to make an honest dollar, I may stop back by the store.

Jack Scalfani is an idiot

[puppetman]

On the Web Log (lot 49), he said, "Here is the biggest mistake of them all: two good songs on a CD. How many times do we have that? Remember that girl who sang "Where Have All the Cowboys Gone"? Vaguely. She was a kind of folksy singer. That was the only good song on that CD."

That was Paula Cole, and for that albumn she got nominations for Best New Artist, Best Album of the Year, Best Pop Albumn, Record of the Year, Song of the Year, Best Female Pop Vocal Performance, and Producer of the Year.

If this guy didn't know that, how would you feel about his business acumen? And if his musical taste is that bad (Paula Cole's This Fire is one of my top 10 CDs of all time), then I don't want to listen to what ever else he's selling (Kid Rock ripoffs?).

Read the full interview!

[bughunter]

Didn't anyone read the full interview on Lot 49? It appears to me no one has. I don't know why the whole thing isn't on Salon, it's great stuff.

Scalfani makes some excellent observations, predictions, and explains his business model fully. He carefully selects the artists he features on Fightcloud.

I expected this to generate some insightful, intelligent commentary here on Slashdot, but all I found was kneejerk whining about shipping and handling and the number of artists on the site.

Damn, I'm really disappointed in you all. Go read the full interview.

The Big Difference

[irix]

You can charge whatever the market will bear. So, game producers charge $50 (at least for a few months) for a new game.

How is that different from CDs? Well, the game producers didn't have to settle with the FTC because they were conspiring to inflate the price of CDs. Retailers wanted to sell them cheaper, but the middle-men wouldn't let them!

Even with the antitrust allegations settled, I wouldn't be surprised if this kind of crap still goes on. The RIAA members are effectively a monopoly on the music industry. As a result, the market isn't dictating what price a CD will go for, they are.

It's WHO you're paying that is the problem...

[telstar]

Musicians put in tons of effort to create a CD.

• Yup ... and what do they get for it? Maybe 50 cents of that $15.00.

Thomas Pynchon's _Crying of Lot 49_

[scubacuda]

Lot49.com is an interesting tribute to Thomas Pynchon's Crying of Lot 49 , an intersting exploration of life in CA. (My favorite part is the name of one of the bands--Sick Dick and the Volkwagens)

For those interesting in a real headtrip, try to plow your way through Pynchon's Gravity's Rainbow.

Pynchon is an interesting hermit. He didn't accept his award for Gravity's Rainbow.

Instead, he sent Irwin Corey.

(BTW, You'll enjoy GR a lot more if you read it with a companion.)