I have seen breakdowns of how much money an artist might expect to make, and I have seen foul-mouthed breakdowns of how much money an artists might expect to spend, but I keep thinking that there is something missing. And of course there is. It is how much money the labels make, and how much money they spend.
For example, that first link describes how the label keeps "packaging deductions" and "free goods" and of course the entire wholesale price as well. But what does the label pay for packaging and physical production and so on? Does anybody know? In that same story, the label is out $400,000 before a single album is sold, which is only paid back after that album sells a half-million units or so, so what happens if the album never sells that well? Does the label just eat it (or hope to make it up if another label signs the same artist), or is the artist somehow on the hook for more money than he's likely to ever earn in a lifetime of flipping burgers?
Steve Albini's piece goes into a little more detail on the label's side of things, but still seems to get some things wrong and leave some things out. The cost of physical production and distribution, for example, is calculated based on the number of units sold. That assumes, obviously, that all of the units manufactured actually sell. If not, the label has spent the money to produce and distribute them anyway. Or are CDs unlike books, and retail locations cannot returned unsold goods for a full or partial refund? What about those "free goods" and the illegal money the labels are paying to radio stations for airplay?
And so on.
I've actually got other problems with Albini's numbers, as they seem to (1) disagree with other reports such as the first link above on various percentages and unit costs, both higher and lower, and (2) not account for the fact that at the end of the day, the band ended up with more than just $16,000 cash. They all got new "fancy" instruments worth about $15,000, some new clothes, a $15,000 "band fund" (whatever that is), all lodging and food bills paid for a month or two, and so on.
Article comments
— go to most recent comments1 - jefito
Nobody I know thinks the labels are spending little or nothing and raking in massive cash. I mean, I ran a label for years and socialize with a lot of musicians, but still.
I think what people believe (and it's pretty accurate) is that the labels drop a lot of cash on big-name releases in the hopes that these releases will bring in enough profits to justify signing 'baby acts' which may or may not turn a profit. It's a model which has worked, more or less, since the Warner Bros./Columbia wars of the 1970s. This is why the labels freak out so much when high-profile releases flop...and they've been flopping with increasing regularity for the past decade or so. Warners paid big bucks to get Tom Petty away from MCA and to renew REM's contract. RCA broke the bank to poach ZZ Top from Warners. Sony and Virgin gave Michael and Janet Jackson record-breaking contracts. None of those big signings have lived up to expectations.
It's been awhile since I've read Albini's piece (sorry), but I think the gist of it was that the labels rob from the baby acts to feed the larger signings (and to pay for more hookers and blow, payola, et cetera). I've seen various industry "insiders" attack his numbers from every which way. I don't think they're really important. What's important is what any artist will tell you: that the label charges you for EVERYTHING, from comp CDs to your A&R guy showing up at the studio with a six-pack of beer. It's easy for an act (especially a band that has to split profits) to go broke trying to pay back what they owe the label.
It's also important to note that the label owns the masters for quite awhile, usually into perpetuity, and the artist can only get them back by either buying them or hoping the label thinks they're worthless enough to part with. This is important if the label decides to a) cut you before you're done with the record, or b) take it out of print.
I used to hang out quite a bit with a formerly big-name singer/songwriter...we'll call him 1980s Grammy Boy. He recorded four albums for a label. One sold like hotcakes, one did better than platinum, and the last two didn't even chart. The label deleted the last two from the catalog, then (as is industry SOP) transferred his debt to earnings from the remaining albums. In short, he would have been paying off four albums' worth of debt with two albums' worth of sales. Since he had one of the industry's better managers at the time, sales from his first album were exempted from this transfer of debt (referred to as cross-collateralization).
This is getting long-winded. But what it amounts to is that Grammy Boy, since he had to pay off all that debt via the sales of that mostly-forgotten-but-luckily-still-in-print second album (and since a divorce took care of the first album's royalties), didn't see a dime of those royalties for almost twenty years. He couldn't reissue the deleted albums on his own, because the record company refused to let them go.
Stuff like this is often why you see old acts doing stuff like touring state fairs. Or why members of your favorite obscure band have to get temp jobs between tours. I think if the real numbers were known, we'd find that the labels are probably losing money...due to exorbitant advances, kickbacks, the worst accounting outside of freshman year at CPA school, and (of course) declining sales.
2 - Eric Olsen
Very interesting Jefito, thanks!
3 - Steve Rhodes
Danny Goldberg who is an insider who knows wrote a piece called the Ballad of the Mid-level artist a few years back for the late lamented inside.com. He gives a breakdown in it of what the band and lable make (though even he writes "No one knows exactly how much distribution and manufacturing costs. The big companies all have large overheads to provide these functions, often creating separate divisions to handle them. The record company presidents run their divisions with internal charges for manufacturing and distribution that add up to around $2.65 a unit. There's obviously profit built into that but the per-unit amount varies, depending on the amount of overall record-group volume as well as unpredictable outside events such as retail bankruptcies. As a rule of thumb, I was always told to assume about $1.00 a unit profit on these combined functions.").
Goldberg's current label is not a member of the RIAA.
Michelle Shocked who he mentions in the article just got her masters back and is reissuing her early albums. Her battle with her label is told in this Washington Post story and an AP piece.
4 - Steve Rhodes
Actually the two shocked stories are the same (I need a nap and a faster internet connection).
There is also Courtney Love's famous speech she gave at the CMJ conference in 2000 which Salon published.
5 - Phillip Winn
Jefito, you must not hang out in the comments section here much. Our esteemed Eric Olsen, Prime Blogcritic, is just one of many who have opined loudly and repeatedly that the proper price point for an album should be $5 or less, and the proper price point for a track should be $.25. I find such suggestions ridiculous if people are expecting the same level of quality they're getting now, and would like to demonstrate that the record labels are not just evil, greedy and money-grubbing, or at least not much more than almost everybody else involved in the biz at every level, from artists to retail.
6 - Steve Rhodes
I think $5 is too low. $10 is reasonable. What they lose in profit, they'll make up in volume.
Though a quarter is reasonable for a downloaded track. Particularly since at that price people might pay for a song rather than download it for free on P2P.
One thing this doesn't take into consideration is used CDs which a lot of indie stores sell and doesn't give any money to the labels or artists (which was why there was a big battle between the labels and a few chains years ago). Some indie stores (both music and book) make most of their money from their used stock.
7 - TDavid
I wrote about this a little while ago that I think $6.25 wholesale is about right, leaving the retailer to go say $2 or more per disc, which would still be 30% plus for them, but be a much higher cut for artists then the current model.
$9.98 wholesale contains too much fat, IMO.
8 - Johno
Jefito....
Joe Jackson?
Anyway...all y'all... the thing is, you can't talk about the "music industry" as a whole in any meaningful terms. It's like talking about global weather systems, and asking whether it's raining. Questions asked in such broad terms become meaningless.
Jefito ably lays out the strategy for most large labels, and even a lot of mid-sized ones. But once you get away from the labels that have multiple millions of dollars of capital, the dynamics change.
I know a dude in Vermont who runs a label out of his bedroom, who loses money on purpose, just for the sake of putting records out there. The artists all understand that they get 50% of the profits after costs, and they also understand they may never see any of those profits. And that's fine for that label.
You also have a LOT of labels out there for whom 5,000 is a smash hit. Other labels celebrate if they ship 30,000 of one album. Others consider 1,000 a big number. It's all relative, and the economics are subtly different at each level. Success is relative.
Yet, for most, the jackpot is still the way to go. Just look at what happened to Blix Street when Eva Cassidy broke. They're a little label with a good catalog, but never really succeeded until Eva broke 100,000 units shipped. Now, because of that out-of-the-blue luck, they are set for YEARS, or until they blow the whole wad over-marketing Eva's next record. Whichever.
The bottom line is, labels can find a comfort level at any size, and even succeed, but raging success, Lexuses, and coke-and-whores parties only come on the back of successfully deploying the economic model that Jefito describes above. In all other respects, success comes just like for any other small outfit-- one unit at a time.
9 - Eric Olsen
All of this makes sense and is good information for all to ponder. Thanks.
Eva is dead by the way, that's part of why this release was such a big hit. i remember when the marketing for it began and it was all about, "check out this poor dead girl whose poignant words are even more poignant in light of her subsequent DEATH." It was all pretty ghoulish, but that's how it works. Death sells even better than sex, and when you combine the two you have Marilyn Monroe.
10 - The Theory
Shhh! Don't tell the RIAA this, eric, or they'll start killing off artists to sell more cds!
11 - Eric Olsen
Good point TT, I wouldn't want that on my conscience.
12 - The Theory
Technically, it wouldn't be your fault, God Forbid the RIAA try something like that.
At least it would shock the government into some kind of action against the rIAA.
13 - jefito
Johno,
If the Joe Jackson reference has to do with my nickname, I confess ignorance. I've never been more than a casual fan.
Anyway, like you said, the business model I described only applies to the majors. I ran an indie for about ten years, and can therefore disagree with Danny Goldberg's statement that "nobody knows" how much manufacturing costs. Cut every corner you possibly can, and you're looking at less than $1 a unit. A great-sounding CD can be made and manufactured for less than $10,000.
Phillip, I'm brand new here. But I don't think it's out of line to say that Eric Olsen's price point is crazy out of whack. MAYBE if you inherited a studio setup and every instrument you need, could play them all, were a capable engineer, and were sleeping with the owner of a manufacturing plant...and then suffered from such extreme insomnia that you could successfully tour and promote the album all by yourself...then MAYBE you could eke a living out by selling discs for $5. But come on.
I'm not saying CD prices aren't grossly out of whack. But they could come down to, say, $9.99 (which is what I saw the new Dave Matthews priced at Best Buy today) and people would be reasonably happy.
The quality of the music, on the other hand...that's another matter entirely...
14 - Johno
Jefito,
Naah, I was just taking a stab in the dark as to a grammy-winning artist in the 80's who fell off the face of the earth after two records.
One more factor that a $5 sticker price doesn't address is marketing. Take the Best Buy scenario I've already been chawing on. Say Best buy takes 300 units chainwide of your record, but will just chuck them in the bins at full price unless you buy some space in their weekly print ads. Only then they'll put the disc in the endcaps for $12. Same goes for Barnes & Noble, Borders, Strawberries, Musicland, and every little indie from Electic Fetus to Bull Moose. You can sink a PILE into one chain just to get them to give a little extra som'n in the way of pricing or positioning. Sometimes it's worth it, sometimes it's not. But if you want favorable pricing and positioning at any chain, you need to spend the money.
A quarter-page ad in Rolling Stone? Tens of thousands of dollars. Ditto Spin, Alternative Press, etc.
And if you want to get on the radio.... whoa. Depending on format, that can be a fairly cheap prospect (for a blues record, say), or a multimillion dollar prospect, for a new teenypop act. And don't get me STARTED on the cesspool of corruption that is commercial radio.
These venues are expensive because they work. You can go the low road and put ads only in smaller magazines: Mother Jones, Dirty Linen, Blues Revue; go to non-commercial, niche, and college radio; and sell off the internet and stage and by mail order, but you have to expect a guaranteed smaller ROI from that smaller outlay. And since the record industry is still about big-return gambles, that's hard to take.
All in all, a well-meaning label can put themselves in the hole pretty deeply to market a new album, especially by a newer artist who won't be welcomed into retail and radio with open arms.
If things go poorly, a label can end up spending $10, $15, $20 PER UNIT just on marketing, and then have thousands of returns roll back in when the public fails to respond. And sure, that's the artist's money, but the label is fronting it and until the album makes its money back it's the label as financier that stand to lose everything.
I realize this is meandering somewhat (football's on TV), so I'll close up. Given the record industry as it stands, $10.00 is a very low, but reasonable price for a CD. As Jefito pointed out, your production and operating costs are not going to allow you to go much lower than that. The key is going to be whether labels can get their OTHER costs down far enough to survive at that price point, or whether they are going to go broke fighting a rear-guard action against downloading.
----
Caveat: the numbers as given above are back-of-napkin strictly, and only apply to labels making a bid for national attention. You can still run a business out of your dorm room at $7 a unit, but expect two things: modest success; and huge accounting troubles if you have more than modest success.
15 - Phillip Winn
I'm continuing a response to what I consider a muddle-headed comment by Eric on another page, in which he says that $5 per album is a perfectly reasonable cost for online sales, though not physical retail.
My point is this: any attempt, like TDavid's, that starts from nothing and starts to add in pieces to come up with a cost, argues from ignorance. For whatever reason, we don't know what all of the costs are. Using TDavid's formula, we could easily determine that the cost of any car should reasonable be $500. I mean, how much scrap metal is there in a BMW, anyway?
Eric postulates that $5 is reasonable for online sales. Okay, let's assume that all of the retail markup is eliminated, so we're back to the wholesale price of $9.99 on most Universal artists. Subtract out the $2.20 that Steve Albini says the major labels charge for manufacturing, packaging and distribution, and you've got $6.89 for cost. That's higher than $5.
Now add back in what it will cost to either set up and maintain your own very-high-bandwidth site or pay someone with a super-high-bandwidth site to make the music available online. Apple is rumored to charge 35% and is not yet profitable on their operation. Other sites might fare better or worse, but bandwidth is not free, and it is nearly criminally naive to insist that it is, or that there are no costs involved with online distribution. Companies have spent millions of dollars trying to put together sites to handle things like this. Even unencumbered MP3s are 5MB each or more at any reasonable quality, and that's a lot of bandwidth. Uncompressed WAV files are more than ten times as much bandwidth.
This stuff ain't cheap, folks, and we're counting up from $6.89. How do you go up from $6.89 and get to $5?
Or are you suggesting that the artists ought to get a smaller cut?
No, wait, I know. You want the labels to suck it up a bit more. You (like the rest of us) have no idea whatsoever how much it costs those companies to do business, but you're sure that they can cut their prices from $12.12 to $9.09 to $4.50 and still do just fine.
Come on, Eric. How are they going to afford their RIAA dues and all those lawyers if they cut their prices by half or more? ;-)
16 - Eric Olsen
Muddled perhaps, but I am exactly talking about starting over again with artist contracts, marketing costs, label overhead, etc., in order to do whatever it takes to drive the retail online price down to $5 in order to recognize and combat the ongoing threat of free, the gross overpricing of recorded music compared to other entertainment (DVDs for $10-15), and recognizing that volume is the only way to win in the digital music future. Everyone gets less per unit, but volume will make up the difference. It's also the only way to compete with used. When I perceive music to be a bargain, I always end up spending MORE than when I don't. People don't mind spending if it feels like value.
17 - Phillip Winn
Here's a mind-boggling question for you: Why are used CDs usually still $8?
They pay less than a buck for most discs, complete with manufacturing, packaging and distribution already taken care of. And yet still they seem to need more than $5 just in retail markup. Odd, eh?
Yes, Eric, I hear you on re-thinking everything. And yet.
And yet, the labels that have tried to do so are generally squabbling in the kiddie pool. Why is that? If there are labels that are rethinking everything and giving big cuts to the artists and so on, why are they still little tiny, while the big labels are, well, big?
Could it be that all of that "extra" money actually buys something?
Still asking questions...
18 - Eric Olsen
I don't mean they necessarily have to give the artist a bigger "cut" than they do now (as long as they actualy pay what they are supposed to pay, which has never been assured), I mean the artists have to take a "cut" in what they get upfront as well.
Right now the system buys exposure through the media cartel of radio, TV and major print. The key to the future is to circumvent this system via the Internet, which few have actually figured out yet. The Internet affords the ability to promote MUCH more economically, but the players will actually have to make the effort to try to understand and take advantage of how the Internet works vs other media.
19 - The Theory
remember, it only costs about $1 in physical costs to make each cd... but there are other things that went into that cd, including producer's costs, recording costs, mastering costs, and so forth.
And regarding used cds cosing $8 or there bouts...
Remember, used CD stores main income is selling used cds. And they have to pay about $3 or more dollars to the person selling it to them.
The place I shop at will give $5 for a good cd (say Radiohead or something like that, something that's in high demand and will sell) and then sell it at $8. Then for not so popular items they'll give more like $3 and sell for $6.
20 - Eric Olsen
It's rare to find a place that pays that much for used: the key is to buy low, sell high, like anything else.
21 - The Theory
heh, there is proly enough competition around here to drive it up that high.
22 - Phillip Winn
In my never-ending quest to actually procure documentary evidence of costs, I have found that anybody can produce copies of a CD for much less than a dollar. At Mixonic, you can get 10,000 CDs for $.76 or $.79 each with all of the assorted (limited) goodies most of us have come to associate with major-label CDs.
Interestingly, that same site provides the opportunity for you to sell your physical CD online, and they apparently feel that they can make a profit by charing $4 per album.
So any artist that wants to make their album for sale for $5 can do so there and pocket $1 per sale. Out of that $1 per album sold you'll need to finance the production of the album itself and cover all marketing costs, so maybe you might want to go with something a little higher, like $10. At $6 per album, you've got a better chance of paying back whatever loans you had to take out to finance the album.
What did that cost again? Let's say you did it on the cheap, using your PowerMac and a modified garage. Let's say you hired a local producer whose claim to fame is something obscure but still very cool. Let's say you've already got decent instruments and get by on the really cheap, and spend $5000 to produce the album.
So that's 5,000 sales to recoup your production loan(s) at $1/sale (hitting our $5/album goal), or only 1,000 sales to recoup your production loan(s) if you sell the album for $9/album (earning $5/album profit). You can sell 1,000, right? Well, after you spend just a little more on advertising, which means you'll need to sell a few more.
And on and on it goes. I don't see a magic bullet, Eric. I think it can be done more cheaply, yes, but there is a reason why it normally isn't: It will be hard. Even the indies charge $10. Strike that. Especially the indies charge more. I've paid $18 or more for an smaller-label release I really wanted, while I can get pretty much whatever I want from the major labels for around $10.
This stuff ain't free, and it ain't even cheap. If a major studio could put out an album after spending only $5000 in studio, there would be more room for profit for the artists, or a lower CD cost for us. But then again, it wouldn't sound like what we expect from the major labels, either. And even then, according to Albini, what would really be saved? $145,000? Out of a budget of millions?
Sigh.
23 - Tom Johnson
I think it's important to keep in mind Dischord Records (http://www.dischord.com/ - the home of Fugazi, among others,) whose full-length releases are no more than $10 for a single disc, complete with full-color artwork, etc. They're known for being frugal, but they do still have to turn a profit in order to stay in business.
I think $10 is totally manageable by the majors. If a tiny label like this can do it, the majors can too - and they've got more resources at their disposal, which will help keep prices down.
$10 is the magic number, I'm betting. There'll be a big response if the retail price hovers around $10 - and stays there.
24 - Eric Olsen
My guess is that they would sell MORE than twice as many if the price hovered around $5.
25 - Phillip Winn
Tom (#23), I like $10, too. I think it's a reasonable balance, and it just feels right.
Eric (#24), if I sell a good for less than it costs me to produce it, I'd like to sell fewer of them, not more. After all, GM would sell many, many more cars if they would just cut the prices by 60%!