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Thursday, September 23, 2010

Indie Record Label Economics

It seems the way money flows at a record label is largely a mystery to most artists who haven’t worked in the music industry for an extended period of time. It’s always interesting to lift the veil a bit on an unknown. Let’s take a look at one side of the economics of an indie record label, getting a new release to market. What They'll Never Tell You About the Music Business: The Myths, the Secrets, the Lies (& a Few Truths)

Below is a summary of the actual expenses an indie record label incurred for a new release: 

Recording advance: $15,000
Tour support: $2,100
Mastering costs: $934.96
Marketing: $13,433.23
Advertising: $2,067.50
Publicity: $5,153.34
Manufacturing: $16,581.04
Artwork / photos: $200
Misc: $587.71

Total: $56,057.78 

Here is an overview of each of the line item in a little more detail: 

Recording Advance – The money for the recording advance is used to cover the cost of recording. Including studio rental, mixing, session musicians, sound engineer and producer. 

Tour Support – Artists have traditionally sold more overall units when they tour so record labels will often times financially support a tour. Tour support money can help pay some of the expenses of touring such as gas, insurance, hotels, food and supplies. 

MasteringMastering is a post production process that takes the final mix of the recording, edits minor flaws, adjusts volume and stereo widths, equalizes tracks, etc. It’s usually expected that the person who masters the recording will be different from the person who mixes it so there is typically a separate line item in the budget. 
MarketingThe marketing line item is entirely for retail co-op marketing expenses. Co-op marketing dollars are expenses distributors incur from retailers for special product placement, in-store promotions, listening stations or advertising. The amount of co-op marketing dollars the distributor (and ultimately the label) are willing to spend on a new release has a direct correlation to the amount of product the retailer orders. 

AdvertisingAdvertising expenses can include any print, radio and online advertising the record label incurs to promote a new release (outside of retail co-op dollars). 

PublicityIt’s fairly common for a record label to hire an independent publicist for a 90 day period to help promote a new release to press, print and online media, bloggers and anyone else who can help influence music fans. 

ManufacturingThe manufacturing costs for a CD with jewel case can vary but is still around $1.00 per unit for a distributor or label with measurable volume.

Artwork – The cost of custom creative and / or photos for the release. 

Miscellaneous – Just like the name implies this is the catch “everything else” expense category related to a new release. For example, legal fees or video production expenses charged to a new release could end up here. 

For this particular release to break even it must generate $70,072.23 in gross sales ($56,057.78 + the 25% fee of sales paid to the distributor ). The typical deductions a distributor takes on sales including return reserves and breakage (to name a few) further impact cash flow on sales back to the record label. 

It’s important for artists to fully understand how the basic economics of an indie label work since they will not get paid any royalties from sales until the record label recoups all the expenses incurred in getting the record to market. This is true of both traditional record label agreements and even “50/50” licensing agreements. It is very common for artists to never receive royalties on sales from their record label since many new releases never fully recoup their expenses. 

Being signed to a record label is no guarantee of sales success. Artists need to carefully weigh what a record label is going to spend on a new release to determine the level of sales that will be needed to achieve profitability before signing a recording contract. Even though the artist might sell a lower number of units on their own there is a very real chance they can actually earn more money without a record label being involved.  

Most indie record label owners are simply trying to get music they love heard by fans. They aren’t in it for the money. In addition to the above mentioned costs of getting a new release to market they have to cover multiple other expenses such as insurance, rent, payroll, travel and mechanical royalties . Making money as an indie label is no easy task. Needless to say, label owners give it a great deal of consideration before signing a new artist and committing to releasing their music. 

It does take a lot of money and resources to get a new release to market. However, real transparency in accounting for these expenses is still largely lacking. Inevitably this leads to conflict between the record label and artist around recoupment of expenses and payment of royalties. Hopefully, as artists better understand the economics of record labels they will be able to make more informed decisions about when it makes sense to sign with a record label and when go it alone. 

Mr. Dangerfield is an I.A.P.D.A Certified Debt Specialist whom has worked in the finance industry for over a decade. He manages , is the author of "A Dangerfield Manifesto" and co-founder of SMG Holdings, the parent company of Squad Music Group, Dangerfield Artistic Entertainment,SMG Publishing and Taboo Dangerfield Publishing Follow me on twitter 

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