How Record Companies Make Money
By Diane Rapaport
Record companies make money by selling recordings. It is a high-risk business. According to the Recording Industry Association of America (RIAA), approximately 90% of the records that are released by major recording labels fail to make a profit.
Independent labels have to be more careful in their choices and in their allocation of expenses because they do not have the resources to cover many failures. However, they can make and promote records for far lower costs than major labels and be profitable with far fewer sales.
The budgets for making and selling recordings are tied to what labels estimate they will sell. Knowing how many ...view middle of the document...
Record labels pay two royalties: The first is a record royalty to the performing artist(s); the second is a mechanical royalty to composers and publishers.
Some companies pay record royalties on a percentage (8% to 16%) of the suggested list retail price (SLRP) less a packaging cost, generally 15% to 25% of the SLRP. Others base royalties on the wholesale price to distributors. For a CD with an SLRP of $16.98, a common packaging deduction of 25% is $4.25 and the amount paid to the artist will be calculated as a percentage of $12.73. Thus, at a 10% royalty, artists will receive $1.27; at a 14% royalty rate, $1.78.
Record labels pay composers and publishers mechanical royalties. They try to cap mechanical royalty budgets at ten songs payable at 75% of the statutory rate ($.80 per song in 2002), which equals $.60 per song under the controlled composition clauses of recording contracts.
Major labels budget approximately 20% of annual gross income for promotion and selectively allocate the funds according to sales projections for each artist. Independent labels generally budget 10% of projected gross sales of all recordings annually and selectively allocate that budget.
Promotional costs include designing and printing promotional and packaging materials for recordings; press kits and Web sites; and advertising, radio promotion, videos, public relations and mailing costs. Some or all the costs for packaging, video production and radio promotion may be recouped from artists’ royalties, depending on contractual agreements.