This morning I read a very interesting article by Music Attorney Dina LaPolt, who represents some high profile clients like Steven Tyler. In part, the article states as follows:
Besides marketing yourself and working on your tours, you must also understand the issues that will come up once you do get offered a record deal from a major, as well as how much money you can expect to make from each CD sold.
First, you need to understand some of the common terms that are used in the music industry and some of the customs that govern the industry today. Listed below, these industry customs are “standard industry practice,” meaning: They cannot be changed no matter how successful you are or no matter how powerful your lawyer is.
SRLP: “Suggested Retail List Price” which is the top line price a CD is sold for in stores. Currently, the SRLP is $18.98.
Producer Royalty: All producer royalties are deducted from the artist royalties, meaning the artist pays the producers, not the record company. A producer usually gets a 3% producer royalty (or “3 points”) (pro-rated with all the other songs on an album) which is deducted from the artist’s royalty.
Packaging Deduction: Major record companies always deduct 25% from the artist’s royalty for “packaging” each CD.
CD reduction: Major labels consider CDs to be “new technology,” so they very rarely pay an artist on 100% of all CDs sold (for a new artist, they usually only pay 80% to 90% of all CDs sold). So, if a record company is only paying artists on 80% of CD sales then the artist is basically only getting paid for 80 out of every 100 CDs that the record company sells.
Artist Royalty: A new artist will probably be offered a royalty of 15% (or “15 points”). So, if an artist gets 15% and the producer gets 3%, then the artist is really only getting 12% (because the producer’s royalty is deducted from the artist royalty).
Unrecouped: Artists hate this word. It means that you have not paid back all the money that the record company has laid out for you. HOWEVER, the way it works is WHACKED. Typically, if an artist is paid a 15% royalty then the record company pays itself back $0.15 for every $1.00 that they bring in. Thus, it keeps the remaining $.85 per every $1.00 as an immediate profit. GET IT?? The record company only credits the artist’s royalty account with $0.15 per $1.00 until the artist pays back the $500,000 the record company spent at the $0.15.
So, hypothetically, if a record company spends $500,000 on an artist’s record and they allocate the artist a royalty of 12% (which is the 15% less the 3% producer royalty) then the record company has to make approximately $4,000,000 before the artist is even in a recouped position!
Penny Rate: The actual dollar amount that is paid to the artist for every CD sold (when they refer to it as a “penny rate” they ain’t kidding!).
Determining Your Record Royalty Penny Rate
Now that you understand the terms and concepts above, below is how the major labels calculate the artist’s royalty rate per CD sold which, in turn, becomes the “penny rate” that is paid to the artist.
Single CD Record Company Royalty Formula
$18.98 (the “SRLP” ) x 12% (the total artist royalty of 15% less the producer royalty of 3%) x 75% (the packaging deduction remainder ….remember 25% off for every CD sold) x 80% (the CD reduction) = $1.37 per CD!
You do the math. Hypothetically, if Big Head Todd and the Monsters were only making $1.37 per album less their recording costs (which includes their advances and probably 50% of all marketing, promotion, and video costs totalling, let’s say, 1 million dollars), then note that Big Head Todd will have to sell 729,927 albums before they even end up inrecouped position (i.e., $1,000,000 in recording costs divided by their net artist royalty rate of $1.37 equals 729,927 albums). However, please note that, although Big Head Todd would technically not make any money if their record sells 729,927 units, the sale of their album will have generated approximately 13 million dollars in record sales! For the full article, visit “Music Business Microscope”.
We haven’t event talked about iTune sales. For another day.
But, check out this song called “Jimmy Lovine” that sends the major labels to their grave.
Here are some of the lyrics, and see video below.
“Now I’m sorry, I’ve had a long day
Remind me, now what’s your name?
That’s right, Macklemore
Of course, today has been crazy
Anyway, you ready?
We’ll give you a hundred thousand dollars
After your album comes out we’ll need back that money that you borrowed
So it’s really like a loan
A loan? Come on, no
1-2, 360 degrees, we will reach your goals
You’ll get it done in the merch that you sell out on the road
Along with the third of the money you make when you’re out doing your show
Manager gets 20, booking agent gets 10
So s**t, after taxes you and Ryan have 7% to split
That’s not bad, I’ve seen a lot worse
No one will give you a better offer than us
I replied I appreciate the offer, thought that this is what I wanted
Rather be a starving artist than succeed at getting f***d”
Click for full lyrics.