How Record Companies Make Money

SOURCE: musicclout.com

How important are record labels?

Behind every great artist, there's a music label backing everything they do and promoting all of their stuff. But how responsible is a label for an artist's success? This article from Taxi.com seems extremely credible because it is taken from a published book about the music industry by Diane Rapaport.

This article basically explains how record labels make profit from their artists. The music industry is very competitive as we know and is extremely difficult to get into so music labels must be wise with their spending towards an artist. The article reports that, "approximately 90% of the records that are released by major recording labels fail to make a profit," so when signing an artist, they must be confident that the artist will make a profit.

The costs that a record label are responsible for are recording costs, manufacturing costs, royalty costs, promotional costs, and distribution costs. These things are all necessary when they decide to sign an artist. First, recording costs are generated only by the artist for making their record. The label, however, a majority of the time gives loans to the artist to cover some of their costs because making a record is expensive and can cost tens even hundred's of thousands of dollars. Manufacturing costs are the costs generated from actually producing and making the physically copy of the record. This is generally between 50-65 cents per CD. 

Next are the royalty costs. These are the expenses paid to the artist and composers and publishers for making the music. The artist receives either a percentage of the suggested list retail price (SLRP) or based on the price sold to distributors. Finally, there are promotional and distribution costs. Promotional costs are generated for actually advertising the artist. Labels usually dedicate between 10-20 percent of their budget to marketing the record. And when the record is all done, the label gives the final product to a distribution company and marks a price on it. When all is said and done, did the label make a profit or not?

I thought this article was really interesting because it shows all the steps a record label takes when marketing a new artist. Labels are important to an artist. They boost the popularity and take care of a lot of the behind the scenes stuff that the artists don't usually take care of. But, as we saw in the last article I looked at, labels and companies like Pandora and Spotify that advertise their music make the majority of the money while the artist themselves does not. I think there should be more of an emphasis on the artists receiving more of the profit than labels and other companies that distribute the music.

1. What is the step by step process into making a record?
2. Are record labels as important as the artist themselves?