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The Economics of Making Music
How Artists, Labels, Ticket Brokers & Everyone Else Makes Money in the Music Industry


Behind the music

Why create music? The art of song is a powerful way to connect with listeners and an irreplaceable outlet of expression for musicians. But for those looking to make a career out of their passion, the music industry is a ruthless business, with only a tiny percentage ever reaching the levels of superstardom.

For many, music is simply a hobby because the financial demands are too much. Others struggle to chase their dreams despite the financial challenges. The few that make it big are often forced to battle record labels, music retailers and digital media in order to stake claim to what is rightfully theirs.

The shift to digital downloads

Digital Sales
In 2012, for the first time ever, U.S. digital music sales are expected to surpass sales of CDs and vinyl albums. It was by the narrowest of margins, but according to Boston-based Strategy Analytics Inc., digital sales are expected to reach $3.4 billion this year, while CD sales are only expected to reach$3.38 billion. This trend is likely to continue, as digital sales are expected to set the global benchmark by 2015.

The uptick in digital sales is credited primarily to the increase in streaming music services from companies like Spotify LTD and Pandora Media Inc., coupled with downloads from services like iTunes. Digital music sales now account for 41 percent of all music sales in the U.S. (Image via FutureofMusic.org)

Download services like Napster and iTunes have revolutionized the way consumers buy music. Some companies have profited immensely, while others have refused to embrace the digital marketplace and technology. Musicians who are just starting out may find the internet to be the optimal place to stake their claim in the industry.

Downloading music is growing in popularity thanks to the rise in devices like iPods and smart phones. iPods are often smaller and easier for consumers to transport for jogging and other activities. But for artists, the increasing popularity of downloading music can mean less profit. Proceeds from downloads must be split among band mates and with the artist's record label. Streaming music is a very small portion of a musician's income; most comes from selling CDs and touring.

Musicians will need to be creative as digital sales continue to rise, finding alternative ways to encourage the sales of more profitable products. For instance, selling autographed CDs while on tour gives fans an incentive to make a purchase they otherwise wouldn't. Most music fans are aware that musicians profit more from CD sales than downloaded tracks. In some cases, fans will opt to purchase physical CDs out of appreciation and respect to help support their favorite musicians.

Who's getting paid and how much in the music industry.

Image via MinorityFortune.com

Dollars and cents: The download pricing breakdown

The Cynical Musician breaks it down in terms of U.S. minimum wage, currently $7.25. Based on a 40-hour work week and four weeks in a month, the monthly earnings for a minimum-wage employee would equal $1,160. The same amount of income would require 1,813 downloads per month on iTunes. Justin Bieber's song "Boyfriend," for instance, is the fourth best-selling download of all time. His record label collected $390,000, iTunes received $200,000, and Justin earned $83,000 from downloads of the song.

Some musicians aren't fans of programs that allow consumers to download music. Pete Townshend of The Who made headlines in 2011 when he blasted iTunes in the media, calling them a "digital vampire." According to The Huffington Post, Townshend believes that iTunes "profits from music without supporting the artists who create it."

Recorded music sales

Image via Fluid Design

Streaming music earns less than a cent for artists

Streaming is expected to soon be the most popular way for consumers to acquire music tracks. Consumers pay a monthly fee and have unlimited access to any songs they want to listen to. However, music on programs such as Spotify, Rhapsody, or Pandora results in less revenue for a musician than downloads. A survey done by the Future of Music Coalition reported that musicians aren't seeing any money from streaming or it's such a small amount that it almost doesn't count in their yearly profits.

Spotify pay out per stream

The current payment per stream is € 0.004 (about $ 0.005). Image and data via Spotidj.com.

TechSpot reports that, in general, artists earn less than one cent per stream. Some of the revenues received from famous artists may also be a mystery because the service and artist are unwilling to share the terms of specific deals. The numbers get even more confusing when comparing services like iTunes Match and Spotify, as iTunes Match merely allows consumers to stream songs they've purchased outright from the cloud, while Spotify enables streaming of tracks not owned by the consumer.

Artists pay distribution services like TuneCore a yearly fee to enable the streaming of their music. To break even on the cost of a $50 yearly distribution fee, an artist would need more than 15,127 plays on iTunes Match or 5,171 plays on Spotify, a difficult feat for lesser-known bands who don't have millions of fans.

CD sales offer better revenue

Physical retail sales
CD sales are a much more profitable avenue for most artists. Independent musicians can produce and sell their own CDs and keep all the profits, but signing with a record label can be advantageous for boosting audience reach, ultimately resulting in more sales. Profits earned from each CD sale vary based on the label and specific contract terms between the label and musician.

Musicians receive an average of $1 for a $10 retail CD sale after signing with a major record label. A regular record label may only pay the musician 30 cents, which may have to be split among band mates. The artist takes the smallest amount of profits from album sales, and because it's not free to create an album, some of what appears to be profit usually goes to paying the record label. (Image via FutureofMusic.org)

Some musicians don't write their own songs; therefore, they also have to pay a percentage of each copy sold to the songwriter. Just over one cent for every copy sold is often split between the songwriter and publisher. Retailers actually get the biggest slice of the pie from album sales.

When an artist signs with a record label, they typically have tracks that they've already recorded. Recording programs, such as ProTools, have drastically cut down on recording costs. Recording programs make it easier for new talent to get heard and old talent to keep record label advance money. However, musicians don't get their money back for tracks recorded prior to getting the record deal.

Once an artist reaches stardom, they then have more leverage with their record label. After she sold 10 million copies of "The Woman in Me," Shania Twain's record label, Mercury Records, offered her 40 percent of the profit if she was able to finish her next album by a deadline. This increased Twain's revenue by $10 million and also boosted the label's yearly profits.

Believe it or not, vinyl records are still alive and well today. Thanks to a culture shift embracing vintage and classic goods, vinyl sales actually increased in 2011 - and by a shocking 39.3 percent.

Vinyl sales

Image via Digital Music News.

YouTube and Vevo

In addition to free streaming services dedicated to music, like Pandora, YouTube and Vevo have music videos completely free to anyone with an internet connection. YouTube was initially plagued by lawsuits, but eventually they obtained licenses from all the major recording labels and publishers.

YouTube partnered with Vevo to add legal music videos to YouTube. YouTube hopes that this partnership will bridge the gap between the music and digital industries, which has been a source of great conflict to date. But not all artists are resentful about downloads and other technology. Courtney Love, for instance, believes that any venue that allows fans to hear her music is positive, instead placing the bad-guy rap on the record labels.

Touring remains the most profitable stream

Touring can be exhausting for musicians but has proven to offer the biggest bang for the buck in terms of artist revenue. Record labels have started forming "360 deals" with new artists, allowing them to take a percentage of concert revenue, merchandise sales and endorsement deals - items which used to be off limits to them. The label is typically more invested in the artist in this case, and therefore more inclined to offer support to the artist in all career aspects.

Performance Pay

Image via The Big Picture.

For instance, John Mayer selling 15,000 concert tickets at $50 each will result in $750,000 in ticket revenue, guaranteeing him $200,000 to $300,000. Most artists make an average of three to four dollars per head in merchandise sales at concerts, adding another $60,000. If he sells out, he will also get a 50/50 split on the back end. So Mayer could potentially make $560,000 just in one night.

Don't forget about all the expenses that must come out of that revenue though. When artists first sign a record label contract, the label gives them a check. But artists tend to forget about the overhead expenses they have to cover with those funds, and some artists end up in financial ruin because they spend the money fronted to them before covering the necessary costs.

Even musicians can go bankrupt

Some music lovers are surprised to hear news of their favorite artists going bankrupt, but it does happen - and not always because the artist went on a wild spending spree. Bankruptcy is one of musicians' only defenses against bad record contracts.

Despite TLC's overwhelming success as an R&B group in the 90's, they were for forced to file for bankruptcy due to the massive overhead costs they weren't able to pay. They earned less than 2 percent of the $175 million dollars generated by CD sales - about 40 times less than the profit that was divided among their management, production and record companies. Likewise, Toni Braxton declared bankruptcy in 1998 after generating $188 million dollars from CD sales; her record contract paid her less than 35 cents per album.

Every recording embodies two copyrights

The Goo Goo Dolls have generated $2 million in album sales, but filed bankruptcy because they owed so much money to their record label. Bankruptcy has become increasingly common over the years, even with many successful musicians. Even Jerry Lee Lewis and Michael Jackson, both members of the Rock and Roll Hall of Fame, have filed bankruptcy.

Sometimes legal troubles, debts or taxes are to blame for famous musicians filing bankruptcy. Other times; however, it is simply a way to get out of a contract. The Recording Industry Association of America (RIAA) is lobbying to change bankruptcy laws, making it more difficult for artists to file bankruptcy for the sole purpose of getting out of a contract. (Image via FutureofMusic.org)

Musicians enter the record label industry

Because of the hefty percentages record labels make on album sales, some musicians have decided to take matters into their own hands and start their own recording labels. Sean "Diddy" Combs was an unpaid intern at Uptown Records and quickly climbed to A&R executive. After being fired from Uptown, Diddy started Bad Boys Entertainment, signing the likes of Notorious B.I.G and Faith Evans, putting Bad Boys on the map. Bad Boys is now a subsidiary of Universal Music Group and is distributed by Interscope Records.

Who's earning money - three roles or more

Image via FutureofMusic.org

Prince has always been an artist who thinks outside the box. In addition to his one-of-a-kind style and intense creativity, Prince was the first artist to sell his own CDs on the Internet for $50. He also started his own record label, NPG, after being signed with Warner Brothers for 20 years of his career. When he wanted out of his contract because Warner Brothers failed to release some of his material, he didn't take the bankruptcy route. Instead, he recorded an astonishing five albums in two years to meet his end of the deal, enabling him to move on.

Many artists who have started their own label have worked on the other end of the musician-label spectrum, and therefore know many of the sticking points that typically cause conflicts between the two parties. Musician-run record labels are often favored by new artists, because they're perceived to treat their talent the same way they'd like to be treated as an artist. Fellow musicians also understand what goes into the creative process of making music, so these partnerships are often successful because of the combination of creative talents.

The Recording Artists' Coalition

The Recording Artists' Coalition (RAC) was created by Don Henley and Sheryl Crow in 2000 to address legislative issues facing musicians, as well as contract reform, media consolidation, and artist compensation. RAC represents artists and defends their rights and interests, supporting the repeal of laws that tie artists to their record labels for seven years. The organization has also successfully repealed supposed "technical revisions" that shifted American copyright statutes from artists to record labels.

Record labels fight back

It seems counterintuitive that so many aspiring musicians dream of being signed by a major record label considering the bad rap that labels have gotten over the years. But record labels do offer something significant to musicians: The marketing know-how necessary to turn unheard-of artists into overnight sensations and the ability to make risky financial moves that can skyrocket a musician's career.

Of course, not every artist who lands a major recording contract becomes successful, but their chances of doing so are far greater than when going it alone. Record labels actually lose tons of money every year on failed musicians; in fact, only one in ten acts will ever turn a profit for the label. It costs around two dollars to make and distribute a CD; marketing it costs three dollars for a hit record and ten dollars for a failure.

US Recorded Music Revenue 2011

Image via Business Insider.

The record labels also have their own version of RAC, the Recording Industry Association of America (RIAA), which represents record labels and distributors in the United States. The members of RIAA are responsible for distributing, creating and manufacturing 85 percent of all legally sold music, as well as certifying Gold and Platinum albums and singles in the United States.

There are many avenues for musicians to make money. Touring, album sales, and merchandise are the primary sources of profit for artists. Some artists become entrepreneurs and decide to own their own record labels, maximizing their profit potential and providing another outlet to utilize their creative skills by helping other aspiring artists on their way to success. Streaming and downloads may only account for a small portion of total revenue, but this technology gets the music out there to the people who are really funding the music industry as a whole: The fans.

Additional resources:

http://www.themusicvoid.com/2010/04/the-economics-of-making-money-as-an-artist-in-the-digital-world%E2%80%A6/

http://www.investinganswers.com/personal-finance/rich-famous/who-really-profits-your-itunes-downloads-3818

http://www.digitalmusicnews.com/permalink/2012/120213streaming

http://minorityfortune.com/liabilities/how-much-musicians-really-make-in-the-industry-part-i/

http://www.businessweek.com/news/2012-08-15/spotify-pandora-spur-u-dot-s-dot-digital-music-sales-past-cds