With artists still vying for a better deal when it comes to their music being sold on platforms like Spotify and Google Play as well as through traditional methods of physical sales, we looked into how record labels really make their cash.

Record companies have always made money by marketing and investing in their artists and affiliated products. This covers physical products such as vinyl, CD’s and merchandise as well as digital streams where music is sold and licensed digitally.

It’s a tricky subject and one that seems to be changing on a daily basis. Earlier this year The Songwriter Equity Act was reintroduced to Congress in the US regarding section 114 and 115 of the Copyright act with the goal to achieve better rates for songwriters. This act aims to create a fair market royalty rate for streamed or downloaded music as well as updating the current music licensing system.

The American Society of Composers, Authors and Publishers President Paul Williams said the act represents an important first step toward updating an outdated music licensing system that treats songwriters differently than other copyright owners and prevents us from earning a fair market royalty rate when our music is streamed or downloaded online."

So things are changing but not quite yet. Diane Rapaport’s book titled 'A Music Business Primer' was published back in 2003 and took a look at the long-standing music business model, which is currently in contention. Being published almost 12 years ago, her model doesn’t take into account the new era of music streaming services like Spotify and Jay-Z’s Tidal, but it does give an indication as to how costs are broken down. They are as follows:

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1. Recording Costs

For smaller labels, recording costs average US$15k per album. For large labels, the average can be from $100k to $500k and up. The artists bear this debt, which is repaid from royalties.

2. Manufacturing Costs

Large labels pay about $0.50 to $0.55 per CD on orders of 100,000 or more. Labels that buy less than 10,000 CDs per year pay approximately $1.20 per CD.

3. Royalty Costs

Record labels pay two royalties: one to artists, and another to composers & publishers. Artists can receive 10% – 15% of suggested album retail minus packaging costs. Composers and publishers receive 30% or more.

4. Promotional Costs

Promotional costs include advertising, radio promotion, music videos, touring and more. Most of these costs are recouped from artists’ royalties, depending on contractual agreements.

5. Distribution Costs

Record companies decide on how much an album will cost, then they give a wholesale price to a seller. If an album sells for $16 retail, the distributor most likely paid about half the retail price.

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. This means that record companies really are taking a risk when they look to back an artist and part of the reason why companies like Soundcloud have done so well.

The Soundcloud/Myspace model allows users to develop a following for almost zero investment. Social followings are looked at closely by record and touring companies to help identify a potential market for an artists work. So when you hear about an artist being signed to Future Classic off the back of a Soundcloud upload, it could very well be true – although extremely rare.

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The current business model – Who gets the lion’s share?

The Music Business Worldwide site uploaded the details on a new report put together by Ernst & Young with the French record label trade group SNEP, concerning where the money from streaming services Deezer and Spotify ends up and yes it's not with the artists. Here's the overall share of the 9.99 Euros that people pay for a premium account on these services (Graphs care of techdirt):

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As you can see, the labels get the lion's share, with songwriters/publishers splitting 10% and the performers getting less than 7%. And, if you look at the specifics of the actual post-tax payout, you can see the contrast more starkly:

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What the industry says

The people who really know how record labels make their cash are ultimately the people who work at the labels themselves. And guess what, they are not very forthcoming when asked how they make their money. Luckily Recording Connection managed to get a bunch of producers to explain some of the business approaches labels take to turn a profit including producers who have worked with the likes of Beyoncé, Florence & the Machine and Dr Dre. Here is what they had to say.

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Rick Camp, RC1 Productions & Master Mix Live
Worked with the likes of Jennifer Lopez, Beyoncé, Mary J. Blige, Kelly Clarkson, Usher, Dr. Dre, Earth Wind & Fire.

“Record labels make their money off of selling records, but there’s all kind of royalties that the record company collects when a record is played, and that’s how they make their money. When every time a record is played on the radio or sold in a record shop, or sold online now they get a percentage of it, the artist gets a percentage of it, the writer gets a percentage of it. ”

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Cameell Hanna, Serenity West Recording
Worked with the like of Justin Timberlake, Adele, Florence & the Machine, Eva Simons, Wiz Khalifa, Snoop Dogg.

“They make money the way they have for years . . . off of the exploitation of the recordings themselves, and there’s a million ways that is exploited. So, now they make money off of every aspect of an artist’s career. There’s a deal type that’s been around for a while called the 360 deal, which means that they participate in all aspects of an artist’s career, like touring, merchandising, etc.

“So, you, as a label, are now making money off of pretty much every action an artist takes that involves getting income. A 360 deal is sort of the standard operating understanding in most labels, when you’re talking about a major label. You are going over to Interscope, and you’re signing a deal, and you’re like, “I’m going to be the next Justin Bieber.” You’re going to be signing a deal like that, where they participate in everything, including every T-shirt you sell. They’re going to have their own piece of that. It’s a giant markup on merchandise. A lot of people have made more off of the things surrounding the music than the music itself.

“So, they . . . The labels have always figured out ways to get a piece and keep it moving.”

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Mike Johnson, Clear Track Recording Studios
Worked with the like of John Legend, Jeff Berlin, Boyz II Men, The Roots, Alice Cooper, U2, Madonna

“Record labels make their money on sales, touring, merchandise, anything they could sell that has the bands . . . the band or artists name on it.”

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Zach Phillips, Freq Lab Recording
Worked with the like of The Kooks, Talib Kweli, Dnae Beats, Jayleez, J-Banks, The Game, Alice Russell, Comedy Central.

“Here is an over simplified answer to a complicated question. Record labels make money when their music is purchased or licensed for use. When an artist gets signed to a label they get money, called an advance, to make a record. When the record is released the label keeps all the money until they have recouped their expenses, which includes the advance, recording costs, promotion and legal fees. After theses costs have been covered, the label then keeps a percentage of record sale profits. The increasingly popular 360 deal works quite a bit differently. In the 360 deal the signed artist and the label become “business partners” in all endeavors, meaning that the label gets a cut of any profits the artists make, even those not related to records sales.”

If you wanted to hear it from the horses mouth, Recording Connection produced this audio file aptly uploaded to Soundcloud.

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