RIAA Accounting: Why Even Major Label Musicians Rarely Make Money From Album Sales

tech dirt ^ | Jul 13th 2010 | Mike Masnick

[a fool in paradise]

from the going-behind-the-veil dept

We recently had a fun post about Hollywood accounting, about how the movie industry makes sure even big hit movies "lose money" on paper. So how about the recording industry? Well, they're pretty famous for doing something quite similar. Reader Jay pointed out in the comments an article from The Root that goes through who gets paid what for music sales, and the basic answer is not the musician. That report suggests that for every $1,000 sold, the average musician gets $23.40. Here's the chart that the article shows, though you should read the whole article for all of the details:

Source: TheRoot.com
Of course, it's actually even more ridiculous than this report makes it out to be. Going back ten years ago, Courtney Love famously laid out the details of recording economics, where the label can make $11 million... and the actual artists make absolutely nothing. It starts off with a band getting a massive $1 million advance, and then you follow the money:

What happens to that million dollars?

They spend half a million to record their album. That leaves the band with $500,000. They pay $100,000 to their manager for 20 percent commission. They pay $25,000 each to their lawyer and business manager.

That leaves $350,000 for the four band members to split. After $170,000 in taxes, there's $180,000 left. That comes out to $45,000 per person.

That's $45,000 to live on for a year until the record gets released.

The record is a big hit and sells a million copies. (How a bidding-war band sells a million copies of its debut record is another rant entirely, but it's based on any basic civics-class knowledge that any of us have about cartels. Put simply, the antitrust laws in this country are basically a joke, protecting us just enough to not have to re-name our park service the Phillip Morris National Park Service.)

So, this band releases two singles and makes two videos. The two videos cost a million dollars to make and 50 percent of the video production costs are recouped out of the band's royalties.

The band gets $200,000 in tour support, which is 100 percent recoupable.

The record company spends $300,000 on independent radio promotion. You have to pay independent promotion to get your song on the radio; independent promotion is a system where the record companies use middlemen so they can pretend not to know that radio stations -- the unified broadcast system -- are getting paid to play their records.

All of those independent promotion costs are charged to the band.

Since the original million-dollar advance is also recoupable, the band owes $2 million to the record company.

If all of the million records are sold at full price with no discounts or record clubs, the band earns $2 million in royalties, since their 20 percent royalty works out to $2 a record.

Two million dollars in royalties minus $2 million in recoupable expenses equals ... zero!

How much does the record company make?

They grossed $11 million.

It costs $500,000 to manufacture the CDs and they advanced the band $1 million. Plus there were $1 million in video costs, $300,000 in radio promotion and $200,000 in tour support.

The company also paid $750,000 in music publishing royalties.

They spent $2.2 million on marketing. That's mostly retail advertising, but marketing also pays for those huge posters of Marilyn Manson in Times Square and the street scouts who drive around in vans handing out black Korn T-shirts and backwards baseball caps. Not to mention trips to Scores and cash for tips for all and sundry.

Add it up and the record company has spent about $4.4 million.

So their profit is $6.6 million; the band may as well be working at a 7-Eleven.

And that explains why huge megastars like Lyle Lovett have pointed out that he sold 4.6 million records and never made a dime from album sales. It's why the band 30 Seconds to Mars went platinum and sold 2 million records and never made a dime from album sales. You hear these stories quite often.

And note that those are bands that are hugely, massively popular. How about those that just do okay? Remember last year, when Tim Quirk of the band Too Much Joy revealed how Warner Music made a ton of money of of the band's albums, but simply refuses to accurately account for royalties owed, because the band is considered unrecoupable. Sometimes the numbers even go in reverse. If you don't understand RIAA accounting, you might think that if a band hasn't "recouped" its advance, it means that the record labels lost money. Not so in many cases. Quirk explained the neat accounting trick in a footnote to his post about his own royalty statement:

A word here about that unrecouped balance, for those uninitiated in the complex mechanics of major label accounting. While our royalty statement shows Too Much Joy in the red with Warner Bros. (now by only $395,214.71 after that $62.47 digital windfall), this doesn't mean Warner "lost" nearly $400,000 on the band. That's how much they spent on us, and we don't see any royalty checks until it's paid back, but it doesn't get paid back out of the full price of every album sold. It gets paid back out of the band's share of every album sold, which is roughly 10% of the retail price. So, using round numbers to make the math as easy as possible to understand, let's say Warner Bros. spent something like $450,000 total on TMJ. If Warner sold 15,000 copies of each of the three TMJ records they released at a wholesale price of $10 each, they would have earned back the $450,000. But if those records were retailing for $15, TMJ would have only paid back $67,500, and our statement would show an unrecouped balance of $382,500.

I do not share this information out of a Steve Albini-esque desire to rail against the major label system (he already wrote the definitive rant, which you can find here if you want even more figures, and enjoy having those figures bracketed with cursing and insults). I'm simply explaining why I'm not embarrassed that I "owe" Warner Bros. almost $400,000. They didn't make a lot of money off of Too Much Joy. But they didn't lose any, either. So whenever you hear some label flak claiming 98% of the bands they sign lose money for the company, substitute the phrase "just don't earn enough" for the word "lose."

So, back to our original example of the average musician only earning $23.40 for every $1,000 sold. That money has to go back towards "recouping" the advance, even though the label is still straight up cashing 63% of every sale, which does not go towards making up the advance. The math here gets ridiculous pretty quickly when you start to think about it. These record label deals are basically out and out scams. In a traditional loan, you invest the money and pay back out of your proceeds. But a record label deal is nothing like that at all. They make you a "loan" and then take the first 63% of any dollar you make, get to automatically increase the size of the "loan" by simply adding in all sorts of crazy expenses (did the exec bring in pizza at the recording session? that gets added on), and then tries to get the loan repaid out of what meager pittance they've left for you.

Oh, and after all of that, the record label still owns the copyrights. That's one of the most lopsided business deals ever.

So think of that the next time the RIAA or some major record label exec (or politician) suggests that protecting the record labels is somehow in the musicians' best interests. And then, take a look at the models that some musicians have adopted by going around the major label system. They may not gross as much without the major record label marketing push behind them, but they're netting a whole lot more, and as any business person will tell you (except if that business person is a major label A&R guy trying to sign you to a deal), the net amount is all that matters.

[kabumpo]

I’m not working with that kind of music. Again, this is not one size fits all. I’m not remotely talking about Lady Gaga.

You don’t know what you’re talking baout — you don’t know how much those bands are being paid, if they are meking a profit, or if they have tour support — so of what value is your information?

It is really irritating when people think that by clicking onto the internet they can come up with solutions to a business and field they are not in. Why don’t you tell me your field so I can find 2 second internet solutions for you?

[kabumpo]

You don’t get it at. The White Stripes went through a process and became huge. Once you are huge you can do whatever you want. I’m talking about groups that have awards and national recognition but who aren’t huge. It’s like the difference between being middle class and being Donald Trump.

[kabumpo]

I’ve been to Austin. I know some of these acts. I also know the venues. They don’t pay enough to cover the expenses of getting there. You have no idea what goes into setting up a tour. Many of these acts have corporate sponsorship and record label tour support.

[a fool in paradise]

The White Stripes toured and were on an out of state label before they “became huge”.

They didn’t even have a contract with their label so they could freely take their albums to Virgin and rerelease them under a corporate imprint (just as New Order had done before them).

Did the songs “suddenly become better” because the industry owned their copyrights instead of the performers outright?

Why did radio shun them for years before they “made it”?

“Wrong” label.

Yet that same label released records by Hole, Beck, RL Burnside and other.

[a fool in paradise]

Been going to shows in Houston and Austin for 20 years.

Your denials fall flat.

You said that bars don’t even charge covers.

[kabumpo]

thanks — next time, ask them how much it cost to rehearse the group for 3 weeks (that’s rehearsal space PLUS paying the band) how much it cost to get there, how much the hotel cost, and how the band is being paid.

People don’t mind paying for food and cars and clothing, but they think that music shoudl be free.

[kabumpo]

the record label pays for the publishing (the songwriter).

[kabumpo]

Amateurs do it that way. The world of professional music is not a hobby.

[kabumpo]

I said most or many bars/pubs don’t charge.
You may have going to the shows, but you don’t know how much the venues pay the bands and what the costs are. I have put together, booked and run several national tours. How many have you run?

[a fool in paradise]

I’ve done my share and known what others have dealt with.

The venues I know make enough on bar that the door (sometimes minus $50 for a soundman) goes to the promoter/bands to divide up. Not every show even has a promoter “outside” of the bar management.

$8-15 a head is common. Usually local/regional bands for support acts.

The labels put out the albums and get press for the records. Some labels like YepRoc and Bloodshot do more to hype their bands’ tours. But the ones I’ve seen are lucky to get generic posters from their label to send out to the venues.

[Mr. Blonde]

But through that process I’m sure they were filling club sized venues. People will go to see duos.

The Black Keys definitely were as I’ve seen them twice in one, soon to again.

And once you move it to trios, there are a lot of those who are successful and can fill all kinds of venues.

[Mr. Blonde]

But through that process I’m sure they were filling club sized venues. People will go to see duos.

The Black Keys definitely were as I’ve seen them twice in one, soon to again.

And once you move it to trios, there are a lot of those who are successful and can fill all kinds of venues.

[RobRoy]

>>Amateurs do it that way. The world of professional music is not a hobby.<<

I understand. That is why I said “softball” and not “baseball”. ;)

[kcvl]

We follow country music and love going to shows. I can’t imagine how hard it must be to put those together.

Keith Urban
Sugarland
Lady A
George Strait
Kenny Chesney
Gary Allen
Tim McGraw/Faith Hill
Zac Brown Band (my new favorite)
Brooks & Dunn
Martina

Are just a few we have seen several times

[kabumpo]

that still doesn’t account for getting there and lodging —
I know a musician who worked with Dizzy Gillespie for years. He had never been to New Orleans, and could never understand how it was that if N.O. was the birthplace of jazz, the most famous jazz musician alive never played there.
Anser: there isn’t a venue there that could pay for the show, even if a full house is assumed.
The cost of touring is enormous if you’re not high school students sleeping in your father’s band.

[kabumpo]

You don’t know how much money was poured into getting them there. You just have no idea. It’s thousands and thousands of dollars to make them marketable and to give them name recognition.

It’s as if you were to make a type of breakfast cereal tomorrow. You wouldn’t be able to get it onto the shelves of the stores without paying for placement.

[Mr. Blonde]

I never said there wasn’t money involved. I said people would pay to see duos.

[Mr. Blonde]

I never said there wasn’t money involved. I said people would pay to see duos.

[a fool in paradise]

You assume that everyone wants to be shelved in Best Buy and Target.

Some find a level of success in the independently owned stores from coast to coast.

Not everyone looks to Entertainment Weekly to see who Big Media is pimping as the flavor of the week.

And most of the indie labels don’t have the money to PAY their artists to go on the road.

[kabumpo]

Why do you assume that I assume that?
That is the opposite of what I want.
So you are quite wrong.
I am working with very original and unique artists>
But getting into the independently owned stores is
more difficult than getting into Target, and without
a concerted advertisng campaign is useless.
I know of several indie labels that give tour support.
You said that re booking national tours you’ve done “your share”.
How many is that?