Playback and payback series; (part 22) How the Indies are eating the majors’ lunch (I)

Consider the infrastructure of a major record company, as laid out in earlier articles. On the profits from less than 7 percent of its releases, a major record company needs to support its front office operations – officers, promotion people, A&R people, in-house counsel, publicists, etc., not to mention the space to house them in New York, Los Angeles, and Nashville as well.

Then there are the back office operations, the sales and distribution nodes (and local promotion people) located all across the country. A major record company will employ thousands of people, all supported by less than 7 percent of the titles on which they work.

The owner of an independent label and a music business expert sat down with a group of potential students interested in the music business program at a New York City college, where they both taught. The evening had gone from an introduction of the courses to a seminar on the music business.

The company president taught the class about running an independent label. His own label would sign artists, often ones who had toiled and boiled on the roster of major labels only to fall into the 93 percent that did not sell enough copies to break even, perhaps moving between 50 000 and 125 000 CDs. The exposure garnered by the labels, however, expanded the fan bases these artists enjoyed. So the president of this indie label would sign them, agreeing to split all profits 50/50.

How does this arrangement compare to the royalty system used by the major labels? Let’s do the math. Suppose that at a major label, an artist receives a $125 000 advance against royalties with which to record an album. That artist sells around 125 000 copies at, perhaps, a “15 percent of 90 percent” royalty rate (many labels still figure in the pre-1950s glass-and-lacquer disc breakage allowance in their contracts). The company figures the royalty based on a price of nine dollars:

1. 125 000 CDs at $9 each = $1 125 000 (the gross income from the CD)

2. $1 125 000 gross income on the CD multiplied by the royalty rate of (0.15 * 0.9) = $151 875 (the gross income of the CD multiplied by the royalty rate multiplied by the breakage allowance)

Now, this doesn’t look too bad. The artist got an advance of $125 000 and seems to have recouped it and made $26 875 in royalties. But that’s only part of the story. As producer Steve Albini outlined it:

So the artist pulled in $151 975. Subtract both the advance of $125 000 and the budget overage of $7 250 (i.e., $132 250), and the band actually realised $19 625 – not too bad – in fact far better than most. For example, if the band had sold 25 000 pieces less (and remember, as we established previously, only one album in about 15 to 30, depending on the year, achieve those kinds of sales) and the figures look very different:

1. 100 000 CDs at $9 each = $900 000 (the gross income from the CD)

2. $900 000 gross income on the CD multiplied by the royalty rate of (0.15 * 0.9) = $121 500 (the gross income of the CD multiplied by the royalty rate multiplied by the breakage allowance)

For the sake of argument, we’ll assume the band had roughly the same expenses. If the artist netted $121 500, and we take away both the advance of $125 000 and the budget overage of $7 250 (i.e., $132 250), the band still owes the record company $10 750 before it can collect one dollar of royalties. Nor does that take into account contractual withholdings like a percentage for reserves against returned CDs and other items. It may take years for the artist to actually see the royalties on that money.