How does a record contract work? The chart below shows the distribution of earnings for various levels of record sales, assuming a 500k advance to the band (recoupable out of the band's share of royalties), out of which the band must spend 250k to make the record. The royalties at $10/CD (wholesale) are split 85/15 between the record company and the band. This is a simplified picture: normally the record's producer would get a few percentage points as well (which would come out of the band's share), and the record company would incur additional costs (music videos, tour start-up costs), all of which would be recoupable as well.
The 85/15 split is meant to compensate the record company for their risk of potential losses. If the album goes platinum (a million copies), the record company does very well indeed... the band, not so much. In practice, given all the other recoupable record company expenditures, it is very unlikely that the band will see any money at all for the album beyond their advance, unless it is a truly colossal hit. But there are several thousand albums released per year in the U.S., and only about 30 of them go platinum. Most of them don't even earn back their advance, and disappear into the discount bins as money-losers for the record company.
Naturally, an established "big name" band is not going to accept an 85/15 split, as such a band is very likely to sell several hundred thousand copies even with an "off" record. The downside risk to the record label is near zero, and the split is adjusted accordingly.
What does all this have to do with downloading? First of all, the insistence of the record companies that they are just "defending the artists" by fighting downloading rings extremely hollow... they are defending *themselves*. Most artists earn the bulk of their income from touring and merchandise sales, where they get a much higher share of the proceeds. Only a handful of superstar recording acts are harmed by downloading - the rest are in the flat part of the blue curve and couldn't care less if their songs are downloaded or not - in fact they probably benefit from the increased exposure.
So, if downloading only hurts the big evil record companies, should we all start downloading with light hearts and clear consciences? I'm not sure. I'm beginning to think about the service that a record company still provides in an Internet world. We don't need them to manufacture and distribute a shiny disc for us anymore (and we don't need to pay Apple a 35 cent cut of a 99 cent song to ship us a few megabytes when bandwidth and disc space are too cheap to meter), but we DO (perhaps) need record companies for *filtering*. I live in a major city, and on any given weekend there are 100 bands plying their trade. The job of the record companies is to prowl these sweaty clubs, looking for the "good" bands and signing them to record contracts, fronting the money they need to make a professional-sounding record, and thereby increase the odds that this band will come to my attention. Even if I disregard all record company advertising, don't own a radio, and rely on word-of-mouth from my musically sophisicated peers to make musical discoveries, the chance that *they* will have heard of the band in the first place is greatly increased by the intervention of the record company. Is that worth something to me?
The reward the record companies get for this service are the windfall profits they get when they manage to hit it big with a new artist, and it is exactly those profits that are most threatened by downloading. No wonder they're pissed.
There are so many other interesting economic issues here, but that's enough for now.
6 comments:
Interesting analysis. I wonder how much proliferation of music on the net reduces the need for the recording industry's advertising services though. For example, on the excellent radio3.cbc.ca you can see upcoming concerts in your city with links to samples of the bands' music and very quickly decide what you think of them for yourself. As we all know taste in music is subjective, so do we really need a record company to tell us what's good when we have this degree of convenience? Of course this doesn't deal with the risk sharing aspect of the problem though.
Very interesting analysis... I may pass it along to my economics students, some of whose parents are on one end or the other of the recording industry. Could get an interesting response.
this is so interesting - nice post
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I like your new blog layout!
I've wondered about that "record companies as selection/filter" before (it applies for writing, too -- there is a LOT of self posted fiction online). Maybe that's an unfilled niche -- an editor who does the work of checking out tons and tons of artists, then summarizes them enough so that you can just check out ones that sound good? They can take a little cut (not like record companies do now) for their summary/organization, and the band/writer can get more of the money. (It works for the artists, too -- these editors could be a good source of publicity).
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