HOW DO RECORD LABELS TURN A PROFIT?

In an age when music can be downloaded online, music videos can be seen for free on YouTube, and social media serves up content from anyone to anyone, saying big labels have had to adjust is the understatement of the century. Record labels have had to get creative in how to market to this ever-evolving industry. Considering over 90% of released recordings fail to make a profit, this is a high-risk business for labels and artists.

Independent record labels as well as major labels are now very careful in where they put their money and what artists or bands they sign to a record deal. That being said, independent artists and labels are able to promote their recordings for far less than the major labels, allowing them to turn a profit much easier.

This is the reason that there are so many start-up indie labels surfacing and major labels are signing fewer and fewer unknowns. Smaller budgets mean less risk, but they also translate to smaller profits and rewards. We understand there are those who do it just for the music – but it’s nice to pay the rent, too.

Hear What the Pros Say

Many of our mentors have worked with major recording labels and companies and have an insider’s view of how much it costs to produce a record and what the labels recoup. In some cases, it has nothing to do with the music at all. In an industry where the image is everything, those images sell. Of course, the catchiest, chart-topping hit will rake in the bucks for the labels and the artist.

Rick Camp, RC1 Productions & Master Mix Live, Las Vegas, NV
Credits: 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 are all kinds of royalties that the record company collects when a record is played, and that’s how they make their money. 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, and the writer gets a percentage of it.”

Cameell Hanna, Serenity West Recording, Los Angeles, CA
Credits: 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 are a million ways that it 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. The labels have always figured out ways to get a piece and keep it moving.”

Mike Johnson, Clear Track Recording Studios, Clearwater, FL
Credits: 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’ or artist’s name on it.”

Zach Phillips, Freq Lab Recording, San Francisco, CA
Credits: The Kooks, Talib Kweli, Dnae Beats, Jayleez, J-Banks, The Game, Alice Russell, Comedy Central

“Here is an oversimplified 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 these 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.”

Recording Connection offers a Music Business Program that covers what it takes to be successful as a recording studio owner, label, or audio engineer/music producer. Learn how to get clients, manage your books, hire staff, and other administrative aspects needed to successfully run a studio.