Wednesday, June 10, 2009

The Economics of The Big Label Record Deal



I have some friends who recently signed a record deal with a "big player" in music. I was asked a bit about my opinions regarding their advance, their cut on sales (i.e., "points"), etc. Having grown up in the San Francisco music scene, I have had several friends sign these type of deals. As an economist, I've had lots of them ask me these questions. Personally, I find the deals too complicated to give any real advice. However, I always refer people to the famous (or maybe infamous) essay by Steve Albini on the "music industry." In this essay, he comes up with the following rough accounting of a record deal.

Since some of you may not read to the end of the quote from his essay (not quoted below), the last statement in Steve Albini's essay is usually what I tell my friends once they have signed these deals.






These figures are representative of amounts that appear in record contracts daily. There's no need to skew the figures to make the scenario look bad, since real-life examples more than abound. Income is underlined, expenses are not.

Advance: $ 250,000
Manager's cut: $ 37,500
Legal fees: $ 10,000


Recording Budget: $ 155,500
Producer's advance: $ 50,000
Studio fee: $ 52,500
Drum, Amp, Mic and Phase "Doctors": $ 3,000
Recording tape: $ 8,000
Equipment rental: $ 5,000
Cartage and Transportation: $ 5,000
Lodging while in studio: $ 10,000
Catering: $ 3,000
Mastering: $ 10,000
Tape copies, reference CDs, shipping tapes, misc. expenses: $ 2,000
Album Artwork: $ 5,000
Promotional photo shoot and duplication: $ 2,000


Video budget: $ 31,000
Cameras: $ 8,000
Crew: $ 5,000
Processing and transfers: $ 3,000
Off-line: $ 2,000
On-line editing: $ 3,000
Catering: $ 1,000
Stage and construction: $ 3,000
Copies, couriers, transportation: $ 2,000
Director's fee: $ 4,000


Band fund: $ 15,000
New fancy professional drum kit: $ 5,000
New fancy professional guitars [2]: $ 3,000
New fancy professional guitar amp rigs [2]: $ 4,000
New fancy potato-shaped bass guitar: $ 1,000
New fancy bass amp: $ 1,000
Rehearsal space rental: $ 500
Big blowout party for their friends: $ 500


Tour expense [5 weeks]: $ 50,875
Bus: $ 25,000
Crew [3]: $ 7,500
Food and per diems: $ 7,875
Fuel: $ 3,000
Consumable supplies: $ 3,500
Wardrobe: $ 1,000
Promotion: $ 3,000


Tour gross income: $ 50,000
Booking Agent's cut: $ 7,500
Manager's cut: $ 7,500


Merchandising advance: $ 20,000
Manager's cut: $ 3,000
Lawyer's fee: $ 1,000


Publishing advance: $ 20,000
Manager's cut: $ 3,000
Lawyer's fee: $ 1,000


Record sales: 250,000 @ $12: $ 3,000,000
Gross retail revenue Royalty [13% of 90% of retail]: 250,000 @ $12: $ 351,000
Less advance: $ 250,000
Producer's points [3% less $50,000 advance]: $ 40,000
Promotional budget: $ 25,000
Recoupable buyout from previous label: $ 50,000
Net royalty: $ -14,000


Now, on the other hand, let's look at the Record company income:

Record wholesale price $6.50 x 250,000 $ 1,625,000 gross income
Artist Royalties: $ 351,000
Deficit from royalties: $ 14,000
Costs of manufacturing, packaging and distribution @ $2.20 per record: $ 550,000
Label's gross profit: $ 7l0,000


The Balance Sheet: This is how much each player got paid at the end of the game:

Record company: $ 710,000
Producer: $ 90,000
Manager: $ 51,000
Studio: $ 52,500
Previous label: $ 50,000
Booking Agent: $ 7,500
Lawyer: $ 12,000
Band member net income each: $ 781.25


The band is now 1/4 of the way through its contract, has made the music industry more than 3 million dollars richer, but is in the hole $14,000 on royalties. The band members have each earned about 1/20 as much as they would working at a 7-11, but they got to ride in a tour bus for a month.

The next album will be about the same, except that the record company will insist they spend more time and money on it. Since the previous one never "recouped," the band will have no leverage, and will oblige.

The next tour will be about the same, except the merchandising advance will have already been paid, and the band, strangely enough, won't have earned any royalties from their T-shirts yet. Maybe the T-shirt guys have figured out how to count money like record company guys.

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