(CONTINUED)
Rerecording/mastering, fabrication, distribution, tour support, and other promotional investments all require capitalization. In determining which artists to sign, labels consider his/her sales potential. The label bases its decision on what the artist has accomplished beforehand. A rough rule of thumb remains that major labels sign artists who have made verifiable sales of at least ten-thousand albums on their own. The artist assumes the risk and costs of test-marketing their music. In addition, labels consider plans for touring in order to support direct product-marketing to a wider audience. In addition, labels assess the feedback received on the music through social media and use this information in their marketing and distribution efforts.
We may compare the Business of Music to the spin of a roulette wheel. A wheel has thirty-six black-and-white numbers plus a green “0” and a “00.” The gambling house wins on these last two numbers. Their odds of winning are 5.26%—the two green numbers divided by the total of thirty-eight numbers on the wheel. Generally, the Record Industry hits the break-even point on 10% of their releases. However, only 5% of releases turn a profit. These releases subsidize the 90% that lose money.
Therefore, cash advances bestowed upon artists are determined by their ability (both musical talent and the potential to sell albums), the costs that may be recoverable from an artist, and the probability of success in a marketplace that ultimately relies on the 5% of releases that eventually become profitable. An advance is an ADVANCE.
Essentially, it is a loan that is repaid through royalties (percentage of the sales) that hopefully are earned on future record sales. Under its contract with an artist, the record label is going to want to be paid back—and to be paid back first.
The label withholds all artist earnings from sales until it recoups production, marketing, and distribution costs. Furthermore, sequential or multi-album contracts allow for the repayment of advances for one album from the income earned on multiple albums. This method of securitizing the investment made in an artist by the record company is known as Cross-Collateralization. Apart from a few exceptions, a label can recoup every cent invested in an album from artist-royalty points. As a result, most artists receive $0.00 from their royalty points until recoupment by the label is complete.
So, how do artists go about making money from their recordings? Very simply, they can achieve their goal by remembering that they are involved in a business as well as an art. Furthermore, this business takes place in what economists refer to as a perfectly competitive market—the market interaction between buyers and sellers sets the price for similarly situated products. This price remains relatively constant at any point in time. Due to this market quality, revenue increases at a constant rate as greater quantities of a recording are sold. As a result, there are only two ways to increase profits: one is to sell greater quantities of the product and the other is to decrease the costs of production, manufacturing, promotion, and distribution.
Takeaway
Though the Music Business has evolved dramatically and is in the process of evolving even further, it remains possible to release music and to earn a profit if knowledge of the business is acquired and applied. We hope that we have edified our readers about the physical, economic, and legal aspects of the Recorded-Music Industry over the past four months during a season in which many of us have diverted our professional time to ensure a fair Midterm Election. Furthermore, we again thank our guest Howard Hertz for his enlightening contributions to this column. We wish our audience a wonderful Thanksgiving and a stress-minimized beginning of the Holiday Season.
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Post Script: For those readers interested in learning more about this business, the following is a list of some of my favorite books on the subject.
Rockonomics: A Backstage Tour of What the Music Industry Can Teach Us about Economics and Life Hardcover – June 4, 2019
by Alan B. Krueger (Author)
The Musician's Business and Legal Guide 5th Edition
by Mark Halloran (Author)
Tim Sweeney's Guide to Releasing Independent Records, Mar 1, 1996
by Tim Sweeney and Mark Geller
The Music Industry Book: Protect Yourself Before You lose Your Rights & Royalties! Paperback,1980
by Walter E. Hurst (Author)
Music Money and Success 8th Edition: The Insider's Guide to Making Money in the Music Business, 2018
by Jeff Brabec (Author), Todd Brabec (Author)
Promoting Rock Concerts - A realistic look at what it takes to be a successful concert promoter, Nov 1, 1979
by Howard Stein and Ronald Zalkind
Making It With Music: Kenny Rogers' Guide to the Music Business Paperback, October 1, 1978
by Kenny Rogers (Author), Len Epand (Author)
Inside the Music Industry: Creativity, Process, and Business, May 22, 1996
by Michael Fink
Making Money Making Music: No Matter Where You Live, Jul 1, 1991
by James W. Dearing
All You Need to Know About the Music Business: Ninth Edition Hardcover, November 10, 2015
by Donald S. Passman (Author)
Project Management for Musicians: Recordings, Concerts, Tours, Studios, and More (Music Business: Project Management), Paperback, January 1, 2013
by Jonathan Feist (Author)
The Studio Business Book, Paperback – January 24, 2006
by Mitch Gallagher (Author), Jim Mandell (Author)
This Business of Music, 10th Edition (This Business of Music: Definitive Guide to the Music Industry), Hardcover, June 26, 2007
by M. William Krasilovsky (Author), Sidney Shemel (Author), John M Gross (Author), Jonathan Feinstein (Author)
Music Law in the Digital Age: Copyright Essentials for Today's Music Business, Paperback, May 1, 2017
by Allen Bargfrede (Author)
The Mixing Engineer’s Handbook, 4th Edition Kindle Edition
by Bobby Owsinski (Author)
The Recording Engineer’s Handbook, 4th Edition, Paperback, January 13, 2017
by Bobby Owsinski (Author)
The Mastering Engineer's Handbook, 4th Edition, Kindle Edition
by Bobby Owsinski (Author)
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Dr. John F. Sase has taught Economics for four decades and has practiced Forensic and Investigative Economics since the early 1990s. He earned an M.A. in Economics and an MBA at the University of Detroit and a Ph.D. in Economics at Wayne State University. He is a graduate of the University of Detroit Jesuit High School. Dr. Sase can be reached at 248-569-5228 and by e-mail at drjohn@saseassociates.com. You can find his Economics videos of interest to attorneys at www.youtube.com/saseassociates.
Howard Hertz has represented numerous artists and entities in the entertainment field for more than three decades. In 1979, he established the law firm of Hertz Schram with Bradley Schram. Hertz specializes in entertainment law and is the lead attorney of Hertz Schram’s Entertainment Practice Group. He earned his B.A. and J.D. at Wayne State University. Hertz can be reached at Hertz Schram PC, 248-335-5000 and by e-mail at hhertz@hertzschram.com.
Gerard J. Senick is a freelance writer, editor, and musician. He earned his degree in English at the University of Detroit and was a supervisory editor at Gale Research Company (now Cengage) for over twenty years. Currently, he edits books for publication and gives seminars on writing and music. Senick can be reached at 313-342-4048 and at www.senick-editing.com. You can find some of his writing tips at www.YouTube.com/SenickEditing.
