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“Record labels make their money off of selling records, but there’s all kind of royalties that the record company collects when a record is played, and that’s how they make their money. When 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, the writer gets a percentage of it. ”

- 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
How do Record Companies make money? Record companies make money by marketing and investing heavily in their products – in this case, the product is the artist & their music. Recording Costs For smaller labels, recording costs average $15k per album. For large labels, the average can be from $100k to $500k and up. The artists bear this debt, which is repaid from royalties. Manufacturing Costs Large labels pay about $0.50 to $0.55 per CD on orders of 100,000 or more. Labels that buy less than 10,000 CDs per year pay approximately $1.20 per CD. Royalty Costs Record labels pay two royalties: one to artists, and another to composers & publishers. Artists can receive 10% – 15% of suggested album retail minus packaging costs. Composers and publishers receive 30% or more.

“They make money the way they have for years . . . off of the exploitation of the recordings themselves, and there’s a million ways that 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.

“So, they . . . The labels have always figured out ways to get a piece and keep it moving.”

- Cameell Hanna, Serenity West Recording – Los Angeles, CA
Credits: Justin Timberlake, Adele, Florence & the Machine, Eva Simons, Wiz Khalifa, Snoop Dogg
Promotional Costs Promotional costs include advertising, radio promotion, music videos, touring and more. Most of these costs are recouped from artists’ royalties, depending on contractual agreements. Distribution Costs Record companies decide on how much an album will cost, then they give a wholesale price to a seller. If an album sells for $16 retail, the distributor most likely paid about half the retail price.

“Record labels make their money on sales, touring, merchandise, anything they could sell that has the bands . . . the band or artists name on it.”

- Mike Johnson, Clear Track Recording Studios – Clearwater, FL
Credits: John Legend, Jeff Berlin, Boyz II Men, The Roots, Alice Cooper, U2, Madonna

“Here is an over simplified 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 theses 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.”

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

The Payoff Record companies make around $10.00 profit per CD. Multiply that by thousands or even millions of album sales, and a record company can easily gross tens of millions of dollars from one album’s release.


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