The information given below is general in nature. Your circumstances may differ based on your specific deal with your record label.
Note that this information is general in nature, and that there are differences in how the music business operates between different countries and even between different genres. Treat this information as a guide - the specifics of your own situation may be different.
A difficult and exceedingly frustrating part of life in the music business, especially the indie music business, is the gap between record sales and income. If you’re a band that has released an album on a label, it may very well feel like SOMETHING is happening. You’ve seen your album in the shops, you’ve gotten some press, and the crowds at your shows are getting bigger. Unfortunately, that does not all translate into money in your pocket. It is quite possible – in fact, it is even probable – that your record label could sell 1,000 copies of your album and not make a single penny of profit. Selling 1,000 copies of an album, which, depending on where you live and what kind of music you're making, is a typical press of a new album by a new band on a small label, can easily cost more than it makes. It can actually take several thousand sales to get even a little bit ahead of the curve. Here’s why:
First, before your album even goes into production, there are expenses involved that can slow down how quickly you get paid. These costs include:
- Recording costs – If you as a band have paid for the recording of the album, the label is not obligated to reimburse you for that cost. However, if the label pays for your recording, then the label can withhold money from your album sales until the costs are recouped.
- Advances – Advances are just that – advances against future earnings. Your label can withhold money from album sales until your advance is paid back.
- M&D deals – M&D stands for manufacturing and distribution. If your label has an M&D deal with their distributor, then the distributor pays for the cost of manufacturing upfront. The distributor then withholds the cash from your album sales until the manufacturing bill is paid off.
- Label manufacturing – Under this set up, the label pays for the manufacturing directly.
To see how all of this shakes out, let’s take a very basic sample case and some round numbers. Let’s assume we are dealing with a debut album from a band on a small, indie label. Let’s pretend that the distributor has placed the album into stores, and the album is sold for $15 at the store. That doesn’t mean your label gets $15 for every sale. Each album is sold to the store by the distributor at what is called the dealer price. The dealer price is set by the label, with input from the distributor as to what price will make the album attractive to store buyers. Let’s assume that the dealer price for this album is $7.50. From that $7.50, to see what your label gets for each sale, we have to subtract some basic expenses:
- Distributor’s fee – The percentage the distributor takes depends on the deal your label has with them. Let’s say after the distributor takes their fee, there is $5 left.
- Royalties – Songwriting and mechanical royalties are charged to the label for each copy of the album that is PRESSED, not sold (after a small allowance for promo copies). The royalty collection groups take the money from the label and pay you directly. If your label doesn’t pay these fees, eventually they will be caught and be forced to pay up. The exact amount of royalties your label pays depends on the country in which you life. For our purposes, let's assume that after royalties are paid on each copy, we are left with $3 per sale. (REMEMBER - your label pays this money on each copy of the album, sold or unsold. However, also note that sometimes labels can arrange to pay on sales rather than pressings.)
Now, let’s pretend the highly unlikely best case scenario happens – your label sells 1,000 copies of your album in the first month and gets $3,000 all at once (which they would only get if they did not have an M&D deal). Out of that $3,000, your label must pay for:
- Manufacturing, if there is no M&D deal. (EASILY $1,500 for a first pressing – more if you go for fancy stuff like digipacks)
- Promotion and Advertising – An ad can cost several hundred dollars at least and PR companies and radio pluggers can cost thousands. Tour support can be included in this category
There are still a few more flies in the ointment to consider:
- Just because a store “buys” an album doesn’t mean it is “sold.” A store can buy 1,000 copies of your album and return 999 of them 90 days later. These are called “returns.” Because of returns, your label won’t get paid for at least three months of releasing your album. Manufacturing bills start coming in 60 days after pressing, which means your label is paying for your album before they make any money from it.
- Sales happen over time. Even if every copy is sold, your label is unlikely to make $3,000 all at once. Again, that means your label will be out of pocket while your album is selling through.
It is easy to see how your label could sell 1,000 copies of your album and still be operating at a loss. Getting ahead of the curve requires more sales, and even better, sales that happen in bulk orders, so big chunks of income come in at one time.
This is not to say that there are not labels out there that will try to rip you off. Be proactive about talking to your label – talk about the expenses your label will have in relation to your album and ask to see the sales sheet from the distributor so you can see how thing are going. You can put a cap on things like promotional expenses, so your label has less money to recoup from sales and you get paid faster, but keep in mind that new releases need a certain amount of promotion to sell. Arming yourself with the understanding of how money goes in and out of an album campaign will make you a better judge of when a label is on the up and up and when you need to be concerned.