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The Numbers: Can Indie Labels Really Make Money Through Downloads? Part 1
Spencer Critchley
Dec. 18, 2005 01:12 PM
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Part 2 of this series is here.
So far, many of the arguments on emerging music business models seem to me to be based on speculation and assertions. So I thought I'd sit down and do some actual math. I based it on two scenarios for a moderately successful indie album: physical CD sales vs. iTunes downloads.
It's scary.
Let's assume the following:
- 12 songs on the album
- very low recording budget of $10,000 (major label budgets are well into six figures)
- artist royalty rate of 12%, producer royalty of 3%
- mechanical royalties (which go to songwriters and publishers) are 8.5 cents per song, the statutory rate
- 40,000 CDs pressed, 30,000 sold (a good sell-through)*
First, the CD scenario. These figures are partly based on an article in the Aug, 2005 issue of Nashville's Music Row magazine (subscription required), which, BTW, has excellent technology coverage.
CD: Label's Gross Revenues Per Copy
| Wholesale Price |
9.50 |
| Recording |
(0.33) |
| Mechanical royalties |
(1.02) |
| Artist royalties |
(1.14) |
| Producer royalties |
(0.29) |
| Postage |
(0.10) |
| Distribution Fee |
(1.80) |
| Positioning Fee |
(1.00) |
| Manufacturing |
(0.80) |
| Returns postage |
(0.03) |
| Refurbishing |
(0.05) |
| GROSS REVENUES |
$2.95 |
So if there are only 25% returns from stores, the label makes $2.95 per CD, or $88,400.00 on net sales of 30,000 CDs.
Unfortunately, that figure is before promotional and other expenses, such as radio promotion, publicity, advertising, etc. In the mainstream record business, achieving sales of 30,000 units could easily require a promotion budget of $100,000 to $300,000. Let's assume the label is aiming for the mainstream and spends $100,000:
CD: Label's Net Revenues, 30,000 Sold
| Sales revenue |
88,400.00 |
| Promotion, etc |
(100,000.00) |
| NET |
($11,600.00) |
A loss of $11,600. It would be worse if we included overhead, if more albums were returned, or if the recording budget were higher--and even with a recording budget of $0, the label would still be in the hole. You can see why record company people say over and over that it's a hit-driven business. Non-hits don't make money.
If our label is an alternative indie, it obviously can't afford to risk six figures to earn revenues like these--the break-even promotion budget on this project would have been $88,400. Alternative indies have to find ways to run very, very lean, such as relying on lots of touring by the artist, good will with influential press, and street teams of fans to spread word of mouth. Even so, it looks like a business to be in for love, not money**.
*You may object that the assumption of sales of 30,000 is unfairly low. Actually, it's hard to achieve sales like that. Most alternative indie albums are lucky to hit 5,000 to 10,000 copies sold, and there are untold numbers that never break 1,000.
**Harvard Business Review sells an informative case study (PDF) on Nashville-based Compass Records, which covers Compass' success at becoming viable, followed by its struggle to grow.
Next time: What do the numbers look like for iTunes sales? Hint: They're not better.
Spencer Critchley
is an award-winning producer, writer and composer
with experience in digital media, film, broadcasting and the music
business.
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Showing messages 1 through 8 of 8.
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Whoa...
2005-12-19 08:51:07
dkevone
[Reply | View]
The writer of this article must be joking... He calls $10,000 a small recording advance for an indie label? LOL. Most indies barely offer $1,000, if any advance at all. And a $9.50 wholesale for a CD? Maybe back in 1988.
I can't wait for the next article in the series -- I'm sure it will be full of inaccuracies.
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Whoa...
2005-12-19 11:00:13
SpencerCritchley
[Reply | View]
You may be thinking of smaller indies than I am. In this post I'm exploring the case for viable business models, so I don't go all the way out to the margins. $10,000 is a small budget if you're going to pay something to the studio, the engineer, the producer and some musicians. And whether the label pays it or the artist has already paid it or everyone works for free, someone is paying (if only in the value of their time & the opportunity cost of not doing something else), so it figures into the calculation.
$9.50 seems about right for a wholesale price to national distributors (before a discount of 50 cents, which was folded into the per unit figures I used), and is the figure quoted by Music Row. Again, very small indies and artist-owned labels will wholesale for less, but I'm looking at whether it's possible to make enough money to grow a business selling recorded music.
In 2003 Universal experimented with lowering the wholesale price to $8.98 in an effort to stop the decline in unit sales. But the rest of the industry didn't follow suit and the price went back up.
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Whoa?
2005-12-19 10:34:17
mwalker
[Reply | View]
I'm curious. If we plug your numbers in to his formulae, does the end result get any better? Or is money still lost?
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Line item detail
2005-12-19 04:47:38
SMR
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I would be curious what some of this is - for example the "positioning fee". Also, does this mix change when the band does its' own production, etc? If I, as an artist, approach a label with a CD I recorded and produced myself, assuming it was of good enough quality for distribution, how would this mix change?
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Line item detail
2005-12-19 11:09:09
SpencerCritchley
[Reply | View]
The positioning fee is for getting a favorable position is stores, e.g. in an "end cap" display at the end of a row.
Lowering the recording budget to $0 still doesn't make this particular scenario profitable. In general, I'd say saving money on recording costs is not a top concern of labels that are trying to be successful. Their major concern is whether this project has the potential to reach a profitable audience. If they don't believe that, saving money on the recording doesn't make much difference, and if they do believe it, the recording budget can probably be worked out to a figure that's appropraite given the likelihood and size of the potential payoff.
You can find a good overview of distribution at musicbizacademy.com:
http://www.musicbizacademy.com/articles/cs_distribution.htm (http://www.musicbizacademy.com/articles/cs_distribution.htm)
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Line item detail
2005-12-20 04:29:43
caseydk
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It looks like "positioning" and "distribution" are by far the biggest expenses and also the most important.
Will something like iTunes balance out the equation a bit better?
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Line item detail
2005-12-20 09:06:57
SpencerCritchley
[Reply | View]
That's the hope, since digital distribution is so much more efficient than physical distribution. But as we'll see in part 2, other factors make the revenue picture under iTunes look even worse.
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Line item detail
2005-12-19 11:10:00
SpencerCritchley
[Reply | View]
Sorry about that messy url - I guess hyperlinks don't work in replies. Here it is again:
http://www.musicbizacademy.com/articles/cs_distribution.htm
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