In Part 1 “Yin and Yang”, I laid out the critical questions surrounding music piracy and shared a true story that exhibited a polarized point of view on the topic. We talked about how MYnstrel approached the problem of music retail from a neutral position – concerning ourselves with all of the competing interests of different parties, and digging up the facts.
In Part 2 “Where Does Your CD Money Go?”, I shared some of our analysis that was generated in our music retail Business Process Engineering activities. The key question was simple:
- Where does your money go when you purchase a CD?
It’s important to know where the money for a CD goes to understand how piracy impacts the workers responsible for getting the album from the artist’s mind and into your hands.
In Part 3 “Stratification & Levies”, I continued answering the line of inquiry we began in Part 2. Who exactly is responsible for getting a great-sounding recorded piece of music in your hands? What do they get paid for their labor from that CD sale? What does an artist actually make?
In Part 4, “Writers & Hegemonies”, I’ll finish showing you where the money from your CD purchase goes.
These are just some of the questions our analysis will answer today. You will be able to use this Treatise over and over again as the most thorough reference material on the subject in print to date. Let’s get to it!
Mechanical Royalties: $1.27
Mechanical Royalties go to the artists who invented the songs and all of the people responsible for managing that intellectual property. Not every artist who records an album writes their own material. The Songwriters’ cash flow from your album purchase looks like this:
Now is a good time to talk a bit about intellectual property, and explain this cash flow.
If we were living in anarchy, mechanical royalties could not exist, since intellectual property law is the only way that the creative genius who composed the song can get paid. Without the law and its enforcement thereof, if I wrote a song today and shared it with a few people, there would be no recourse for me when they steal it and call it their own. There would be no way to prevent unscrupulous people from using my creation to make themselves rich, without my permission and without paying me for it.
Intellectual property law incentivizes people to work hard at creating something inherently good – something that is valuable to the mass public. In the music realm, it’s not always easy to write great songs. It takes lots of time, patience, inspiration, life experience, skill, creativity, discipline, and yes – born talent. Intellectual property law exists to make sure that there is justice – that all the time, labor, talent, genius, and willpower is credited to the right people. Once the copyright is secured, the inventors/owners have the right to protect their invention from other people leeching off their ingenuity and taking advantage of those inventors.
With a Copyright prerequisite, Mechanical Royalties are paid when a song is used on a recorded album, film, TV, commercials, video games, or printed as sheet music or in magazines. For our purposes here, we’re interested in what is paid for a CD. For our model, we assumed the CD has 14 tracks that are 4 minutes each on average. This would yield $1.27 in royalties as of 2007 (when we conducted the study).
As strange as it sounds, the Songwriter team doesn’t get all that money. They only get half of it. The other half goes to the Publisher.
The Publisher is responsible for critiquing your songs, helping you to improve them, coordinating collaboration with other songwriters, facilitating the demo recordings, and pitching the songs to Record Labels, recording artists, producers, movie makers, video game studios, and band managers. The Publisher also must administer your accounts – collecting the royalties (money), monitoring them, distributing them, and keeping track of all your licenses.
The Publisher is much different than the Record Label. The Record Label signs and develops Recording Artists – not songs. Just remember that the Publisher is all about the invention of the song and songwriting; whereas, the Record Label is all about the recording of performances by artists who may or may not have written the songs.
In the case that the artist recorded and wrote the songs, they would be entitled to the Songwriter’s share of the Mechanical Royalties in addition to the Performance Royalties previously mentioned. The business players behind those two very different things will always be separate entities – a Publisher vs. a Record Label.
For all of their responsibilities, the Publisher will take $0.40 of the money that the CD buyer paid for the CD.
Now that we have that straight, let’s talk about the Publisher’s partners: a Copyright Administrator and the Harry Fox Agency. These two entities provide services to register, audit, monitor, and collect royalties using sophisticated technologies and business processes. You pay them a total of $0.24 for their services when you buy a CD. Their job is to ensure that the songwriters get paid everything they’re entitled to for their inventions on the CD – a very important job.
And finally, last, but certainly not least, we have the Songwriting Team. They are the creative geniuses who invent those songs you love. Of course, they come with their own lawyers and business managers/accountants. If the Songwriter is also the Recording Artist performing the song on the CD, then this ‘business team’ is likely the same one that’s used on the recording team. Then there’s this strange character called a Songplugger. It’s their job to get the litany of songs that the songwriter creates actually recorded. They’re essentially the salespersons of a song portfolio.
Breaking down the Songwriting Team: the business team gets $0.14, the Songplugger gets $0.13, and the Songwriter(s) get $0.37.
It should be noted that there are detailed formulas for calculating the Mechanical Royalties due, which involve statutory rates, song length, and number of songs on the album. Because we’re performing an estimation to convey concepts, we’ll not discuss those details here. I haven’t written about much of the mathematics behind our analysis in order to keep the discussion focused on the concepts. If I did include those calculations, you might be sitting at your computer all day long reading these articles.
The Record Label: $3.68…but not really, more like $0.89 for majors and bankruptcy for 20% of indies
Now we finally get to the Record Label. According to typical contracts as we’ve described, they claim to only be skimming the remaining $3.68 off the top. But as we discussed in Part 3, they’re also getting a levy from overstated Free Goods and Manufacturing parameters. After these obscure levies are taken into account, the record label is getting somewhere around $7.10 of the money you spent on the CD.
“Those sneaky, dirty crooks!!!” you shout while waving your fist at the air!
As much as some music industry players want to paint a rosy picture about the success of the business to attract investors, and so that Artists in music videos can appear to be larger-than-life, the financial reality for the vast majority of artists is a much different story.
I won’t stand up for the Record Labels; but I will stand up for truth! We can’t afford to be ideological if we want MYnstrel to bring great value to Artists, Fans, and Music Biz Pros. Don’t just take my word for it; let’s look at what Record Labels actually have to put up with to stay in business.
I choose the words “put up with” carefully because you can only imagine how heartbreaking it is for the artist and business team to borrow between $12,750 (indies) and $1,000,000, and to work so hard, just to find out that the music fell flat on the floor and people aren’t buying it.
So, from whom do they borrow that money? Well, look in the mirror, my fellow CD Buyer! That $7.10 of each CD sale is really like a huge insurance premium that covers the immense losses that most albums will suffer. Remember our Tiers of sales and averages from Part 3? Let’s recap:
- Low Tier (69% of new releases): 60 CDs sold per album
- Mid Tier (30.6% of new releases): 3,900 CDs sold per album
- High Tier (0.4% of new releases): 368,000 CDs sold per album
While the major-record-label CDs comprise the vast majority of the Mid and High Tiers, they also spend a fortune to make and promote their albums. The major label record costs between 20 and 25x the amount of money that an indie record costs to make and promote! If an indie spent $12,500 on an album, a major spent $250,000!
In 2006, only 3% of indie records recovered what it cost to make the album. In the same year, only 5% of the majors recovered their cost on an album. All of those losses are subsidized by the few successful albums that sell like hot cakes. High risk, high reward…but lower reward…because the ones that succeed have to subsidize the huge losses of the majority. That money you spend on a CD is going into a big casino, or insurance pool – however you prefer to look at it.
How does it break down? Well, we’ll get into the details in next issue, but basically the industry averages show a 12.6% gross profit off the album sales for majors. As for the indies, they’re in the red! Averages indicate that it is likely that 20% of the indies are operating at a loss every year (oh sweet horizon of bankruptcy).
So your payment to the gambling game caused by a huge diversity of music subdivisions (narrowcasting), and the other risk factors which make music investment so volatile, including the high cost of producing and recording the album, is actually $6.21. That’s the money that the Record Labels will use to subsidize all those albums that couldn’t even make back the money they spent, and the cost of producing all albums. The major record label is left with $0.89 to pay for the employees it takes to scout & nurture talent, legal, accounting, business administration, production, design, and marketing/promotion.
Payola is a bigger topic for another time – let’s just say that “independent promoters” are still legally taking millions of dollars every year, which determines what gets played on the radio – and largely, who ends up in that 0.4% High Tier of sales.
In the game of indie labels versus the majors – the majors’ huge capital expenditure on promotion is largely what determines the hegemonic realities of music sales. This truth is self-evident, and the logic is punishingly simple; can you buy something that you don’t know about? There are other psychological factors in the hegemony that manifest from ‘perceived’ popularity, but it’s a topic for another time.
The final piece of the cash-flow puzzle, the Record Label, looks like this:
In Part 1 “Yin and Yang”, we laid out the concepts surrounding music piracy and exemplified the philosophies with an entertaining story.
In Part 2 “Where Does Your CD Money Go?”, we established a robust analytical model to determine where all of your money goes when you buy a single CD and elaborated the front-end transactions (Government & Retailer).
In Part 3 “Stratification & Levies”, we laid it out for Distributors, Manufacture/Packaging, Free Goods, and Performance Royalties.
In this article, Part Four, we showed you where the rest of your money goes – to the Songwriting Team, Publisher, Risk/Losses, and the Record Label.
In the next article, Part Five “Breaking Even”, we will break all of the numbers down for Low, Mid, and High Tier sales categories and see what a typical artist has to go through in their gamble for fortune and fame. We’ll see what everyone gets paid in ranked order, and we’ll wrap up the entire cash flow from your CD purchase. If you’ve made it this far, I guarantee that you’ll never look at your CD purchase the same way again.