Music Advocacy Journal Issue #6: Technical Treatise on Record Piracy – Part 5, Breaking Even

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”, we finished showing where all the money of your CD purchase goes by reviewing the Songwriter’s Team (Mechanical Royalties) and the Record Label.

In Part 5, “Breaking Even”, we’ll take a look at all the people who get paid from your CD purchase, and what kind of sales they need to make to break even.

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!

The rankings are in…

We’ve gone through all of the people and organizations that get paid from your CD purchase in the previous articles of this series. For the first time ever, MYnstrel brings you an analysis model that speaks to all of the major concepts underlying recorded music production and sales. Key to unraveling the mysteries that we are the first to uncover was asking the right questions. It wasn’t just “how much money do I pay for the CD on average”, but rather, “How much revenue does my decision to buy a CD generate for everyone, how does the retailer and government extract that money from me, and how does the money flow from the retailer to everyone else?” The following figure shows the entire cash flow that we’ve explored in Parts 2 – 5:

MAJ 6 pic 1

Now it’s time to rank all the major players and see who’s breaking even! We’ll make a few assumptions here to simplify our example:

  • Let’s consolidate the Publishing business team (Publisher, Harry Fox Agency, and Copyright Administrator)
  • Let’s say that the Artist wrote all the songs that they recorded on the album
  • The Artist’s business team (legal, management, accounting) is consolidated
  • Let’s use the real estimated values of the cuts, instead of the standard contractual values (our goal is to get better insight as to what is really happening to your money, so this makes sense)

Furthermore, let’s stratify the artists into their primary sales tiers to see what kind of revenue the players can expect:

  • A Low Tier album sells 60 CDs (69% of all new releases)
  • A Mid Tier album sells 3,900 CDs (30.6% of all new releases)
  • A High Tier album sells 368,000 CDs (0.4% of all new releases)

With this, we can finally show you where your money goes for a CD purchase, and how much money each party gets for their respective responsibilities (please don’t mind the rounding errors throughout this article):

MAJ 6 pic 2

Is your mouth agape now? Doesn’t look so much like what you see in the music videos, huh? Remember that the Recording Artist / Songwriter has to split that money amongst the band members too. Oh and did I mention something? The artist was paid money up front to spend on the recording and promotion, and they don’t even get paid more until they’ve earned that money back. That loan is what your $6.20 expenditure on Risk is paying for – the majority of artists who will default on that ‘advance’.

Our High Tier example is one that might have just broke even, because it takes between 250,000 and 500,000 CD sales to break even for the recording costs of a major label release, and remember that most artists in the high tier are signed to major labels.

Many of the players you see on that list have their reasons for their costs – the distributors have a lot of logistics personnel and warehouse costs to pay. The retailer has their own costs. The artists and manufacturers responsible for packaging have pretty low-margins, but so does the Record Label after they’re done underwriting the financially failed albums. We’re not talking pharmaceuticals’ net margins here.

The Free Goods are a cost of doing business. A consulting firm would spend time courting prospective clients, writing Scope of Work documents, proposals, and then suffer similar losses to get new business. The thing that frustrates me for Music Fans, Artists, and Music Biz Pros is the high-risk, unhealthy and obscure dynamics between the Record Label, Government, Retailer, and Artists. And if you think things are going to get better in the digital era, I hate to bear the bad news, but you should read the latest IFPI report that touts the fantastic deals in the making with ISPs. We’ll get into that stroke of Machiavellian genius in future editions of the Music Advocacy Journal.

Things could be better for many reasons, but MYnstrel identifies decisions that are being made today that work against our mission. Aren’t there better ways?

Let me reiterate, I don’t begrudge the Record Label for the levy that they take from album sales – this is an industry-wide issue that arises from the universal business processes and market-driven factors. The large cut of your CD money needs to be skewed heavily in the Record Label’s favor – it’s an insurance premium. Did you see all those albums in the low and mid tier? The Record Label fronted millions of dollars to make and promote those albums that couldn’t make the money back – so if they didn’t have the huge profits from the high tier, how would they continue to gamble on signing new acts (that will most likely lose money)?

And that’s what it is – a gamble. Remember, I say that you can either look at it as a casino or a high-risk insurance pool. I bet you never would’ve guessed that most of your money that you spend is going towards the luxury of enjoying hugely diverse and stratified genres (narrowcasting) and the result that comes from having to limit the predictive scope within those genres-within-genres. Are the Record Labels just really bad at picking the winners? Not necessarily, but we’ll have a full discussion on Narrowcasting in future editions of this journal.

Does it have to be this way? That’s a huge question for another time. What would you propose to reinvent a more stable and lower-risk environment? MYnstrel has invented our own solutions to all these problems and many more.

Industry averages reveals some profitability…and bankruptcies

Let’s look at the industry-wide averages and combine them with my cash flow model. We’ll validate with numbers, yet another real-world fact that will astound you. In a recent year, the averages for indies and majors were thus:

  • An average new indie label album sells 1,438 CDs in the first year
  • An average new major label album sells 41,109 CDs in the first year

So what is the total money that an average album will pull in on the first year? We compare the majors and indies:

MAJ 6 pic 3

Now let’s say that the average recording and promotion cost for an indie album was $12,750. Let’s say the major label average cost was about $255,000. Well that means that about 20% of indies are operating at a loss or going bankrupt – which explains the rise and fall of so many indie labels every year. It also means that the major is just squeaking by at a 12.6% gross profit margin. After looking at Government taxes and the 23 – 25% gross margin of the retailers, sure does make the Retailers and Government look like the real fat cats, doesn’t it? Of course, unlike the Government, Artists and Record Labels can’t devalue the currency by printing their own money and borrow billions of dollars from other Countries at the expense of future citizen labor.

Breaking Even

Now that we’ve gotten to the bottom of this convoluted money pool, we can finally answer the burgeoning question on everyone’s mind: how many CDs does the artist need to sell in order for the Record Label to break even?

Or…wait…is that really the question we want to answer? You know, in all of the thousands of pages I’ve read about the music business, not a single author has ever considered the labor of the musician. They talk about how the artist doesn’t get paid until the Record label’s costs of recording and promotion is recouped – but no one thought about what’s a fair price to put on the Artists’ time and labor. Well I’m going to do that here.

I’m going to say that these are fair salaries, and that the band will spend 3 months aggregate time writing material and recording in the studio. We’ll figure that this is a five-member band. That gives us:

  • Indie Nominal – $52,500 for labor of 5 people @ an annual salary of $42,000 per member for a small-budget indie band (prorated)
  • Indie High – $75,000 for labor of 5 people @ an annual salary of $60,000 per member for a large-budget indie band (prorated)
  • Major Nominal – $100,000 for labor of 5 people @ an annual salary of $80,000 per member for a small-budget major label band (prorated)
  • Major High – $125,000 for labor of 5 people @ an annual salary of $100,000 per member for a maximum-budget platinum-selling band (prorated)

The following table shows album expenses, how many CD units need to be sold for the Record Label to break even (RL Break Even), the artist labor described above, and how many albums need to be sold for the Artists to compensate themselves fairly for the labor it took to make the album (Art. Break Even):

MAJ 6 pic 4

And we haven’t talked about additional expenses on top of the ones listed above. A major label figures that when they sign a new artist, they’re investing $1M. It’s from this figure they derive the ‘break even sales’ of 250k to 500k CD units. Who’s thinking of the Artist’s lifelong career? Who’s thinking of the labor of the Artist?

As usual, the organizations with their hands on the big bucks – the Government, Retailers, Major Labels, and Distributors possess the power to levy the taxes, file suits in courts of law, and manipulate the contracts to look out for their own people first. That’s just business. The only way that’s changing is to decentralize power in favor of the independent companies who are closest to the product – that is – each and every single band, which is supposed to be their own company according to the IRS and all of these ‘partners’ signing contracts with them.

Moral of the story: love music, look to the future, believe in yourself

I’ll reiterate for one last time – in terms of industries I’ve developed technologies for, the Major Labels and Distributors really aren’t making out like bandits, even if they have to monkey the contracts to subsidize their losses and stay afloat.

One thing is for sure – if you like uncertainty, risk, and gambling with your life’s career and daily toils, you might enjoy this long-standing business model in the music industry. The supposed trajectory for a hard working artist historically is to work a day job, play clubs for years as a second job, working at nights, sacrificing family, friends, relaxation, and every other semblance of a stable life, hoping to get signed to a major where they have a chance at super-stardom, and then ride off into the sunset.

The reality is that the sacrifice is certain, but once the record label contracts are signed, it’s more like having all your hard work compressed into a 20-sided dice. The market of fans and the record label rolls that die with your life, and if it lands on 20, you’ll be around for a while. If it lands on anything else, you’ll be out on the street in 4 to 5 years, having gained nothing, which will put an end to about 15 years of struggling with your musical passion and hopes and dreams.

Maybe you’ll come off onto an indie label and make some decent money with a moderate fan base gained from the exposure you got by being on a major label. Maybe you’re cool with not making your music into a career, and just reaching out to a few hundred people in a local scene – just doing it for fun.

Whatever the case, you’ve got to love music with all your heart, not just to make it but to stay sane throughout the process. As funny as it sounds, MYnstrel team members started this company just like we played in our bands in our free time – working 60 to 90 hours per week. It takes most startup companies 5 years to see any money – the ones that don’t crash and burn. Do you see a parallel between startup companies and bands?

We’re working and sacrificing so much because we believe we can make a difference for music fans and artists everywhere. Do you love music that much? Will you work that hard to succeed in your band? If you do, you’ve got a chance. A lot of passionate artists just don’t know where to look to improve their odds. MYnstrel’s community initiatives are all about filling that gap.

For our part, we’ve invented ways to improve the business processes that can put more certainty into the business – making your prospects and rewards as an artist more tangible and certain, and making the quality of music getting to music fans better than ever.

What of music theft? Isn’t this treatise supposed to be about record piracy?

Well, you’ve been introduced to the major players and artists who ply their respective trades to bring your lifeless stereo speakers to a state of vivid resonance. You also now know about key financial concepts surrounding those players. Now we can finally talk about how widespread music theft affects all of these laborers and companies who depend on your purchases to continue bringing your speakers to life and being able to feed their families by doing so. That’s the next article.

Next time…

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 Part 4 “Writers & Hegemonies”, we showed you where the rest of your money goes – to the Songwriting Team, Publisher, Risk/Losses, and the Record Label.

In this article, Part 5, we looked at all the major players who get paid from your CD purchase, and what kind of sales they need to make to break even.

In the next article, Part 6, we’ll tie everything together to see how piracy hurts the workers who get that CD in your hands. Which of all these workers we’ve talked about suffers from piracy? Who suffers the most? Can’t artists just make money from the live shows? Isn’t that enough (Radiohead tried it)?

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