Derrin Lee

Intro into commercial music

The Business Of record Companies

Record companies make and sell recordings in many formats- vinyls, analog
cassettes, compact disc, minidisc, digital videodiscs, and digital downloads.
Annually approximately 300,000 titles are available for sale.
I.

Recording Labels
There are two categories of record companies: major labels and
independent labels. Each segment makes important
contributions to the national entertainment industry and to
regional economies
Major recording labels are consolidated into five companies, each
integrated into larger multinational conglomerates: Warner Music
Group (AOL Time waner, Inc.-United States), EMI Recorded Music
(EMI Group-Great Britain), Universal Music Group (Vivendi
Universal-France), Sony Music Entertainment (Sony CorporationAmerica-Japan) and BMG Entertainment (Bertelsmann-Germany)
These companies release approximately 6000 recordings
annually in the United States and account for approximately 85%
of the retail sales.
The United States is the largest producer and consumer of
entertainment product, and accounting for 60% of the worlds
consumption of music
Once an artist is signed, their music is manufactured and
packaged in the conglomerates manufacturing and printing
facilities and marketed through their distribution subsidiaries
which sale products directly or through sub distributors and
wholesalers to record stores and large department store chains,
and etc.
Joint ventures between conglomerates enable the major labels to
dominate and control the marketing and promotion of music
worldwide.
Independent Labels in the United States are not subsidiaries of
major labels and are not distributed through companies that are
owned by major labels
Independent labels release approximately 30,000 recordings
annually in the United States and account for approximately 15%
of the retail sales.
Independent labels and artists use sales outlets to reach
consumers- direct sales at performances, fairs, craft shows and

Derrin Lee
Intro into commercial music

II.

III.

educational workshops; mail-order promotions to fan lists and

etc.
Independent labels have no radio airtime and must develop
alternative promotional resources that serve niche music genres.

Legal Requirements
There are no state or federal certifications or licenses required
for record companies. They must however, abide by the
worldwide laws and agreements that govern the intellectual
property rights of composers and record companies.
California has imposed a seven-year limitation on the terms of
personal service contracts and according to the law; no one can
be forced to sign a personal service contract for a period longer
than seven years. This however conflicts with standard record
companies and all U.S, major label record contracts originated on
California.
To bypass this law, RIAA persuaded the California legislature to
pass an amendment that enables the record companies to break
the seven-year rule with recording artists and sue their artist for
future lost earnings if the artists break the contract.
How Record Companies Money
Record companies make money by selling recordings. Its a highrisk business.
According to the RIAA, approximately 90% of the records that are
released by major recording labels fail to make a profit.
Independent labels have to be more careful in their choices and
in their allocation of expenses because they do not have the
resources to cover many failures.
Budgets for making and selling recordings are ties to what labels
estimate what they will sell.
Record companies bear these major costs in a productionmanufacturing, some promotion, distribution, royalties, and
administration.

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Intro into commercial music

IV.

V.

Artist bear the costs of recording, some promotion, and touring

Recording Cost
Recording costs are borne by artists, not record companies.
Record companies commonly make loans to artist (advances) for
these costs and recoup them from royalties.
With the exception of jazz and classical artists, new major label
artist can spend between 100,000 and 500,000 to make a record.
Independent artists will spend less than 10,000 to make a record
Manufacturing cost includes replicating recorded material and
packaging.
Manufacturing cost are generally borne by recording labels and
are not recouped by artists royalties, although labels try to
deduct packaging cost from the base price on which they pay
these royalties.
Major labels pay .50 to .55 cents per CD.
Independent labels that order more than 100,000 CDs a year
pay.65 per CD.
Labels that buy less than 10,000 CDs a year pay 1.20 per CD.
Record labels pay two royalties: the first is a record royalty to the
performing artist; the second is a mechanical royalty to
composers and publishers.
Some companies pay record royalties on an 8-16% of the
suggested list retail price.
Royalties are paid within a contractually agreed on amount of
time after the record companies collect the money from their
distributors and stores.
Record labels pay composers and publishers mechanical
royalties. They try to cap mechanical royalty budgets at then
songs payable at 75% of the statutory rate.
Major labels budget approximately 20% of annual gross income
for promotion and selectively allocate the funds according to
sales projection for each artist
Independent labels generally budget 10% of projected gross
sales of all recordings
Record companies decide on the suggested list retail price of
each format.
The SLRP helps stores to determine the discount price they
charge customers and helps performers determine the price to
charge fans at gigs and by mail order.
Principle Job Responsibilities

Derrin Lee
Intro into commercial music

The principle job responsibilities for people that work in record

companies are

VI.

VII.

Administration: Handle legal matters, mergers, and acquisitions;

restructuring; and royalty administration and accounting
Artist and Repertoire: Scout for new artists; sign artists; career
development; input on creative aspects. Oversees recording
budgets and progress.
Creative: Graphic design and photography for all packaging and
promotional materials, advertising, merchandising materials, etc.
Marketing: Budget and design marketing campaigns. Coordinate
plan with sales, promotion and public relations department.
Expand existing markets and develop new ones
Promotion: Execute budgets and implement plans for getting
radio airplay for artists.
Sales: Work with distributors, retail company branches and rack
jobbers to place records and in-store advertising in retail venues.
Manufacturing: Schedule and coordinate work with
manufacturers and printers
Publishing: Work with subsidiary publishing companies to
maximize publishing and licensing revenues.
Getting Record Deals: Major Labels
Major labels sing artist that perform music in popular music
categories or that have sold many records in a niche genre.
Artists and their manager must be able to answer the questions
why should record companies risk the money, time and effort to
sign them?
Although talent plays a part in that answer, other factors are
equally compelling- the music appropriateness for commercial
radio and television programming needs
Teams effective work with artists
The willingness of artists to tour
Artists effectiveness in increasing fan bases with performances
and recordings.
Artists potentials for commitment, longevity, stability, and
sustained creativity

Getting Record Deals: Independent Labels

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Intro into commercial music

Independent labels look for artists that fit the genre of music
they specialize in.
Artists willingness to perform live and tour.
Performances help create the excitement that is needed for
alternative radio stations to play recordings and for reviewers to
write about them
VIII. Contracts Between Record Companies And Artists
Recording contracts between record companies and artists are
complex and managers and artists must find attorneys that are
well-versed in negotiating these contracts.
Most recording labels combine advances and recording costs in
an all-incentives recording fund.
Major labels pay 12-18% of the SLRP for recordings sold in retail
stores and independent labels pay 8%-12%, less packaging
costs.
If artists negotiate a 12% record royalty and contract to pay
producers a 2% record royalty, the artists net a 10% royalty.
Some of the most contested points of record contract
negotiation: Terms and recording commitment, creative control,
promotional expenses, Rights to the masters and artwork,
Ownership of artists, Packaging costs, Publishing, circumstances
under which labels cancel contracts
IX. Distribution and Production Deals
There are alternatives to recording contracts that sing artists
directly to record companies
Distribution deals: Independent labels deliver an agreed
amount of manufactured and packaged recordings to larger
recording labels, which agree to distribute them.
Larger labels pay smaller ones 70-80% of the monies they
receive from distributors and stores.
Pressing and distribution deals: Independent record labels that
manufacture, distribute and promote the recordings. The
larger labels pay 14-18 of the suggested retail price to the
smaller ones.
Production deals: Artists sign with producers that own
production companies. The royalties that artists receive
depend on whether the production companies have existing
deals with recording labels and what their contracts provide.
X.
Conclusion

Derrin Lee
Intro into commercial music

The recording industry provides artists with many opportunities

to make and sell recordings at levels that are commensurate with
their popularity in the marketplace.
Artist that perform regularly and have larger followings can
approach independent labels that have histories of success in
promoting and selling music in various categories.
Artists that record popular music categories on independent
labels and garnering airplay and promotional support approach
major labels.