All About Income Streams, Part I

When TuneCore first began, we called George: few people understand the music business as deeply. George Howard is a professor of management at Loyola University, New Orleans. He is the former president of Rykodisc, and founder of Slow River Records. He is the senior editor for Artists House Music, and a board member and advisor for a number of companies including Wolfgang's Vault and Daytrotter. He has written two books on the music business for Berklee Media. Check out his personal blog at www.9giantsteps.com.

All about Income Streams, Part I
--By George Howard

One thing that’s very important to get a handle is the multiple royalty (income) streams available to artists. As an artist in today’s landscape you must think in terms of varied sources of revenue. What many artists don’t understand is that there is a HUGE difference in potential income streams for the person who writes the song versus the person who performs the song. This article will explain these differences and illustrate the first two multiple streams of income. Future articles will explain further streams.

Concept of the song as a separate entity from the performance of the song To begin to understand how this works, you must separate out the performance (or recorded version) of the song from the actual song itself. Think of it this way, Frank Sinatra never wrote any of his songs. He performed songs written by lots of different people on his albums, on his TV appearances, via radio broadcast, and in venues, but he didn’t write any of the songs. Why is this important? It’s important because, every time Sinatra released a record, the person (or people) who wrote the songs got paid. It’s important because, every time Sinatra sang on TV, the person (or people) who wrote the songs got paid. It’s important because every time one of Sinatra’s records was played on the radio, the person (or people) who wrote the songs got paid. It’s important because when Sinatra was one of the top-grossing touring acts in the world, the person (or people) who wrote the songs the he performed on stage got paid.

Now in some of the examples above, of course, Sinatra also got paid. But what’s crucial to begin understanding is that Sinatra got paid for something completely different than the writer(s) of the songs did. Sinatra got paid for performing the song, not writing it. For performing the song, Sinatra received a royalty from the label called an “artist” or “record” royalty (both terms are used, they mean the same thing). This “artist” royalty is based on a percentage of the list price of the album, while the writer of the song(s) received what is called a “mechanical” royalty based on the number of songs the writer has on the album.

“Artist” Royalties

I know this sounds confusing, but it’s so very crucial to understand. To try and make it as clear as possible, let’s imagine Sinatra releasing a record. Using hypothetical numbers (based on reality). The record cost one million dollars to record and market. The record is priced at $15 (again, for easy math). The record sells one million copies. The record contains 10 songs. Five of these songs are written by writer “A,” and five are written by writer “B” (none are written by Sinatra). Now, because Sinatra is a superstar, he has a higher than normal “artist” royalty, and receives 20% of the retail list price of each record sold. So, 20% (the royalty) of $15 (the list price) is $3 per record. On a million records sold, therefore, Sinatra is owed 3 million dollars. Of course, it cost the record company $1 million to record and market those records so the record company “recoups” (pays themselves back) that money before paying Sinatra. He, therefore, ends up with $2 million in “artist” royalties.

Mechanical Royalties

There is, however, another completely separate and distinct stream of income that is generated from the sale of these records. Remember, as stated above, there are two different songwriters (writer “A” and writer “B”) who each wrote 5 of the 10 total songs that Sinatra recorded on the record. By law (statute), these writers must be paid by the record label. The record label pays the songwriters a license fee for the right to “mechanically” reproduce the writer’s songs on the Sinatra album that the label releases. This is why this is called a “mechanical” license. What’s important to understand is that neither the record label nor Sinatra owns these songs that are being released on the record—the songwriters do— and the label is only licensing the songs from the songwriters, and the only thing the label can do with these songs is release them on Sinatra’s record. The label, then, owns the body of work that is comprised of the artwork and the collection of songs, but NOT the individual songs themselves, these are owned by the writers. As stated, in exchange for the ability to use these songs on their record, the label pays the songwriters a mechanical license fee.

The copyright board sets the fee that the labels must pay to the songwriters. This fee has historically always gone up. Currently, the rate is nine and one tenth cents per song ($.091). This is the license fee that the labels must pay to the songwriter(s) for every song that they have written that the label uses on their album. The labels must pay the songwriter this per song fee for every album they sell.

So, to go back to Sinatra’s million-selling record. Writer “A” and “B” both wrote 5 songs on the album. This means that each is owed forty-two and one-half cents for each record sold ($.091 x 5 songs = $.455). On a million records sold, therefore, each writer receives $455,000 ($.455 x 1 million records = $455,000). Had there been only one writer who wrote all 10 songs, she would have received $910,000 ($.091 x 10 songs = $.91 x 1 million records sold = $910,000).

While this income is less than what Sinatra received in “artist” royalties, it’s still significant money. Also, remember, had Sinatra written his own songs, his total payday would have been $2,910,000 ($2 million in “artist” royalties and $910,000 in “mechanical” royalties).

For Part II, please click here.

Comments

[Zapp Royce]

Hi I have been making music for around 20 + years mainly as a hobby, but all the while recording songs at the same time having a full time job, it seems so difficult to break into mainstream music channel, however one of my songs Highly Radioactive is getting some great reviews, feel free to check out my songs if you go to my myspace page & then to sterefame & from sterefame there are links to all my other sites.
Rockon

Zapp Royce.

[Dan Petersen]

Very good information! I found all kinds of valuable little nuggets, very insightful. As I am just getting started on my venture in music, and reading this gets me excited about the journey ahead. Thanks!

[George]

@EMMSLY and @Eugene,

Thank you both for the comments and suggestions. I'll try to address those issues more thoroughly in another article, but to give you some general food for thought, you should think about it from a bottoms-up, rather than a top-down approach.

The goal, I believe, of all artists/labels should be to generate enough revenue from their current project to fund another projects *and* release music that affects the culture in a positive way over the long term. To do this, you have to determine exactly how much you will need to sell in order to make not only the money you spent/are spending on your current project, but to generate enough to release another record. This is a bottoms-up approach. A top-down approach looks at the overall size of a market and attempts to grab a % of the total market share. Meaningless.

So, the "indie" economics are:

1. what does it cost to make a record
2. what does it cost to distribute a record
3. what does it cost to market a record

(No different, by the way, than major label economics).

The good news is that, thanks to tech advances, number 1 is a low number, and - thanks to TuneCore (shameless plug), the cost to distribute is de minimus.

That leaves us with number 3: marketing. This is where your time, money, and effort *must* go.

So, say it cost you $2k to record your record.

Say it cost you another $2k to press up some records (you still need them for promo), and get your music - via TuneCore, natch - up on all the possible sites. And maybe some other merch (t-shirts, stickers...whatever) You MUST have social objects (http://www.9giantsteps.com/?p=845)

Now, you gotta spend another grand to get a decent web site up (yes, Facebook and MySpace are free, but you really need your own site, and they cost more than you think).

I'd put aside another grand for misc. expenses (phone, mailing, etc.).

So, you're in it for $6k. This may sound like a lot, but, believe me it's about a tenth of what it cost only five years ago. These are good times.

So, now you have to determine exactly how money you need to sell to recoup this $6k, and make another (at least) $6k to have the opportunity to do it all over again.

For easy math, say you're netting out at $5 a "unit" (be they sales of actual CDs or income from downloads). I'm assuming that you're releasing both your own songs (no mechanical royalties due), and you're acting as your own label (no other royalties due). To get to $12k you'll need to sell 2400 units.

That's your goal: 2400 units.

Now you have to figure out how to get there. I believe strongly that it all starts with the live gig, so you must be performing your butt off. Don't think about a national tour until you're truly ready. Instead, think regionally. Don't think about the same old tired clubs that don't result in anything other than frustration when you play them. Instead, make your performances events; make them happenings; have them at alternative venues (house parties, churches, VFW halls, whatever). You may need to start at open mics, but if you're savvy and if you're good, you'll start building a fan base. This will result in selling. Your distribution mechanism is right from the "stage" Remember, you need to sell 2400 copies. So, maybe it'll take you a year to sell 1200 from the stage.

At the same time, of course, you're also building your online presence. You're not only selling via all the sites that TuneCore has allowed you to make your music available, you're also "releasing" new stuff from your own site and via YouTube every month (live performances, acoustic versions of song, whatever) to your growing list of people on your email list. You must connect with them beyond just putting a record out every eighteen months. So, between all the sites you're up on, and your direct sales from your web site, you need to sell another 1200 units. Maybe this takes you the same year. It doesn't matter how long it takes.

You notice I've made NO mention of a publicist or a radio promoter. That is not an oversight!

Soon enough, you've recouped your investment, and have enough to start the process over again. But guess what, this time things happen much more rapidly. You already have a fan base. You also now have more products (you're still selling record one even while you focus on record two) that allow you to generate revenue even faster. Of course, you're also making money from your live gigs.

This, to me, is indie economics.

Hope it helps.

George

[EMMSLY]

Great information but I would like to see information aimed at inde artists focused on internet and retail numbers.

[Eugene Thomas]

I've been plugging away at my music for over 40 years, and knew about this breakdown, but not the percentages. I've learned a lot and shared a lot. Having some figures to work with will help when I'm sharing with others that are just getting started. I'm new to Tunecore and this news letter and blog, but I'm already looking forward to the next one. If you haven't done so in the past you may consider doing a breakdown of monies to be made by bands that record and sell their own originals vs what they would get going through a record company. Thanks again.

[George Howard]

It's important to remember that the focus needs to be on the multiple streams of revenue rather than precisely how they are calculated. While traditionally the record royalty (that is, the royalty paid to the person signed to the label, whether this person writes the songs or not) has been calculated based on a % of the SRLP, this is not the only way, and likely will not be the way it's done moving forward.

For instance, many labels pay the signed artists based on a profit sharing deal (often erroneously referred to as a joint venture ("jv")). These deals divide the profit (if any) between the artist and the label after ALL expenses have been recouped.

Whether the artist is paid a record royalty in the more traditional sense (% of srlp) or in some other manner (profit sharing), the fact remains that the writer of the song is still owed the mechanical royalty, and this royalty is paid in a far more consistent manner: currently, $.091 per song, per album sold, for songs under 5 minutes.

This writer (and not the artist signed to the label) will also receive other streams of income; such as, income from synchronizations (i.e. when their songs are used in movies/TV), performance income (e.g. when their songs are broadcast publicly, such as on terrestrial radio). But that's a topic for another piece.

For now, just be sure to understand the important distinction between how the writer is paid and how the person signed to the label is paid.

Thank you for all the wonderful comments.

best,

George

[George Ziemann]

The royalty is the performers' commission on the sale between the record label and the record store. This transaction takes place at the wholesale price.

Hypothetical (for easy math)--

Label sells 1000 CDs to record shop for $10 each. Shop sells CDs to customer for $15. Shop collects $15,000 from customers; owner pays record label $10,000.

Artist royalty rate is 25%. Record label sits down to write a check to the artist. The sale was $10,000. The royalty/commission is $2500, not $3750 (25% of the retail price). There are going to be deductions, of course. That's just a starting point.

Using the retail prices as the basis for royalty/commission would be an accounting nightmare. It's very impractical. The royalty would change if WalMart has a sale to clean out back stock. It just doesn't work like that.

[barry bynum]

oh sorry forgot to say thanks so much for putting this info out here for the folks

God Bless

Barry Bynum

[barry bynum]

Been a few years since I was signed with a label (now independent) but I was writer and performer both. Within the realm of writers royaties you have to make the distiction between sales royalties and airplay royalties. Writer's royalties for sold product are general paid to writer by the record company or their publishing branch, and Writer's royalties for airplay or disco use are collected by and sent to the Writer(s) by a collecting Agency (in my case BMI, UK has new config now, not the old PRS)

Standard Artist Royalty in those days was 5-7% of 90% of retail,(to allow for returns, promos, and damage or theft)And most cases no money for artist until production budget is recouped. Record company would sometimes set up tour and incur expenses which should generate more sales, but that often goes against your break-even point.

[JOSEPH IVEY]

HAY I READ ABOUT THE ROYALTIES AND HOW THEY WORK I THINK THAT IS CRAZY GOOD I HAVE A NEW CD WRITTEN AND PROFORMED BY ME LOOK UP MY SITE JOSEPHIVEYMUSIC.COM TELL ME WHAT U THINK LOVE1234@BELLSOUTH.NET THANKS FOR THE INFO

[Don Cameron]

I am a writer of music and this a very interesting topic ,when the lyrics are used by other musicians and how it rates against the backdrop of perfomers and fan clubs.I sing as well and would care for some info on how I can write for advertising and songs or jingles for others to use in cd,comercials,TV and so on .If there is any info on how I can start selling myself I would love to know.It is a passion and a dream for success that will be acheived.Thankyou and keep rockin.Don Cameron

[Aisha Walters]

Is this based on the US? As in the UK the artist in addition to receiving a artist royalty based on the list price of the album also receives a royalty in the UK from PPL for the Public performance and broadcast of a recorded version on f the song irrespective of sales. At the same time the writer also receives via PRS a performance royalty. This is separate to the Mechanical which in the UK is based upon how many copies are pressed/downloaded (again this would be for the writer/publisher). None of this takes into account any additional income both the writer and the label would gain if a song is licensed for use as a sync within a programme (ala Snow Patrol - Grey's Anatomy)

[nizguyk]

Valuable info...

[courtney]

great article.insightful and informative.it was a good re-fresher course for me as a writer.thanks........

[George Ziemann]

Rosemarie is asking how the songwriter makes the connection with the artist.

Good teaching point on the difference between the performer and the songwriter, as long as these are hypothetical numbers. Artist royalties are never paid on the basis of the retail price.