How Record Labels Make Money
In recent years, with the rise of digital music services like Spotify and Apple Music, the way people consume music has changed dramatically. This has changed the entire face of the music industry, including record labels, who in the past made most of their money off the sale of physical music.
Record labels still primarily make money by selling recorded music, however nowadays most of this money comes in the form of streaming royalties rather than physical sales.
In addition to streaming royalties and physical sales, record labels can also turn a profit from touring and merchandise sales by their artists, as well as licensing fees for the use of music in films, TV shows, commercials, and video games.
Another source of revenue for record labels is touring and merchandise sales by their artists. They also earn money from music publishing rights, which include the rights to the lyrics and musical compositions of songs.
Despite the ever-changing face of the music industry and the rise of the “DIY” musician, record labels still play an important role for one simple reason — they have the money, and they use it to provide funding for artists and distribution for the music they create.
Now let’s take a closer look at the different revenue streams available to a record label and see how each one works:
Selling Physical Music
We’ll start with the original way that record labels made money, and the former number one source of revenue: selling physical music. Record labels do this in several different ways, amounting to an all-encompassing approach that grants them a sizable piece of the pie.
First, they cover the cost of manufacturing the physical copies of the album, such as CDs, vinyl records, tape recordings, what have you.
Then, copies of the record are sold by the record label to wholesalers at a discounted rate, to be paid to them in the form of royalties from records sold. These wholesalers then sell the copies to record stores and other retailers at a slightly higher, yet still discounted rate.
If all goes according to plan, the physical copies of the records are then sold in stores at full retail price, and the label gets paid a pre-agreed percentage of every copy sold, also known as the wholesale price.
Depending on the situation and the size of both the artist and the label, the record label themselves may be the wholesaler, selling the records directly to the retailers. This is more likely to be the case with smaller, boutique labels than with your majors.
As I mentioned earlier, physical music sales have declined significantly from their peak in the days before streaming services. Nonetheless, selling physical copies of music remains an important source of revenue for record labels and artists.
Plus, there has been a resurgence in recent years of people interested in vinyl records, providing reassurance that the long-beloved LP format is here to stay.
In a world where most people listen to music via streaming services, it’s only natural that streaming royalties are one of the top income sources for the modern record label.
It’s a relatively simple process that is similar in theory to the way they make money off selling records, just without the actual physical music and direct transaction.
How it works is, the label makes a deal with streaming services like Spotify, Apple Music, etc, that gives them the right to include the music in their catalogue in exchange for a payout per stream.
Anybody who has been around the music industry knows that this entire process has been a major source of contention in the music industry, as it is usually the artist — the creator of the music — who ends up with the short end of the stick in this deal.
Streaming royalties are paid out to the label on a per-stream basis (a laughably small number per stream, but that’s a story for another day). The record label takes a cut of this before giving the rest to the artist — the exact split here being dictated by their contract.
Thus, the more streams a particular piece of music gets, the more money the record label (and the artist) will make.
Touring & Merchandise Sales
When an artist goes on tour and sells merch (on tour or online), the record label makes money off that, too. They essentially take a percentage of all the revenue generated by their artists while on tour.
While not all labels take a cut of merchandise sales, it is definitely a common practice among labels in today’s music industry. You will find less of this with smaller, boutique labels, but once you reach the big leagues, the label certainly takes a cut of merch sales.
As soon as tickets go on sale, the record label makes a percentage of all tickets sold. This is the case as the record label is often heavily involved, if not solely involved in booking the tour in the first place.
The same goes for both in-person and online merchandise sales. First, the label fronts the cost of producing the merchandise, and then the label makes their investment back plus a profit.
Part of this profit is then passed on to the artist. The exact percentage comes down to what is written in their contract.
Licensing for Other Media
In addition to licensing for streaming services, record labels also make money from licensing the song for use in other forms of media such as movies, TV shows, commercials, and video games. This is what is known as a “sync license”, and is paid as a one-time fee by the creators of the other media for permission to use the song in the production.
This is where things get a little bit muddy, as publishing rights come into play. Publishing rights are the actual ownership of the underlying composition of a given song, rather than the ownership of the specific recording of that song.
Sometimes, artists maintain their own publishing rights when they sign a record label contract. This gives them the power to pick and choose for themselves how their song is represented in other media. Of course, it also allows them to keep all of the money from licensing agreements such as these.
It’s also common for the label and the artist to share the publishing rights, thus splitting the royalties in these situations.
Looking to the Future
The rise of the “DIY” musician, or the trend of musicians taking control of their own careers without the involvement of a traditional record label, has already had an impact on the music industry, and has the potential to significantly change the way record labels make money in the future.
As musicians become more self-sufficient and are able to handle tasks such as distribution, marketing, and touring on their own, they may be less reliant on record labels for these services, which could lead to a decline in the power and influence of record labels.
This would cause the traditional functions of record labels become less relevant, and record labels may need to reinvent themselves to find new ways to add value for artists. For example, they may focus on providing access to resources and expertise that musicians can’t easily obtain on their own.
In addition to this, new players may enter the market, offering alternative models for artists to make a living from their music. Direct-to-consumer platforms and music aggregators may play a larger role in the distribution and promotion of music in the future.
Overall, the emergence of the “DIY” musician and the changing music industry will likely lead to significant shifts in the way record labels make money in the future. However, it’s difficult to predict exactly how these changes will play out, and the record label industry will likely continue to evolve and adapt to these challenges.