The Numbers: Can Indie Labels Really Make Money Through Downloads? Part 1
by Spencer Critchley
So far, many of the arguments on emerging music business models seem to me to be based on speculation and assertions. So I thought I’d sit down and do some actual math. I based it on two scenarios for a moderately successful indie album: physical CD sales vs. iTunes downloads.
It’s scary.
Let’s assume the following:
* 12 songs on the album
* very low recording budget of $10,000 (major label budgets are well into six figures)
* artist royalty rate of 12%, producer royalty of 3%
* mechanical royalties (which go to songwriters and publishers) are 8.5 cents per song, the statutory rate
* 40,000 CDs pressed, 30,000 sold (a good sell-through)*
First, the CD scenario. These figures are partly based on an article in the Aug, 2005 issue of Nashville’s Music Row magazine (subscription required), which, BTW, has excellent technology coverage.
CD: Label’s Gross Revenues Per Copy
Wholesale Price 9.50
Recording (0.33)
Mechanical royalties (1.02)
Artist royalties (1.14)
Producer royalties (0.29)
Postage (0.10)
Distribution Fee (1.80)
Positioning Fee (1.00)
Manufacturing (0.80)
Returns postage (0.03)
Refurbishing (0.05)
GROSS REVENUES $2.95
So if there are only 25% returns from stores, the label makes $2.95 per CD, or $88,400.00 on net sales of 30,000 CDs.
Unfortunately, that figure is before promotional and other expenses, such as radio promotion, publicity, advertising, etc. In the mainstream record business, achieving sales of 30,000 units could easily require a promotion budget of $100,000 to $300,000. Let’s assume the label is aiming for the mainstream and spends $100,000:
CD: Label’s Net Revenues, 30,000 Sold
Sales revenue 88,400.00
Promotion, etc (100,000.00)
NET ($11,600.00)
A loss of $11,600. It would be worse if we included overhead, if more albums were returned, or if the recording budget were higher–and even with a recording budget of $0, the label would still be in the hole. You can see why record company people say over and over that it’s a hit-driven business. Non-hits don’t make money.
If our label is an alternative indie, it obviously can’t afford to risk six figures to earn revenues like these–the break-even promotion budget on this project would have been $88,400. Alternative indies have to find ways to run very, very lean, such as relying on lots of touring by the artist, good will with influential press, and street teams of fans to spread word of mouth. Even so, it looks like a business to be in for love, not money**.
*You may object that the assumption of sales of 30,000 is unfairly low. Actually, it’s hard to achieve sales like that. Most alternative indie albums are lucky to hit 5,000 to 10,000 copies sold, and there are untold numbers that never break 1,000.
**Harvard Business Review sells an informative case study (PDF) on Nashville-based Compass Records, which covers Compass’ success at becoming viable, followed by its struggle to grow.
Sunday, April 02, 2006
The Numbers: Can Indie Labels Really Make Money Through Downloads? Part 2
The Numbers: Can Indie Labels Really Make Money Through Downloads? Part 2
by Spencer Critchley
Related link: www.oreillynet.com/pub/wlg/8788
In Part 1 we looked at the revenues and costs of a moderately successful indie album release, and saw how hard it is for a record company to make money selling CDs. The promise of digital downloading is that it offers dramatically more efficient distribution. But a look at a comparison scenario using iTunes shows that the label may end up worse off.
In our first scenario, the label lost $11,600 (before overhead) on sales of 30,000 CDs, based on a low end mainstream marketing budget. For an indie, 30,000 units sold is an achievement. But it would still need to sell a few more thousand to break even, and wouldn’t earn serious money unless it had a hit (especially since more marketing will be required to drive more sales). Alternative indies make do with lower marketing budgets, and try to compensate with heavy touring and other tactics.
Now we’ll run a comparable project through iTunes. My numbers here are based in part on an article at musicbizacademy.com by entertainment lawyer Diana LaPolt:
iTunes Scenario: Label’s Gross Revenues Per Album1
Wholesale Price2 6.44
Recording (0.33)
Mechanical royalties (1.02)
Artist royalties3 (1.00)
Producer royalties3 (0.25)
Postage (0.00)
Distribution Fee (0.00)
Positioning Fee (0.00)
Manufacturing (0.00)
Returns postage (0.00)
Refurbishing (0.00)
GROSS REVENUES $3.83
Wow, looking good so far! The label makes $3.83 per album as opposed to $2.95, even with a wholesale price of $6.44 instead of $9.50. It looks like we’re seeing the magic of zeroing out all the manufacturing, shipping and handling associated with physical product (and last I heard, Apple doesn’t charge for favorable positioning).
Now let’s factor in the marketing expenses (radio promotion, publicity, advertising, etc) and estimate the take from sales of 30,000 albums–with, of course, no returns:
iTunes: Label’s Net Revenues, 30,000 Albums Sold
Sales revenue 114,805.00
Promotion, etc (100,000.00)
NET $14,805.00
A profit! $14,805 to put towards rent and salaries.
Except… There’s a new factor with downloading: Digital delivery unbundles the album format, allowing the purchaser to buy only the songs he or she wants. How often do people buy an entire album on iTunes? I don’t know, but on average they buy some fraction of total number of the songs.
Let’s see what happens if our 12-song album sells an average of six songs to each customer, which actually seems optimistic to me, at 64 cents wholesale (based on iTunes’ 99 cent/song retail price):
iTunes: Label’s Net Revenues, Avg. Customer Buys 6 Songs1
Sales revenue 72,943.00
Promotion, etc (100,000.00)
NET ($27,057.00)
Oh oh.
This is why record companies want you to buy albums. From the consumer’s point of view, it stinks to buy a whole album if you only end up liking a few songs. But from the label’s point of view, selling singles is a lousy business.
And of course it gets worse if people buy fewer songs from the album. At an average of three songs per album, the label loses $72,022. At one song, they lose $87,843.
Again, they will make a profit on a hit, but labels have similar up-front investments for dogs and for hits. The rule of thumb in the traditional record industry is that you’re doing well if one out of ten of your artists sells enough to pay for the other nine who lose you money. You can see why artists’ royalty rates work out to be roughly 10 cents on the dollar–the other 90 cents is paying for the other nine albums.
From the artist’s point of view: Your advance is recouped at the royalty rate. So if your record earns $1,000, your debt to the label goes down by only $100. It’s kind of an owing-your-soul-to-the-company-store thing. Producer Steve Albini runs those numbers in “The Problem With Music” at negativland.com. See also Moses Avalon’s Confessions Of A Record Producer.
1. After a challenge from teejay (see below) I’ve corrected some of these figures.
2. A typical album retails for $9.90 on iTunes, a single is 99 cents, and Apple takes 35%.
3. Artist and producer royalties are based on 130% of the wholesale price. As in the CD scenario, I’m assuming a 12% royalty for the artist and 3% for the producer.
Next time: According to the Long Tail hypothesis, good filters are critical to making downloading work as a business. We’ll look at the value those filters will have to add.
by Spencer Critchley
Related link: www.oreillynet.com/pub/wlg/8788
In Part 1 we looked at the revenues and costs of a moderately successful indie album release, and saw how hard it is for a record company to make money selling CDs. The promise of digital downloading is that it offers dramatically more efficient distribution. But a look at a comparison scenario using iTunes shows that the label may end up worse off.
In our first scenario, the label lost $11,600 (before overhead) on sales of 30,000 CDs, based on a low end mainstream marketing budget. For an indie, 30,000 units sold is an achievement. But it would still need to sell a few more thousand to break even, and wouldn’t earn serious money unless it had a hit (especially since more marketing will be required to drive more sales). Alternative indies make do with lower marketing budgets, and try to compensate with heavy touring and other tactics.
Now we’ll run a comparable project through iTunes. My numbers here are based in part on an article at musicbizacademy.com by entertainment lawyer Diana LaPolt:
iTunes Scenario: Label’s Gross Revenues Per Album1
Wholesale Price2 6.44
Recording (0.33)
Mechanical royalties (1.02)
Artist royalties3 (1.00)
Producer royalties3 (0.25)
Postage (0.00)
Distribution Fee (0.00)
Positioning Fee (0.00)
Manufacturing (0.00)
Returns postage (0.00)
Refurbishing (0.00)
GROSS REVENUES $3.83
Wow, looking good so far! The label makes $3.83 per album as opposed to $2.95, even with a wholesale price of $6.44 instead of $9.50. It looks like we’re seeing the magic of zeroing out all the manufacturing, shipping and handling associated with physical product (and last I heard, Apple doesn’t charge for favorable positioning).
Now let’s factor in the marketing expenses (radio promotion, publicity, advertising, etc) and estimate the take from sales of 30,000 albums–with, of course, no returns:
iTunes: Label’s Net Revenues, 30,000 Albums Sold
Sales revenue 114,805.00
Promotion, etc (100,000.00)
NET $14,805.00
A profit! $14,805 to put towards rent and salaries.
Except… There’s a new factor with downloading: Digital delivery unbundles the album format, allowing the purchaser to buy only the songs he or she wants. How often do people buy an entire album on iTunes? I don’t know, but on average they buy some fraction of total number of the songs.
Let’s see what happens if our 12-song album sells an average of six songs to each customer, which actually seems optimistic to me, at 64 cents wholesale (based on iTunes’ 99 cent/song retail price):
iTunes: Label’s Net Revenues, Avg. Customer Buys 6 Songs1
Sales revenue 72,943.00
Promotion, etc (100,000.00)
NET ($27,057.00)
Oh oh.
This is why record companies want you to buy albums. From the consumer’s point of view, it stinks to buy a whole album if you only end up liking a few songs. But from the label’s point of view, selling singles is a lousy business.
And of course it gets worse if people buy fewer songs from the album. At an average of three songs per album, the label loses $72,022. At one song, they lose $87,843.
Again, they will make a profit on a hit, but labels have similar up-front investments for dogs and for hits. The rule of thumb in the traditional record industry is that you’re doing well if one out of ten of your artists sells enough to pay for the other nine who lose you money. You can see why artists’ royalty rates work out to be roughly 10 cents on the dollar–the other 90 cents is paying for the other nine albums.
From the artist’s point of view: Your advance is recouped at the royalty rate. So if your record earns $1,000, your debt to the label goes down by only $100. It’s kind of an owing-your-soul-to-the-company-store thing. Producer Steve Albini runs those numbers in “The Problem With Music” at negativland.com. See also Moses Avalon’s Confessions Of A Record Producer.
1. After a challenge from teejay (see below) I’ve corrected some of these figures.
2. A typical album retails for $9.90 on iTunes, a single is 99 cents, and Apple takes 35%.
3. Artist and producer royalties are based on 130% of the wholesale price. As in the CD scenario, I’m assuming a 12% royalty for the artist and 3% for the producer.
Next time: According to the Long Tail hypothesis, good filters are critical to making downloading work as a business. We’ll look at the value those filters will have to add.
The Numbers: Can Indie Labels Really Make Money Through Downloads? Part 3
The Numbers: Can Indie Labels Really Make Money Through Downloads? Part 3
by Spencer Critchley
Related link: www.oreillynet.com/pub/wlg/8816
In Part 1 of this series I looked at how hard it is for an indie label to make money selling CDs. Part 2 was about how it can be even harder with iTunes. In this part, I talk about where all the money went, and about what new models, such as those based on the Long Tail, will have to be worth.
First of all, where’d the money go? As I mentioned in Part 2, even though iTunes eliminates a lot of a label’s expenses related to physical distribution, it may yield the label less money. That’s partly because iTunes, like other download services, unbundles the album format, allowing customers to buy individual songs. That’s great for customers, but given that the up front marketing costs to launch a new project are roughly equal for an album or a 99 cent single, it’s big trouble for labels.
In response to Part 2, teejay argued that because singles are so much cheaper than albums, people will buy more singles, and the increased volume will help make up for the lower price. I agree that more people are likely to buy a single, but I’m not convinced yet that the increase will be in the hundreds per cent, which is what would be needed to replace physical album sales (physical singles sales have become close to negligible). And given that cheaper digital production and distribution are leading to an explosion of new product, I’d expect the benefit from increased singles sales to be diluted by the availability of more releases, except in the case of big hits.
But there’s more to it than just unbundling. Comparing the numbers in Part 1 & 2 for CD sales vs. iTunes sales, I notice that the wholesale album price has gone down just over three dollars, from $9.50 to about $6.44 (depending on the retail price1). That might seem logical, given the savings realized by dropping physical distribution:
Postage (0.10)
Distribution Fee (1.80)
Positioning Fee (1.00)
Manufacturing (0.80)
Returns postage (0.03)
Refurbishing (0.05)
TOTAL GROSS SAVINGS (3.78)
“Gross” savings because digital distribution is not cost-free.
But have a look at this line-up of figures:
Gross distribution savings 3.78
Reduction in wholesale price to labels (9.50 - 6.44) 3.06
Apple’s gross margin (9.90 - 6.44)1 3.46
Steve Jobs showed the record companies a way to reduce their expenses and convinced them to give almost all the savings to him.2 There IS a reality distortion field! One begins to see why EMI and some other labels have begun arguing that Apple should raise its iTunes prices.
So that’s where the money went. For now, anyway, it looks as if labels have lost the advantage gained from increased distribution efficiency. So is there a way left for labels, in particular the indies, to make money? As Philipp and dannyo_152_redux have pointed out, reduced marketing expenses could be another route to profit.
This is also the promise of Wired editor Chris Anderson’s Long Tail model. Anderson says that in the digital economy hits will serve as entrees to similar non-hits that are further down the long tail of the sales curve. And he highlights the importance of filters, such as recommendations from trusted experts.
This kind of marketing can be close to free. But what’s it worth? And how much value does it have to make up? As I mentioned in Part 1, marketing expenses for indie albums that are attempting to compete in the mainstream are in the range of $100,000 to $300,000. Alternative indies can’t spend that much cash, so they do things like have their artists play lots of shows. But I’d guess that if you account for time and work, the investment is similar. I hope new forms of marketing can have comparable impact for less money, but I haven’t seen convincing details yet of how that will work. I’ll repeat what I said a little while ago in a post called “Beware Of Risk-Free Business Models”:
So far in business history, there’s been a requirement that risk and reward roughly balance… Many of the alternative models I’ve seen seem to be based on the assumption that merit is enough: people will hear good music and recommend it to their friends, who will want to buy it. But it’s at that point that the model appears to go risk-free… [the] marketing investment is the risk in the risk-reward equation. In particular, it’s the “impresario fee” for finding an artist that is extraordinary in some way and then doing all the things that have to be done to, in effect, modulate pop culture with the image and sound of this artist.
If there’s little or no risk behind a product, why will anyone want to pay for it? So far there have in fact been few money-making acts to emerge from the net, and there have by now been many attempts. It may be that the era of hit recordings is ending, as David Bowie3 and others have argued. Until now, only hits have made profits; the hope for the new models is that increased efficiencies will make non-hits profitable. But in order to make that work these models will have to overcome some powerful forces pulling in opposing directions–in particular, the conversion of music into a commodity whose unit value is approaching zero.
1. iTunes’ retail prices vary.
2. Apple is believed to make little direct net profit from music sales, but the value in iPod sales is huge. The money saved by switching to digital distribution will vary widely depending on the particular model. Running iTunes is apparently quite expensive, while P2P networks can spread expenses so thin they pretty much disappear.
3. ‘’Music itself is going to become like running water or electricity… So it’s like, just take advantage of these last few years because none of this is ever going to happen again. You’d better be prepared for doing a lot of touring because that’s really the only unique situation that’s going to be left. It’s terribly exciting. But on the other hand it doesn’t matter if you think it’s exciting or not; it’s what’s going to happen.'’–New York Times, June 9, 2002.
by Spencer Critchley
Related link: www.oreillynet.com/pub/wlg/8816
In Part 1 of this series I looked at how hard it is for an indie label to make money selling CDs. Part 2 was about how it can be even harder with iTunes. In this part, I talk about where all the money went, and about what new models, such as those based on the Long Tail, will have to be worth.
First of all, where’d the money go? As I mentioned in Part 2, even though iTunes eliminates a lot of a label’s expenses related to physical distribution, it may yield the label less money. That’s partly because iTunes, like other download services, unbundles the album format, allowing customers to buy individual songs. That’s great for customers, but given that the up front marketing costs to launch a new project are roughly equal for an album or a 99 cent single, it’s big trouble for labels.
In response to Part 2, teejay argued that because singles are so much cheaper than albums, people will buy more singles, and the increased volume will help make up for the lower price. I agree that more people are likely to buy a single, but I’m not convinced yet that the increase will be in the hundreds per cent, which is what would be needed to replace physical album sales (physical singles sales have become close to negligible). And given that cheaper digital production and distribution are leading to an explosion of new product, I’d expect the benefit from increased singles sales to be diluted by the availability of more releases, except in the case of big hits.
But there’s more to it than just unbundling. Comparing the numbers in Part 1 & 2 for CD sales vs. iTunes sales, I notice that the wholesale album price has gone down just over three dollars, from $9.50 to about $6.44 (depending on the retail price1). That might seem logical, given the savings realized by dropping physical distribution:
Postage (0.10)
Distribution Fee (1.80)
Positioning Fee (1.00)
Manufacturing (0.80)
Returns postage (0.03)
Refurbishing (0.05)
TOTAL GROSS SAVINGS (3.78)
“Gross” savings because digital distribution is not cost-free.
But have a look at this line-up of figures:
Gross distribution savings 3.78
Reduction in wholesale price to labels (9.50 - 6.44) 3.06
Apple’s gross margin (9.90 - 6.44)1 3.46
Steve Jobs showed the record companies a way to reduce their expenses and convinced them to give almost all the savings to him.2 There IS a reality distortion field! One begins to see why EMI and some other labels have begun arguing that Apple should raise its iTunes prices.
So that’s where the money went. For now, anyway, it looks as if labels have lost the advantage gained from increased distribution efficiency. So is there a way left for labels, in particular the indies, to make money? As Philipp and dannyo_152_redux have pointed out, reduced marketing expenses could be another route to profit.
This is also the promise of Wired editor Chris Anderson’s Long Tail model. Anderson says that in the digital economy hits will serve as entrees to similar non-hits that are further down the long tail of the sales curve. And he highlights the importance of filters, such as recommendations from trusted experts.
This kind of marketing can be close to free. But what’s it worth? And how much value does it have to make up? As I mentioned in Part 1, marketing expenses for indie albums that are attempting to compete in the mainstream are in the range of $100,000 to $300,000. Alternative indies can’t spend that much cash, so they do things like have their artists play lots of shows. But I’d guess that if you account for time and work, the investment is similar. I hope new forms of marketing can have comparable impact for less money, but I haven’t seen convincing details yet of how that will work. I’ll repeat what I said a little while ago in a post called “Beware Of Risk-Free Business Models”:
So far in business history, there’s been a requirement that risk and reward roughly balance… Many of the alternative models I’ve seen seem to be based on the assumption that merit is enough: people will hear good music and recommend it to their friends, who will want to buy it. But it’s at that point that the model appears to go risk-free… [the] marketing investment is the risk in the risk-reward equation. In particular, it’s the “impresario fee” for finding an artist that is extraordinary in some way and then doing all the things that have to be done to, in effect, modulate pop culture with the image and sound of this artist.
If there’s little or no risk behind a product, why will anyone want to pay for it? So far there have in fact been few money-making acts to emerge from the net, and there have by now been many attempts. It may be that the era of hit recordings is ending, as David Bowie3 and others have argued. Until now, only hits have made profits; the hope for the new models is that increased efficiencies will make non-hits profitable. But in order to make that work these models will have to overcome some powerful forces pulling in opposing directions–in particular, the conversion of music into a commodity whose unit value is approaching zero.
1. iTunes’ retail prices vary.
2. Apple is believed to make little direct net profit from music sales, but the value in iPod sales is huge. The money saved by switching to digital distribution will vary widely depending on the particular model. Running iTunes is apparently quite expensive, while P2P networks can spread expenses so thin they pretty much disappear.
3. ‘’Music itself is going to become like running water or electricity… So it’s like, just take advantage of these last few years because none of this is ever going to happen again. You’d better be prepared for doing a lot of touring because that’s really the only unique situation that’s going to be left. It’s terribly exciting. But on the other hand it doesn’t matter if you think it’s exciting or not; it’s what’s going to happen.'’–New York Times, June 9, 2002.
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