The Numbers: Can Indie Labels Really Make Money Through Downloads? Part 1

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.