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.