The New Economics of the Music Industry

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Speaking of wads of money, CDs were intensely profitable for artists and (especially) record labels for more than two decades, until the Internet, MP3s, piracy, Napster, iTunes, YouTube and Spotify kicked in over the past 10 years. The formula for artist payment is roughly the same as the iTunes model – only labels have traditionally removed hefty percentages for mysterious deductions.

Josh Grier, veteran music-business attorney for Wilco, Ryan Adams and others, walks us through the math. The retailer takes out about 30 percent of the suggested $17.98 price, or $5.40. From what's left, the songwriter and publishing company remove another 9.1 cents per song – or say, 91 cents for 10 songs. That leaves $11.67. (Often, producers take a cut as well.) From that, the artist receives 12 to 20 percent – let's use 16 to split the difference.

But Grier points out that labels have been cutting into artist royalties for years with deductions marked "free goods" (usually 10 percent of the artist's royalty) and "packaging" (usually 25 percent) -- dropping the royalty rate from roughly 16 to 11. (These old-school deductions for physical CDs and LPs don't apply to digital sales.)

In the end, in very broad terms, that leaves about $1.93 per sale in profit for the artist and $9.74 for the label. (We're assuming, once again, that the artist in question has recouped expenses, meaning he or she no longer has to pay back a record label for videos, tour support and so forth.) Of course, both need to remove their own expenses from that.

A decade ago, this disparity in payments was a huge point of contention between artists and the labels they worked for. That's still true today, but artists are far more likely to throw up their hands and say, "Who gives a crap? Let's just make a pile from touring." Says Grier: "The questions you're having are not all that relevant to the band. 'How many records are we going to sell? Pfpfpfpft. We just want to play the songs.'"

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