How Do Record Labels Make Money? Everything You Need To Know

Not very many years ago, artists relied solely on record labels to help them make it in the music industry. But, with technology and the Internet, most musicians and artists now can survive, if not thrive, without being signed to a label.

However, record labels still play an important role in getting music out there. They have the big money, the connections and still offer a huge marketing opportunity. But how do record labels make all of this money? Especially with big artists being paid so well, right?

How Do Record Labels Make Money? Everything You Need To Know

The Inner Workings Of A Record Label: The Business Side Of Things

To understand how record labels make money, we first need to understand what they are and their purpose:

A record label is a company that is in charge of:

  • manufacturing,
  • distributing,
  • and promoting the product of their affiliated artists.

The products here are the music recordings. The label is responsible for selling the artist and his or her music. Note that the goal is not just to sell music but to market the artist as well.

These companies shell out the money for recording, mixing, and eventually mastering the recordings of the musician's work. The label gives the artist feedback and suggestions on how to improve the work. The company also plans how the rollout of the album will go, as well as prepares everything for the artist's tours and more.

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The record label is also in charge of communicating with the distributor. This entails making all the arrangements to get the records from the manufacturer to the various music stores all over the world. Or if done digitally, it is in charge of uploading the music so that buyers can get their own copies.

Part of the company's job is to find new talents and convince them to sign with the label. If you are a budding artist, this is one of the roles of the record label that you need to understand the most. This role is fulfilled by the label's A&R or artist and repertoire department.

The label representatives or agents of the label go to live shows, watch cover videos, listen to submitted demos, and network with other channels to find the industry's next big name. The representatives offer the artist a record deal so that they can begin working on the music that the artist can release.

How Do Record Labels Make Money: 5 Key Record Label Revenue Streams

How Do Record Labels Make Money: Different Record Label Revenue Streams

Most people think that record labels make all of their money from selling records, but that's only a small part of the story. In reality, there are five main ways that record labels generate revenue:

  1. sales,
  2. licensing,
  3. royalties,
  4. merchandising,
  5. and live performances

Let's take a closer look at each of these revenue streams:

Sales

Sales are the most obvious way that record labels make money. By selling records, either physically or digitally, labels can generate a huge amount of revenue. Of course, this revenue stream has been in decline in recent years as streaming services have become more popular.

Licensing

Licensing is another important revenue stream for record labels. When a label licenses its music to be used in TV shows, movies, or video games, it can generate a significant amount of money. This is often done on a one-time basis, but some labels also sign deals to license their music for an extended period of time.

Royalties

Royalties are payments that labels receive whenever their music is played on the radio, streamed online, or used in public places. These payments can add up quickly, and they provide a steadier stream of income than sales or licensing.

Merchandising

Merchandising is another way for labels to make money off of their artists. By selling branded merchandise like t-shirts, hats, and posters, labels can bring in a lot of revenue. This is especially true for larger artists who have devoted fanbases who are eager to buy anything with their favorite artist's name on it.

Live Performances

Finally, live performances are a major source of revenue for many record labels. By booking their artists to play shows and festivals, labels can make a lot of money. This is often done through exclusive deals with promoters or venues.

Record Deals Are A Record Labels Investment

In order to make money from their artists, record labels first need to invest in their artists. They do this by helping them develop, market, and sell their records, and then take a portion of that generated revenue to recoup the investment. They do this via different types of record deals.

Whenever an artist agrees to sign a contract with a record label, they agree that part of the earnings from recordings would go to the label. This is the payment for the investment that the company will make in the artist. A fraction of the royalties will go to the label.

Some record deals entail giving the artist an advance. In return, the artist is expected to come up with a record that the label will sell. The advanced amount will then be taken from the sales. The rest of the profit will be split by the label and the artist. There is no formal format for contracts. A deal can vary depending on the label and the artist.

In short, some of the most popular deals are:


The Standard Deal

For the traditional kind of deals that labels offer, the artist is expected to release at least sixteen songs for a cycle of 36 months. Take note that this is the old standard deal in the US and may not be true for other countries.

The deal is straightforward. The label offers the artist a budget for marketing and promoting, and then it takes a large part of the profit. This is usually above 80%. This is for newly signed talents. More established musicians may get a better cut.

The artist is typically offered a huge advance based on projected royalties. The label covers all the expenses for making the record and logs it as recoupable expenses. What this means is that once the album starts selling, the label takes the profits first. Once it has earned its investments, then the artist can start earning his or her share.

What does this tell us? Those record labels are taking huge risks in investing in new talent. They solely rely on the album doing great in the market to recoup the investment. And the artist also needs to produce quality material to start earning. If the label only breaks even, the talent gets nothing.

The scary thing about this deal, from the talent's side, is that it takes a lot of sales and streams to break even. On average, it takes 174 million streams before the label breaks even. With the label taking over 80% of the royalties, it will be hard for an artist to make a profit from their work if it is not well received.


The Distribution Only Deal

For artists who do not want to sign with a record label, they can also accept distribution-only contracts. According to ShapeMusic, a distribution deal is like a mini contract. The artist shoulders the recording expenses and does their own mastering. And then the record label is in charge of distributing the song.

This task can be done physically or digitally. This means that the record label coordinates the delivery of the albums to music stores. When an artist receives this type of deal, they can decide whether the company gets exclusive rights to distribute the music. In exchange, of course, for an agreed percentage of the sales.

The artist stays in charge of the majority of the recording, marketing, and promotion, then the label will not need to give the artist a huge advance. It is the artist's responsibility to take on the expenses during the release cycle. This means, once the album starts selling, the talent gets to break even and earn much faster.

An independent artist takes on the investment risk that the label would usually shoulder. However, with this agreement, the artist gets a bigger portion of the profit but still gets some of the service of the label. It is a huge risk though because the artist will not have the label's resources and expertise in getting the music out there. 

Luckily, there are now new channels to explore. An artist can make it big via viral marketing channels such as YouTube and TikTok. These platforms allow artists to grab people's attention and develop a fanbase with almost no marketing expenses.


The Net Profit Deal

There is also the net profit record deal where the artist gets a bigger cut of the sales. What happens is that, after the record label has recouped all of the expenses from recording the artist's work, the net profit will be split more evenly by the artist and the label.

In short, until the net of the album cycle reaches zero, then the label gets to keep 100% of the royalties. Afterward, instead of taking over 80% of the profit, the label will only receive about 50 to 60%. This means that the artist can earn bigger and faster as long as the label breaks even.

This is said to be the response of most labels to the growing influence of an artist. This type of deal is most often offered to more established talents who have their own fanbase and can command a higher portion of the profits because their labels are taking less risk when it comes to helping with releasing the product.

However, while this may seem likely the most profitable deal for any artist to get, there are still downsides to this type of contract. For Net Profit deals, the contract typically contains clauses that skew the revenue splits towards the label. This is why any talent should look long and hard at the contract being presented to them.


The Net Profit Deal with Overhead Fees

What is an overhead fee? This is usually included in net profit deals as a tacked-on recoupable expense. The overhead fee is meant to compensate the label for corporate and administrative costs. These include the logistics, staff salaries, and even office rent. Based on current data, overhead fees range from 3 to 10% of the current cycle's gross.

Some labels consider overhead fees as a marketing expense. So, even after recouping all of its initial expenses, the overhead fee is still charged and deducted from the artist's share. For example, if the artist is meant to receive 50% of the profit, with the overhead fees, he or she will only get 40% per cycle.


The Cross-Collateralization Clause

The Net Profit Deals work mainly with single album contracts. For Multi-album deals, some labels add on a cross-collateralization clause. This allows the label to get revenues from other sources of revenue including profits from other albums as well as subsequent releases.

If you want to learn all about the different types of record deals and choosing the right one, read this guide.

How Do Independent Labels Make Money?

We've been looking at what major labels offer artists. But there are also hundreds of independent labels that are approaching and looking for new talents to develop. You might also be considering starting your own record label, in which case, the following info will be very helpful to you.

According to Wikipedia, an independent record label is a company that operates without the funding of a major label. It is an SME or small and medium-sized enterprises. These labels are often launched by distributors or producers for specific music genres. If you are a talent who is looking to sign with an indie label, you should know the basics about the type of contracts they can offer.

An indie contract is an agreement between the company and the artist that gives the label ownership rights over the talent's recordings. With this agreement, the company gets various rights to license, sell, and promote the recordings. The agreements in the contract would typically cover the clauses regarding payments, advances, and such.

Naturally, since indie record labels are smaller, their reach and influence are not going to be as significant as the major labels in the country. However, these companies thrive because some artists prefer what they can offer. Plus, since there is not too much financial burden, they are freer to choose the talents they want to work with.

The first one is that indie record labels tend to provide talents with more freedom. Artistically, these companies try to give more creative control to the talent because they are not as concerned about making a profit as the bigger companies need to. So, if you are an artist that values your freedom when it comes to your work, then this is a huge benefit.

The other benefit is that the artist tends to retain the rights to anything they produce. This means that the talent can use their song or music however they like after it is recorded. It can be sold commercially, or it can be offered for use in movies, television, or radio shows.

The relationship between the label and the talent tends to be closer because indie labels have fewer artists to deal with. Communication is quicker, and the artist is better cared for. And these labels also tend to offer shorter contract periods. So, if the relationship doesn't pan out, the artist is not tied down for too long. Again, it all boils down to more freedom for the talent.

Why Do Artists Sign with Record Labels?

How Do Record Labels Make Money & Why Sign with A Record Label?

Even with all the resources at an artist's disposal, there are things that record labels can do better. Big record labels have the funding and resources to get the best when it comes to mastering, marketing, touring, and more. For the talent, you get access to better artists for your album artwork or even better venues for your concerts.

Another thing that good record labels bring to the table is connections. The company can help the artist reach a larger audience because the label already has an established fanbase.

It can also help with liaising between PR companies, booking agents, music industry professionals, and fellow artists. These will give you an edge over other musicians.

As an artist and a musician, you want to make the best music that you can. However, you also want to sell it. Signing with a good record label means the company can help you make more sales using its existing marketing strategy. Most labels already have a strong social media presence so they can promote you and your work easily.

Plus, labels also have established email lists where they can send out newsletters. One announcement about you and your work can help you gain more fans, and in turn, sell more copies of your single or album. Experienced record labels already know what strategies work and don't so you don't have to flounder around wasting resources.

Finally, signing with a good record label can increase your prestige especially if the label is already well established. It is like receiving a gold star. Being part of a huge company known for having a good roster of artists is a sign that you are good enough to be part of it.

This reputation can help you secure better publishing deals and licensing. It can open up larger venues or better timeslots at festivals. You can get more radio plays and better media coverage. All of these will ensure that you are heard by more people, and in turn, sell more records. This and more should entice an artist to secure a record deal.

How Do Small Record Labels Make Money?

Most people don't know this, but the majority of signed artists are actually signed to imprints which are just smaller divisions of the major record labels. So when you hear about someone being “on” Def Jam, they're really under Universal Music Group.

The reason that these imprints exist is that the major labels want to be able to appeal to as many different types of fans as possible. With different artists on different imprints, they can target specific audiences with specific types of music.

It's a pretty smart marketing strategy, and it's one of the reasons that record labels can make as much money as they do and a handful of companies can continue to monopolize!

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