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Record Profits

Who's making the cash out of record sales - the artist, the record company, the management, the record shops? David Bradwell investigates record royalties.

Ever wondered just where your money goes when you buy a record? Or where pop stars' millions come from? Read on and find out about the world of record royalties and needle time.

HOW MANY WOULD-BE pop stars have not lain awake at night, planning the ideal way to spend that first advance? How many have never been excited by the promise of a lifetime of financial security - the reward for writing a simple three-minute song?

But getting a foot on the ladder to fame and fortune can be one of the most frustrating experiences life has to offer. The stakes are continuously rising, yet today more young musicians than ever before are recording demos in the hope that one day they, too, will become a pop star. And that's only the beginning. Once you've signed on the dotted line and spent weeks in the recording studio recording your debut single, everything suddenly comes into focus. The theory is simple - you sell records to get rich and go on tour to get richer. Reality, as always, is a lot more complicated...

The four main areas of income for the budding musical legend are record/cassette/CD sales, broadcast royalties, touring and merchandising. As is common in the music industry, there is no such thing as a standard contract. Consequently, all the figures that follow are average amounts which can differ greatly from artist to artist.

RECORD SALES ARE still the most widely visible source of income. Last year the value of UK retail sales of singles, albums, cassettes and CDs totalled some £914.5 million, an increase of over £172 million on the previous year. This increase was mainly due to an extra £100 million being spent on CDs. If obtaining a slice of this for yourself sounds inviting, bear in mind that only a fraction of it goes to the artist. Record companies work on what is known as the "points system". This is similar to a percentage, except that one point is equal to 1% of 90% of the record price. In other words, the company dismiss 10% of their earnings as overheads and work out royalties on the remaining 90%. The details of each record deal can differ enormously, but ultimately the artist will be offered a number of points, and from this the royalties can be determined. In cash terms, an average artist royalty from the sale of one copy of a vinyl album is a meagre 79p (based on a retail price of £6.49). Artist royalties are paid to whoever performed the song, not to the person who wrote it, and are normally divided equally between band members - so if you are in a newly signed five-piece, expect around 16p per album. Paul McCartney, on the other hand, is rumoured to earn around 20 points, giving him £1.17 from each album sale - well above the average. Record companies can be prepared to make a loss on prestigious acts, and on big sellers their overheads will be proportionately lower.

Mechanical royalties, at 6¼% of the VAT-exclusive retail price, go to the publisher of the song, and in turn to the writer, rather than the performer. Most publishers are members of the Mechanical Copyright Protection Society (MCPS), which acts as a collecting house on their behalf. These payments are known as mechanical royalties because they relate to music being reproduced mechanically, either on record, tape or CD. On the average album the mechanical royalty would be around 35p. The mechanical royalty on CDs is slightly lower, at 6¼% of the dealer price plus 22%. At the start of next year this will rise to dealer price plus 29%, and eventually to the full retail price.

The third type of royalty goes to the producer. Some producers accept a set fee for making a record, while others opt for a number of the artist's royalty points on each sale, either on top or instead of this. It's an area for negotiation, as in some cases the producer is more important than the band - arguably the case at PWL or with Trevor Horn and Frankie Goes To Hollywood.

The difference between the wholesale and retail price of a record is split between the record shops and the Government, who take 15% as VAT. Although the record shops seem to take the largest slice of any out of the retail price, this has to cover their overheads, such as running and maintaining the shop, rent, rates, staff, electricity bills and the risk involved in stocking records which don't sell as well as expected.

All of the remaining money goes to the record company, but it's not all juicy profit. In the first instance, the record, cassette or CD has to be manufactured. Manufacturing involves a comparatively high initial outlay for the pressing of master discs, acetates and so on, but once the presses are moving, the average cost per record comes down dramatically, averaging 39p for a vinyl album.

Another expense is distribution - in taking the records from the factory to the wholesalers and then on to music retail outlets around the country. Design and packaging costs include the photography, design and printing of the sleeve in addition to any sleeve-mounted promotional items, such as stickers and posters. Advertising and promotion costs vary depending on the size of the campaign for any particular record or artist. Included in this category are advertising on TV and radio or in the press, posters, press handouts and any other pieces of promotional ingenuity that might be involved. There is also an allowance made for pluggers who are employed to take the records to shops and radio stations and promote them on the record company's behalf.

The record company A&R department spends money on deciding where and when a group will record, and on spotting new bands and subsequent career development. This is paid for through record sales at an average 29p per album. Record company overheads are mainly spent on wages for the staff (of which there are usually many), with separate departments for A&R, press, promotions, legal, marketing, accounts and administration concerns. Other overheads are the normal expenses incurred by any business - heating, rent, rates, security, maintenance and so on. Finally, there's record company profit, the reward for taking a financial risk. Around 90% of all records make a loss, so the other 10% have to subsidise them. In the last few years the singles market has collapsed, and seven-inch singles selling for £1.79 now make an average 13p loss for the record company. Twelve-inch versions fare even more badly, losing the record company 15p per copy. Record companies now view singles as promotional items for related albums, which is one of the reasons albums are often rush released by bands who appear to be one-hit wonders. Independent record companies are still able to make a profit from singles due to their costs being much lower than those of the majors.

Cost breakdowns

  Pop CD Pop LP Pop cassette 7"single 12" single
Retail price £10.99 £6.49 £6.49 £1.79 £3.29
VAT 1.43 0.85 0.85 0.23 0.43
Dealer margin 2.81 1.33 1.33 0.31 0.57
Distribution & dealer discounts 1.02 0.80 0.80 0.21 0.40
Artist royalty 1.08 0.79 0.79 0.22 0.40
Mechanical royalty 0.51 0.35 0.35 0.10 0.18
Design and packaging 0.23 0.28 0.12 0.12 0.23
Manufacturing 1.20 0.39 0.42 0.16 0.39
Other A&R costs 0.39 0.29 0.29 0.09 0.17
Advertising and promotion 0.46 0.36 0.36 0.24 0.28
Contribution to overheads 1.08 0.74 0.74 0.24 0.39
Profit (Loss) 0.78 0.31 0.44 (0.13) (0.15)

AIRPLAY ROYALTIES ARE the next major way to earn cash from a record. Each time a song is played to the public, a fee is due to the copyright holder, and these can add up to more than you might imagine.

By far the simplest way of ensuring you don't miss out on any earnings that are rightfully yours is to join the non-profit making Performing Right Society. Last year the PRS collected over £78 million for its writers and publishers in this country. Joining the PRS involves meeting certain criteria which, as Eileen Stow, deputy manager of public relations, explains, are there because "there is no point in belonging to PRS if we can't do anything for you". The criteria for composers and lyricists are as follows: you must have written at least three works which have either been commercially recorded, broadcast within the last two years or performed in public on at least 12 occasions within the last two years, and have been commercially published. Alternative ways of gaining admission include having a Top 50 single and writing the theme, or opening/closing music, for a film which has been publicly exhibited or for a series of three or more episodes broadcast on television or national radio. Should you not qualify under these criteria, you may be signed to a publisher who is a member, in which case you would still enjoy the benefits of the PRS collection service.

Whether or not you're a member you are still entitled to royalties, and these can soon add up to a substantial amount. At the last PRS distribution, one play on Radio 1 was worth around £183, divisible between the composer, lyricist and publisher. Recommended divisions are equal thirds, so if you wrote the music and words you could expect around £122, although in a band situation where there may be five writers and two publishers this would come down to £26.

"Should an album 'go gold' in its week of release - 100,000 sales - the average band will be nearly £100,000 up on record sales alone."

Aside from radio, television, juke boxes and discos, royalties are also earned for music on aeroplanes, at football grounds, on telephone switchboards... Some people have been known to try to get composers who aren't members of PRS to write for them, so they can offer music to major chain stores and tell them that if they have that tape they won't have to have a PRS licence.

"They're actually exploiting the composer", observes Stow, "because if the composer held on to his copyright he would be eligible to join the PRS anyway, because his music would be being widely used".

Obviously not all airplay is of equal importance, and this is reflected in the size of the royalty to be paid. Here a system of station values comes into operation. The basic point of this is an attempt to look at the population able to receive transmissions rather than the number of listeners for each particular programme. BBC Radios 1-4 are available to the whole population, so they have a station value of 100, whereas Radio Newcastle is 4.15 and Radio Jersey 0.19. BBC radio stations give the PRS a computerised tape of usage which has been conceived by the various DJs. Independent Local Radio stations each have a separate agreement with the PRS, and pay a set fee every year, rather than being incorporated in the station values system. Not every record necessarily gets noted down, as Stow explains:

"There has to be a lot of sampling, because if we distributed for every performance, the size of PRS administration would be half the West End of London. That would take all the royalties and there would be nothing left to send to the composer. To compensate a lot of writers who might miss out, there is an extra payment in our July distribution."

Remix producers don't automatically get royalties from airplay, although there is a strong argument for this to be the case. If a remix proves immensely popular, the parties involved in the original version may agree to cut the remixer in, but probably not before extensive negotiation.

PRS royalties are payable to the writers rather than the artists. Artist royalties are governed by Phonographic Performance Limited (PPL). They have agreements with 52 radio stations whereby the stations pay for an agreed amount of "needle time" - typically nine hours per day. Each station then makes a note of which records have been played within that time, and royalties are worked out accordingly. Some independent record companies aren't members of PPL, and usually write "Non-PPL" on record sleeves to inform radio producers of the fact. The argument in favour of not joining PPL is that non-PPL records fall outside the needle time agreements and can therefore be played to extend the station's music coverage. Understandably, PPL play down the importance of this, as do radio stations themselves, but the theory does seem to be based on fact.

THE POTENTIAL OF merchandising as a money spinner is often underestimated by the public and is something many young bands fail to capitalise upon. The best opportunities for selling T-shirts, posters, scarves and the like are usually found after gigs, whether at Wembley Stadium or the local pub. Bands make a profit of around 30% on all merchandising sales - more if they sell everything themselves without a promotion company.

On a shirt costing around £7 this represents a financial gain of at least £2.10, compared with 79p on the sale of an album. Suddenly merchandising begins to make sense. Many major tours are subsidised in this way; recovering the cost of staging a show on ticket price alone would make admission prohibitively expensive. Touring can be a way to earn a living for small bands, and an alternative route to fortune for mega-stars. It's the bands somewhere in the middle that tend to lose out.

Major record companies tend to overestimate the needs of their bands at gigs: the PA system is always bigger than necessary and there are always more lights than the band strictly need. Extra roadies are always hired just in case and everybody stays in the best hotels. Pretending to be a star at the expense of a record company is best avoided because the record company isn't picking up the bills, the band themselves are. Artists like Michael Jackson and Bruce Springsteen can afford the prima donna treatment because of the size of the crowd and record and merchandising sales. Small bands who pay for themselves can make a profit because they will always err on the side of financial caution.

IT IS POSSIBLE from the above to work out approximate weekly earnings based on average contracts for a variety of chart placings. Take as an example a synthesiser duo, signed to a major label, where the songs are co-written by both band members, and published by one single company. Looking purely at revenue from record sales and airplay, the figures are as follows for chart positions of 100, 20 and the prestigious No. 1 slot:

Reaching no. 100 involves selling around 800 copies of a single in a particular week. This generates £1,432 from sales, of which £176 goes to the artist. Out of this a manager could take 15%, (equivalent to £26.40), leaving £149.60. The revenue from record sales may be offset against an advance from the record company, and if this is the case, the band would see nothing from record sales at all. Airplay for a record at number 100 is likely to be sparse, but two Radio 1 plays and the equivalent on local radio would add around £700 to the total. Of this the publisher would take a third, leaving the band with £465. Again the manager would take 15% (£69.75) reducing this further to £395.25. The band, as a whole, would therefore earn £544.85, each member taking home around £272 before tax.

At No. 20, record sales alone generate £23,807, based on an average weekly sale of 13,330. Of this the band receive around £1,250 each, after similar deductions to the above. Airplay, based on ten Radio 1 plays would bring in around £3,660, of which each artist receives £1,037.

Hitting the jackpot with a No. 1 charting single means the band are selling around 77,000 records per week. Airplay would go up to around 18 Radio 1 plays and the equivalent nationwide, which, if my trusty Casio is to be believed, gives each band member a total payout of £9,066 before tax. Not bad for a week's work.

This mythical synth duo could well also have an album in the charts to top up their revenue, in addition to earning extra cash for television appearances, merchandising sales, appearing on compilation albums and the like. It all paints an enticing picture. Should an album "go gold" in its week of release (100,000 sales) the average band will be nearly £100,000 up on record sales alone. With all this money just asking to be taken, it's no surprise that the music industry is infested by sharks. The best advice is to keep your eyes and ears open and never go fishing alone.

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Music Technology - Copyright: Music Maker Publications (UK), Future Publishing.


Music Technology - Dec 1988

Donated & scanned by: Mike Gorman

Feature by David Bradwell

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