Record companies pay an advance to an artist so the artist can record an album. The advance is to cover the cost of producer, studio time, mixing engineers, mastering etc. there might be something left for the artist to use for living costs and if the manager is lucky he may get a commission.

The record company will always recoup the advance before they start sending out any further checks to the artist.

So do the maths.

Artist gets $200k in and avance.
The artist will receive $2 per sold CD.
The first 100k sold CDs he see's NO CHEQUE for at all.
Starting from CD sale 100.001 the artist can see a cheque.

Some record companies will even claim packaging costs on the royalty. Up to 25% out of the artists royalty so and artist who has gotten a $200k advance will have to sell 125k CDs BEFORE the artist start generating a royalty cheque. The packaging clause in a contract is a scam that many artist managers are picking up on and some are successful in arguing against it.

A record company may sell a CD at whole sale price of $9 - $15 per CD to the stores. (I paid a major 3letter label £9.90 + VAT in wholesale for an artist whos website I run. That's $20+ wholesale price!)

The artist, who has managed to get the packaging clause dropped, receives $2 out of the whole sale price. The record company keeps the rest, claiming it is used for marketing. Normally a label budgets for x amount of sold CDs as a goal. Per CD around $1.50. So a goal of 200k sales they'd spend not much more than $300k in marketing.

So - say the label is selling the CD to the shops for $15 a pop.
100k CDs is $1.5 million.

The artist has had his $200k advance

Leaves $1.3 million to the label.

the label has spent $150k on marketing.

Leaves the label with $1.15 million

The label has also paid $2 per printed CD in mechanical rights.

Manufacturing a CD including jewel case and sleeve is about $0.4 per CD so deduct another 40k.

Leaves the label with a profit of $910k.

The artist may have gotten $400k out of the sales (inc mechanical rights) in total. the initial 200 has covered the recording costs. Leaves him 200k and the record company has made a profit of 910k.

Please tell me what is wrong with this picture?

More often than not will a label drop an artist who doesn't sell according to the goal. Sometimes they will even drop an artist who does reach the target but as they haven't sold more they still get dropped. They don't look at the profit. They look at what it has cost them to get it out there.

Let's do the maths again.

An artist who has a fan base and can sell upwards of 500k CDs on a release. Gets an advance of say - $400k. They get $4 per sold CD.

After having sold 100k CDs they start seeing a royalty cheque. This may turn up every 3, 6 or 12 months depending on the deal and whatever cut off date the label has decided on.

After 500k sold albums the band is paid $1.6 million in sales. The label has made $4.75 million, after marketing. Probably more. Still they decide to drop the band. Why? Too much royalty to pay out.

As for radio play and PRS, that can take as much as 2 years before the band see anything. If they have a publishing contract and an advance from that - they get a cheque. They also sign off 30-50% of the ownership of the songs to the publishing company AND the publishing will also recoup that. The chances of seeing anything is highly unlikely.

Most pop artists out there don't write their own songs. The composers get the PRS money.

What the illegal download has an effect on is the profit margin with the record companies. Very few artists sell enough to recoup the advance but the label may still be going on a profit on the artist. Still the label is looking at their diminishing profit and to cut cost will drop the artist and/or start spending less on advances = less quality recordings, less on the packaging = ugly CD covers, not be too keen on removing the packaging clause from the deal and so on. The end result is that us consumers don't get a quality product for the same money the shops and labels had us pay when the labels were running on a high profit margin.

Itunes has revolutionised the entire industry. It's no longer the label who decide what song is the single release. The music buyer can do that by buying single tracks of the album. Any random one they like and not what the label pushes at them. So even if ONE track sell enough on itunes to cover the advance, the marketing, the mechanical rights etc. The label looks at the big picture and see that they lose money on the other tracks that do not sell.

Itunes video gave the artist a second revenue stream. I believe the top list of downloaded music videos on itunes are videos recorded in the 80s and early 90s. Says a lot who the real music consumer is. The 40 somethings, or the "50 quid guy" as he also was called.

About 1 artist in 10 is profitable for a label. Another 2 - maybe even 3 break even. Leaves 6-7 artists going on a loss.

Some labels will sign artists they know will go on a loss as they can use that for tax write off's.

Now, don't get me started on the touring business.....

/E - have written songs that are recorded and released, been signed to a publisher, manage a band and run websites for other bands + is an old roadie.