The Label Business—Recording Budgets

8

The Invention

The Parisian Édouard-Léon Scott de Martinville (1817–1879) was the first to make a sound recording, in 1857. He developed a visual way to convert sound waves into physical lines on a rotating cylinder, applying for a patent and his invention of the phonautograph.¹ Scott de Martinville had invented a process to record a soundwave, but not how to play it back. As a matter of fact, when we pause and think about it, the entertainment and music industry has always been device-driven, so let’s start this chapter by taking a look into the history of essential processes and devices we now take for granted that allowed recordings to happen, which led to the development of record labels and fostered other entrepreneurial activities that still support the modern industry.

In 1877, when Thomas Alva Edison invented the playback process enabling him to record “Mary Had a Little Lamb,” he simply reversed Scott de Martinville’s process. Edison combined a little entrepreneurial wisdom, added his own innovative thinking, and bingo, his transformation led to the birth of the music business. But here’s the amazing part of the story. Édouard-Léon Scott de Martinville had also recorded (probably using his own voice) the French song “Au Clair de la Lune,” never thinking it could be reproduced. His thing was creating a visual record of a sound, making it doubtful he thought about how it might be played back since that had never been done. In 2007, some of the original phonautograph recordings made on cylinders were found and converted digitally to their original states as sound recordings.² Thus, it appears that Thomas Edison was probably the second person to actually record a song, following de Martinville’s recording. Because they were inventors, interested in physics and audio engineering, they likely had no idea the impact of their inventions on our music industry and the availability of entertainment products in the years to come.

Recording Labels

Several of the most successful labels in the early stages of the business were started by entrepreneurs who were either creative artists themselves or executives who visualized the profits of marketing live performances of artists into “recording artists.” Columbia Records was formed in 1886 around the earliest version of a “talking machine,” with sound quality that is really awful by today’s standards. But their concept was to use the invention for the creation of a new type of business model by selling recorded copies of live acts. Since a machine had been invented that could play recordings, they thought why not sign live artists and record them so that consumers will buy tickets and use the recordings to create a memory of the concert or event, which we know as building a fan base. The Recording Corporation of America, better known as RCA, was created as a support platform to sell the Victor Talking Machines in 1901. Capitol Records was created by the three-person team of songwriter Johnny Mercer (1909–1976), movie producer Buddy Desylva (1895–1950), and retail store owner Glenn Wallicks (1910–1971) in 1942. The store was called Music City, located at Hollywood and Vine, and it had private listening booths. The three formed Capitol Records by combining the elements of a modern label, including the creative side, film side for soundtracks, and even the retail stores to sell products. Jack Warner (1892–1978) jumped into the business in 1958 by forming Warner Bros. Records to increase another revenue stream for his movie soundtracks. The entrepreneurs had developed a way to monetize Édouard-Léon Scott de Martinville’s and Thomas Edison’s inventions that would grow into a terrific multibillion-dollar business. They provided a high-quality form of entertainment at a very reasonable price to the consumer. In addition, the new recording industry, like the movie industry, united a nation with songs by great artists that had only been available live before the recording and playback process increased the size of the consumer market and created new ones across the socioeconomic spectrum.

Magnetic Recording

Samuel F.B. Morse (1791–1872) invented the telegraph in 1844 that sent an electronic signal over a wire in the form of short or long pauses, leading to Alexander Graham Bell’s (1847–1922) device that was the first to convert acoustic sound waves into electronic waves and then back again into acoustic sound waves in 1876. The theory of passing a wire through a magnetic force field showed the means of creating electricity (electromagnetic frequency; EMF) for consumer use. This led to magnetic recordings and playback functions (on a wire), invented by Valdemar Poulsen (1869–1942) of Denmark in 1893.³ He also described how paper with a coat of magnetic powder could be used to record a signal that, in turn, inspired German Fritz Pfleumer (1881–1945) to develop the first magnetic recording tape in 1929.⁴ This series of sequential inventions illustrates how one discovery leads to another opening up entrepreneurial opportunities to create entertainment products, such as phonograph players, vinyl singles, albums, and, God help us, those lousy-sounding audio cassettes. The same innovative process seems to have taken place with films, and projectors in theaters, leading to cheap consumer versions of film cameras, and then video cameras and those old, blurry TV screens of 525 scanning lines, consisting of tiny dots or “pixels,” blinking faster than our eyes blinked, so we saw only what appeared to us as a constant moving picture.

The Star System

The film industry discovered it could increase profits if it revived the practice of making some of its movie actors into personalities good for fan magazines and into screen stars consumers wanted to follow. The star system, rooted in notions of fame and celebrity, was a great business decision to enrich company profits. Actors were signed to film companies/studios (just as many athletes are currently with sport teams) and given new names, acting lessons, homes, money, and so forth. However, the seven-year deals placed them under strong studio controls in both their careers and personal lives. Actresses Betty Davis (1908–1989) and Olivia de Havilland (1916-) brought lawsuits that Davis lost and de Havilland won, which changed the contract system. In 1950, Jimmy Stewart (1908–1997) was the first actor who negotiated his own deal and won a percentage of the profits his movies made. That shifted the power in the movie business to the actors who were most in demand.⁵

During the early stages of the recording industry, the artists who signed with labels and positioned themselves in more than one media had a better chance of becoming household names. Thus, we find stars worked as recording artists, and performed on live tours, in stage shows and in the movies. The vocalists and musicians who drove recording profits in the early years of the industry include Al Jolson, Tommy Dorsey, Glenn Miller, Perry Como, Dinah Shore, David Bowie, Elvis Presley, Frank Sinatra, Dean Martin, The Beach Boys, The Everly Brothers, The Beatles, The Grateful Dead, Joni Mitchell, The Doobie Brothers, Fleetwood Mac, Smokey Robinson and The Miracles, The Temptations, Diana Ross, Marvin Gaye, The Commodores, The Jackson 5, Michael Jackson as a solo act, Stevie Wonder, Dolly Parton, Hank Williams, Sr., Buck Owens, the Carpenters, Joe Cocker, Cat Stevens, The Police, Janet Jackson, and many others. You probably know that some of these recording stars also made movies, and one notable trio of singers—Sinatra, Martin, and Davis, Jr.—were part of the Rat Pack (which also included Joey Bishop and Peter Lawford). Sinatra, Martin, and Davis, Jr. doubled their value (at the very least) in the entertainment industry as they were solo music acts and film stars with notable followings in each media. The Rat Pack was reinvented in 2001 with a remake of the 1960 Oceans 11, which has become the Oceans 11 trilogy of movies, starring George Clooney, Brad Pitt, and Julia Roberts.

History of Computers

Researching who developed the first computer is a little like the Magical Mystery Tour, which is the title of one of the Beatles’ songs. There are so many different answers to this whodunit that a better way to answer it may be to ask a different question: Who contributed what to the devices we now call a computer? The best review of the history of the development of the computer is probably an online article titled “Computer Hope” by Nathan Emberton of Salt Lake City. According to Emberton,

And that’s just the very short version of the history of the computer. Most of us do not think about our iPhones and other household devices as computers, yet it’s often the microelectronic chips developed in computers that make them function. Everything from our TVs to rice cookers has computer chips in it, which convert the binary codes of the signal into a high-definition TV monitor or cook the sticky rice at just the right temperature and moisture. Computers have also improved the quality of the music and video recordings, from solving math problems and breaking war codes with mechanical and vacuum tube devices to producing the crystal clear quality of a recording, film, or video with a digital camera, laptop computers, or “smart” cell phones. There are other economic advantages to using computers in the entertainment industry as broadcast transmissions require far less bandwidth and are less expensive to use and maintain than the corresponding analog systems. As an example, one fiber-optic line the size of a human hair can handle a hundred thousand phone calls and a cable of fiber-optic lines can carry over several million calls at the same time.

Digital Recording

In the early 1950s, the Whirlwind machine was introduced, using a magnetic core RAM, and later the transistor replaced vacuum tubes.⁷ These inventions reduced the size of computers from huge, clunky, room-swallowing machines into personal computers with workstations. I was in Los Angeles in the late 1970s visiting my friend the late Tom May, manager of the A&M recording studios, where the old Charlie Chaplin film studios were housed. Tom took me into one of the studios being set up for a new album by jazz horn player Herb Alpert (b. 1935) and his band. Spread across the control room floor were the modules from the second digital tape recorder in the world, developed by 3M. The engineer was frantically trying to figure out how to make the machine work, as he was having a problem keeping the modules electronically isolated from each other. The damn thing didn’t work and he was freaking out, trying to figure a way to correct the problem. He was under the gun as Herb Alpert and his band, The Tijuana Brass, were walking into the session in about 20 minutes. What he was struggling with can be explained this way. Digital recordings take the incoming signal from the microphones and mixing boards and convert them into a digital binary code made up of 32 or so zeros and ones. The code is then recorded on a tape or hard disk drive as a magnetic pulse code, which represents no recording (zero) or a one (a present pulse of magnetism). When a digital machine is played back the pulses—or lack of them—are converted by the computer back into the binary codes of zeros and ones. The computer inside the tape machine then uses a string of the numbers (the binary code) to convert it into an audio sound, or frame of a picture if using a digital camera. The quality is amazing as the computer is making the sounds we call music, just as the computer chips in our TVs are creating and coloring the TV monitor. To better understand why the engineer was stressed, read on to understand more about how the code works.

Binary Codes’ Unexpected Effect

Gottfried Wilhelm Leibniz (1647–1716) invented the binary code number system around 1685 in Germany.⁸ It’s what makes computers work, yet it took us a few hundred years more to invent the rest of the stuff we needed to build an actual computer. Binary code, as we saw in Chapter 1, uses the different combinations of the zeros and ones (zero being off and one being on) found in many logic circuits. It is a very cool concept when converted into ASCII, where the binary code numbers may be programmed to represent a letter. As an example, the bit code (zeros or ones) that represents the word entertainment is 01100101011011100111010001100101011100100111010001100001011010010110111001101101011001010110111001110100.⁹ And converted into ASCII, the word entertainment appears as 101 110 116 101 114 116 97 105 110 109 101 110 116.¹⁰

Binary codes, for all the good they do in improving quality by eliminating various types of noise from audio recordings, also make it possible for anyone with a copy of the code to replicate the product, and thus steal it.

The Advantages of Digital Recording

In analog recordings, when a copy is made it’s called a dub. The dub is one generation (or recording effort) beyond the original, which is called the “master.” The problem is that each generation or copy decreases the quality of the sound as the distortion from the recording process and the hiss on the tape are usually doubled. After about ten or more dubs, the copies start to sound quite inferior to the master and thus are worthless if you’re trying to sell them. Take a pure glass of water and start adding salt. A little salt, no big deal and, in fact, it might help heal a sore throat. But ten spoons of salt make the water worthless. By the way, do not drink saltwater, as all it will do is make you thirstier!

Some young people like the distortion and noise found on vinyl recordings. They hear it as a “warmer” quality of sound. But for as much as they have acquired a new fan base, vinyl recordings simply do not sell well; the total revenue is significantly less than 1% of all music recordings each year. Usually a hit recording on vinyl is lucky to sell over 50,000 copies. When you tack on breakage problems, the vinyl recording business model’s economies of scale are too risky, meaning there is not enough financial return on the company’s investment. The front-end expenses of recording, mastering, pressings, shipping tied to marketing, promotion, and publicity require a large investment that is not typically offset by significant profits.

Advances in recording technology should have an impact, maybe even a positive one, on the recording industry, so let’s take a dive into what a record label really is, how it functions, and how that entertainment is monetized for profit by the team that creates it. As you read, let’s ponder: with all the changes in the music and entertainment industry today, do we really need labels and what functions have they served and do they serve? How might they need to transform themselves to stay viable? What are your questions?

Major Labels: Traditionally Surviving or in Need of Transformation?

What is a major record label? The current business models are much different from the labels of the past, where many subsidiary brands were used but actually owned and distributed by one of six major labels. Warner Music, for instance, sold recordings under labels including: Asylum, Atlantic, East West, Elektra, Fueled by Ramen, Nonesuch, Reprise, Rhino, Roadrunner, Rykodisc, Sire, Warner Bros., and Word, as well as Warner/Chappell Music Publishing, which controls over 1 million titles.¹¹ Many of those old label brands continue to exist currently, but the labels have dramatically reduced their roster of acts, which simply means they have let go many of the former famous artists for economic reasons.

Traditional Business Model

Labels tend to have a five-step process as part of their business model to find, sign, create, promote, and sell an artist’s recordings. Traditional labels are usually divided into several departments, all of which have specific tasks to accomplish as they attempt to profit from the recordings of their artists. The departments have their own autonomous but interlinked responsibilities. They must accomplish their individual missions while working together with the other label departments to accomplish the overall strategic mission of the label, which is, of course, to create and sell recorded music. Of course, due to the changes in the marketplace caused by digital innovation and the lack of copyright enforcement, labels have been forced to morph their recording business models into a branding business model. If we can’t sell enough recordings to pay the bills and make a profit, what should we do? Still, they have to make the recordings that are becoming more difficult to sell for promotion and publicity purposes. In addition, they have to recoup their expenses and, with luck, profit from new revenue streams. It is essential to know the departments found in a major label and how they interact, whether you plan to be an artist or an industry executive. And not all the intersections at a label are self-evident, as the legal department and the royalties department, which is the label’s equivalent of a payroll department, are part of the administration directly serving and reporting to the president of the label.

Legal Department

Legal is responsible for writing and negotiating contracts, as well as signing

• Songwriters or their songs
• Copublishing deals
• New and returning recording artists
• Label employees’ government forms

They are also responsible for negotiating mechanical, performance, sync, and other licenses with domestic and foreign agencies, and representing the label in legal actions. Accordingly, attorneys negotiate the “terms of agreement” between the creative and business subsystem players of this creative business. Again, it is creativity informing business principles. Most labels have one or more attorney on retainer, which means they are paid a monthly stipend for their part-time employment. As you may have noticed, labels usually have their own music publishing companies, which means they want to have their acts recording their published songs to increase overall total revenues. In the digital age, this has been very important as some labels may now pass on an artist if they can’t also get their music publishing to be as profitable as they want or need. The economics of the game have changed dramatically as streaming increases and record sales drop.

Royalty/Payroll Department

Payroll or the royalty department pays the bills and the royalties, accepts sales payments, and reviews artists’ recoupment. Financial experts control the flow of money in the label’s and the artists’ accounts. Most expenses are billed to the artists’ accounts and recouped through album sales. That’s how the old business model worked, yet we’ll soon understand why that model simply does not work anymore. “Recoupment” is a standard practice in the business that is often seen as unfair for acts as the label may make millions before the average artist makes their first dollar in royalties. However, more labels have switched their deals to 360s and now negotiate various types of deals from what were revenue streams owned by the acts. Accountants add the recording costs to the rest of the label expenses (artist development, photography, tour support, and most of the marketing, promotion, and so forth) to the recording artist’s ledger. In traditional recoupment deals artist royalties are paid only after all the label’s expenses for the recording, marketing of the album, and all additional expenses (tour support, and so forth) have been repaid from unit sales. These expenses are called the “all-ins” and are usually 100% recouped by the label before acts are paid. Artists are regularly supplied with quarterly or semiannual profit and loss (P&L) statements, often through their personal managers.

The Department of Artists and Repertoire (A&R)

Better known as A&R, the department of artists and repertoire is the communicative link between the label’s creative and business executives. They are the front door or filter for acts and songs the label may want to sign and then develop into (shall we say) money machines. It drives artists crazy to think this way, but labels are in the business of making money, not satisfying egos. The CEO, president, and vice president of each label department meet at least once a week to review the label’s acts and marketing strategies. They review units sold and analyze marketing, promotion, and publicity that might increase sales. This is a serious business meeting as decisions are often made about which acts to resign (pick up their option) and which acts to drop—that is, electing to pass on an act’s option. Decisions are made by the group as a whole and based on the profit and loss projections of each act’s recordings (in the prestreaming days). The department is sometimes divided into two sections, creative and administrative, as in the case at Sony Music. Creative A&R acts as the “ears” of the label, always searching for new artist and songs that will help make the label become more profitable.

A&R is more than the people in the office. It is also the key process that determines what the label has to sell, as Figure 8.1 shows you. Spend some time with this figure to learn the mechanics of one of the central departments in the sustainability of a recording label’s business.

The folks in A&R do not have an easy job. Between a half million to 1.2 million dollars are spent on “breaking” an individual recording artist; however, the actual cost generally depends on the type of artist, the genre of music, and the type and size of the target audience. Different players, such as executives, producers, and directors, make the same types of decisions in the movie business. The “stakes” or risk of business is just a lot higher. Instead of a million-dollar investment in a new recording artist, the investment may be $10–$100 million for the production and marketing of a new film project. Their budget usually starts at about $10 million for a low budget and may quickly hit $100 million when the marketing, promotion, and publicity kick in.

The department of A&R also acts as an administrative facilitator between the creative and business subsystems. Songwriters create songs, musicians and vocalists record demos, and writers pitch their demos to music publishers. Publishers in turn pitch the songs they have acquired to A&R. Most labels simply leapfrog the steps by having their own music publishing companies under the label banner. That keeps everything “in house” and improves profit statements at the end of the year as the music publishing royalties are now added to the labels’. Songs selected by A&R are evaluated for current album projects and pitched to the recording production team, consisting of the producer, artist, and sometimes the artist’s personal manager. In preproduction, the recording artist, producer, artist’s manager, and A&R representative determine which songs, musicians, and recording studio to use. However, the producer makes the final decisions about which songs to record, studios to rent, musicians and singers to hire, and audio engineer to use. A&R is often required to establish a reasonable recording budget and time frame for the project. After the final master recordings are completed, if the master tapes are accepted they are then converted (mastered) into consumer products, such as CDs and digital downloads, and distributed, marketed, and promoted through the mass media, cell phones, and Internet sites to generate profits.

Labels/music companies create sellable products (recordings) through major recording deals with expenses in the recording budgets including renting great studios; contracting AFM musicians and SAG-AFTRA vocalists; hiring major producers and audio engineers; and factoring the cost of the mechanical license at statutory rate (or at the CCC rate) multiplied by the estimated number of units pressed and sold or digitally downloaded. Budgets for the actual multitrack recording range from $50,000 to $200,000, plus mechanicals are established and budgeted by A&R administration. The recording costs plus mechanicals and advances are usually defined in the deal as 100% recoupable and are considered all-ins.

Artist Development

Once an act has been signed to a recording deal, labels have to teach them how to walk and chew gum at the same time. Only kidding, of course, yet most new acts have to be developed into a sellable image that will “catch” the consumers’ attention long enough for them to get hooked. Labels seek recording artists who are able to capture the imagination of the human spirit and of the current popular culture, themes, and beliefs. New artists who have established a local image, a fan base, and a successful number of units sold (even in small numbers) are seen as having potential, as they may have already developed a meaningful image that communicates some emotional message to consumers. Labels view small successes in local markets as an indication that if the act is developed, recorded, and exploited (marketed), they may become very profitable. According to record producer Jimmy Bowen (whose artists included Frank Sinatra, Dean Martin, and Hank Williams, Jr.),

Artist development may be its own department or part of A&R or even sales and marketing within a label. However, marketing is usually defined in the music business as distribution and unit sales, whereas development is often divided into creative, artist, and product development in the music and entertainment industry. As these are areas of psychographic research, let’s pause for you to see the richness of what goes into the idea of artist development:

• Image development considers the artist’s image, including acting, speech, appearance, demeanor, and social manners. The artist’s image frequently has to be enhanced. Trainers are hired to help the artist control a weight and/or drug problem, dentists to improve the smile, and stylists to suggest various types of cosmetics, clothing, and hairstyles for concert, stage, TV, and/or movie appearances. Image consultants are hired to suggest methods to help the act appear comfortable and confident on stage and with the media.
• Creative development focuses on songwriting, music publishing, and the ability to promote the artist through shameless self-promotion. They may also supervise video script treatments, budgets, and production and provide the finished videos to the marketing department for promotion.
• Branding and product development supervises and coordinates the development of the label’s actual album projects through each department at each stage of the marketing, promotion, publicity, and distribution process. Branding has become very important, as album sales have decreased. However, in the traditional business model, branding was not as important as it currently is, as labels have had to find new revenue streams. The marketing plan, promotion, publicity, and street date launch are usually based on the act’s image tied to consumer preferences. Remember this is the emotion business and it’s the consumer’s reactions to the act’s image and recordings that open up the merchandise and touring opportunities. More will be said about this in Chapter 10 within the contexts of media use and risk management for the label.

Promotion

Promotion or “exposure” of the artists and their recordings is vital to the financial success of the artists and their label. It is usually handled as a “campaign,” with most of the label’s efforts being focused on breaking a new release to radio stations and Internet sites. In addition, the labels often hire independent promoters to motivate radio station airplay as well as retail sales. Publicity, which helps drive promotion, is often thought of as free promotion because the artists do not have to pay for the stories, pictures, and articles used in the mass media. Nevertheless, professional publicists who are paid by the label or artist’s manager supply most stories to the mass media. Budgets for promotion are expensive, usually in a range of 100% to 200% of the all-ins. If the recording, pressings, and mechanical licenses total $200,000, then it’s not uncommon to set a promotion budget of $200,000 to $400,000. Major superstars actually require less in the promotional budgets, as they are already famous, yet they usually want more money in their advances or recording budgets.

The three levels of promotion are national, regional, and local, all of which have their advantages and disadvantages. National ads are expensive and targeted toward several demographic and psychographic types of consumers. Regional ads build support in only a section of the country, and the label may therefore miss its true market. Local ads (from free press to posters on local telephone poles) are usually poorly produced and sometimes do not generate an increase in consumer buys; however, they can start word-of-mouth conversations leading to a buzz about a new act. World promotion is often contoured to local and regional consumer preferences, as a marketing campaign or advertisement in France may often be very different from one in Japan.

Tour Support Tied to Marketing Plans

Labels also provide tour support through financial advances to place the act on the road. These shows are considered events that provide primary opportunities to create radio airplay, fan hype, and word-of-mouth publicity, all of which are tied to the artist’s self-promotion. Of course, this is the label’s effort to increase consumer excitement and bottom-line product profits by raising the level of consumer awareness and motivation to buy. Before 360 deals, labels would rarely receive any money from the merchandise bought by fans at the concert. Now, it is usually part of the recording deal and will probably soon include other event income sources, like ticket sale profits and corporate sponsorship endorsements. Note that product distribution, promotion, and publicity are designed by the label’s marketing plan and usually occur before or at the same time as the street release of the recording or album. While a show in one part of the world might be seen as very cool, it may be offensive in another part of the planet. It is important for the long-term security of the act’s career to be aware of the local customers and norms.

Publicity

Publicity is about telling consumers the story behind the artist and his or her image; plus it’s very powerful when combined with a corresponding promotional campaign. While promotion provides a sample of what the labels or music companies have for sale (recordings in traditional deals, plus concert tickets, merchandise, and corporate sponsorships in 360s), publicity tells consumers why they might enjoy the artist and their recordings. Effective promotion is an attempt to have the artists perceived in ways that match or create consumers’ interest in the act. Remember that the emotional connection between act and consumer is what counts in the entertainment and music industry. The three variables in consumer responses to an entertainment product can be easily summarized as like it, hate it, or don’t even notice—and you certainly don’t want to be in that last group!

Publicity from the label’s perspective includes stories and interviews planted in the trade magazines, popular press, and through social media. It also includes appearances on cable and network TV talk shows and the human-interest stories, pictures, and feature articles publicists provide the media. All of these publicity efforts, known as impression opportunities, are designed to communicate messages consumers can use to form an emotional connection to better understand themselves consciously or subconsciously. The best entertainment products are linked to situations in the consumer’s life or a specific worldview. If consumers get a warm and fuzzy feeling, connecting that with the artist and the music they’ve recorded is great for the label. Labels hope we get excited enough about our emotional connection that we decide to buy a CD, steal it, catch the act on tour, and buy lots of merchandise.

Shameless Self-Promotion

Once the album is completed and they are on tour, the artist’s job becomes shameless self-promotion on talk shows and through interviews and/or performances. The act has to reflect the “image” that matches how they are perceived by consumers who need to buzz over a new album, book, movie, and tour. Keep it simple, as it’s always better to enhance “who the artist is” than to fake an image. Faking it and making it appear believable or real are what actors and great crooks do. Labels use psychographics in the form of consumer lifestyle research to determine the placement of stories (about the artist’s life or daily events) in trade magazines, the popular press, in-store endcaps (those main aisles facing shelves in the stores), images in social media, ads for concert tours, and even paparazzi photos in digital media. Of course, all the publicity releases are used to enhance the image of the act being a sexy dude, bad guy, or amazingly attractive girl band. The labels deliver the publicity hits to the media fans are using, especially the websites, where they get their news and share their enthusiasm for entertainment products through social media. These materials and placements cost money as well, and budgets are usually 50%–100% of the all-ins. However, it is much less expensive to advertise directly to the fans on the devices they use than it is to buy national radio and TV spots that won’t be noticed by most of the market. The good news is that great publicity tied to glitzy and well-thought-out promotion will provide results in as little as a two- to four-week campaign. It either works and the act is on its way toward success or it fails and the label will move on to the next act or project. A lifetime to get a shot and only two to four weeks to decide if it’s going to work. That’s another kind of wow!

Marketing and Sales Department

In business, marketing is defined as the four Ps of product, placement, price, and promotion. In the music business, marketing is defined as the distribution and sales of recordings in the traditional sense, and as branding opportunities associated with the acts in the 360 business models. Consumers’ illegal downloading of entertainment products and innovation in the industry have changed that—remember the perfect storm and the principle of creative destruction are at play. Correspondingly, recordings are quickly becoming the buggy whips of our time, as consumers no longer need to buy the recordings. Though sales are not totally dead, even a blind mouse can see that the cheese (album sales) is going away. Previously, weekly sales figures related to the marketing plan indicated the need or lack of promotional radio and tour support to increase profits. The marketing and sales department makes sure that CDs (product) are distributed to retail and iTunes (place), at the right price (price), and that radio and YouTube have consumers buzzing (promotion). Retail stores’ customer base, location, and co-op advertisement are considered as well. Highly trafficked retail websites, such as iTunes, are always considered first for CD and digital sales.

Retail

Delivery of the recordings to wholesale and retail outlets using worldwide mega-entertainment distribution channels is vital. Timing is imperative, as labels want consumers to be able to easily buy, stream, or, in some cases, steal the recordings they have just “discovered.” The idea is steal them if you don’t buy them so that we know where to set up touring opportunities and profit from the live shows and merchandise. Sounds odd, right? But reaching the consumer market in any way they can is what the labels need to do.

Traditional distribution of recordings (one of the subjects of Chapter 10) used to be through one-stops (record chain stores, most of which are now out of business), mass merchandisers (Best Buy, Target, Walmart, and Kmart), record clubs and per inquiry (PI) advertisements through local late-night TV ads. However, the old business model of brick-and-mortar stores is quickly reducing their inventory of CD and DVD products, and it appears that within three to five years, they will stop stocking and selling them. Digital sales usually follow the same street release date schedule, with buys available for digital download through Internet websites and other providers. The problem is that people just do not buy many recordings anymore and the labels can’t make money on such a few sales unless you’re a trendy artist.

Streaming Royalties

Streaming has become one of the new revenue sources for labels, but not for the recording artists. Spotify and other streaming services must negotiate license deals with labels to play the recording of music over their systems. About 70% of all the money collected by streaming services, after expenses and taxes, is now sent to the three labels—Warner Music Group, Universal, and Sony—and any independents that acquire enough streaming time to receive royalties. Artists have been understandably upset, because of the lack of payments from streaming, or the minimal payments they may receive to make up for the royalties lost from album sales. Of course, some of the artists never negotiated a percentage of streaming royalties for themselves, so labels do not have to pay them. There has been such an uproar from artists that Sony has agreed to drop its package fee deductions from royalties (described in Chapter 9, but here, think of it as advances charged against records broken in shipping) and Warner Music Group has declared it will pay approximately 3% of revenues, if and when they decide to sell their shares of ownership in Spotify. At present, the three major labels also appear to own up to 18% of Spotify, so in addition to the 70% of the profits the labels receive for licensing fees, they receive 18% of Spotify profits and are struggling for some programming power.

YouTube Video Royalties

YouTube videos tied to master recordings of major stars or wannabes’ recordings (a cover) of major hit songs are illegal. The wannabes rarely acquire the correct licenses—master licenses from the label (copyright holders of the recordings) for the actual recordings and sync licenses (copyright owners of the song) from the music publisher. However, the music publisher and labels know the wannabes don’t have any money and it is often a waste of time to pursue legal action against them. So, what are the owners of the copyrights to do? Demand a percentage of advertisement from YouTube in order for them to be allowed to remain in business on the Internet. YouTube is a safe harbor, meaning that it’s outside of the law, as long as it scans all content and takes down the content when it is notified of or recognizes a copyright infringement. The labels turn a blind eye and, instead of shutting it down, simply demand money. At the same time, the labels may take the position that the music played on YouTube is at least “heard” as free promotion.

Mash-Ups

In 2014, two students at Belmont University recorded a very cool mash-up of Taylor Swift’s songs “Blank Space” and “Style.” Louisa Wendorff was a School of Music major and Devin Dawson, who was my student at the time; he graduated in December 2015 as a music business major. A female student in the very next class after Devin’s had seen the mash-up on YouTube and she sent an email to Taylor, with whom she is acquainted. Next thing you know, 27 million hits plus, Taylor Swift tweeted her compliments about the cover to her fans. At the time, Louisa Wendorff was a School of Music major, and Devin Dawson, was a student of mine, who graduated in December 2015 as a music business major. Of course, it was their great vocals and student recordings, video, edits, and other efforts that made it all happen.

Good for them! The video can be seen at https://www.youtube.com/watch?v=7m3o5LuFKxg.

Free Goods and Promotional Copies

Free goods to the retail outlets are used to stimulate rack stocking and potential sales of new artists and releases. Buy 100 and labels may give you another 25 free. If the retail outlet sells 30 copies, they return 95 copies and keep all the money paid for the 25 “free copies” and the net money received from the customer minus the cost of buying the other five albums at wholesale. To better understand the concept, if you own a store, would you buy at wholesale a new act nobody knows exists and then try to mark up the price to make a profit? Of course not, as nobody has ever heard of the act and does not even know you’ve got it in the store. The labels, therefore, create a win-win situation where the store owner won’t lose any money if the albums don’t catch on with the public, but it is in the inventory if (and that’s a big if) radio, YouTube, and streaming start to play it and people want to buy it. Of course now labels have to ask themselves, would anyone actually buy it or would they rather illegally download it? How are the labels going to make any profits on their financial investments in new talented artists?

Promotional copies can’t be sold to customers. Promotional copies are used by the marketing and promotion departments to provide samples of the releases to broadcast radio stations and TV talk shows to encourage websites, local papers, and magazines to print stories about the artist and his or her career, recordings, and tour dates. Likewise, broadcast radio receives free promotional copies to play on air, which can’t be sold, and retail outlets get free goods (over the units purchased from distributors at about 60% of the suggest retail list price) to sell for whatever price they want. Interactive streaming is different, so Spotify must pay labels for the rights to transmit their recordings. Remember labels own the copyright to the recordings. They licensed the right to record, distribute, and sell the recordings from the music publisher, who owns the copyright of the song. When Spotify and other streamers pay the labels, do they pay the recording artist some of the monies collected? Usually not at this point, as it depends on what’s in the artist’s contract with the label! It does appear that labels are starting to realize the difference in the sums of money they would have paid artists for album sales is not being made by SoundExchange royalties (which we’ll talk about later) and streaming royalties collected by the labels.

Cost of Doing Business

Labels have already run the numbers before they sign an act. They use current and past recording artists’ financial reports (both successful and failures) to determine their financial risks of investing in the artist. They want to estimate as closely as possible their risks and potential profit on every dollar spent. Part of it is just running the numbers on the expenses of recording, development, marketing, promotion, and publicity to estimate a reasonable figure, which will usually be between $800,000 and $1.2 million. Movie companies, Broadway theaters, computer game companies, and book publishers all do the same thing. It takes money to launch a book and millions more to create and distribute a major film. Small independent films may be budgeted at a minimum of $10 million. Welcome to the business of entertainment. It really does take money to make money. Ask yourself, why? Let’s run through some of the same concepts the label executives have to before they decide to sign any artist.

The Recording Budget

Understand that artists, labels, music companies, and producers have many options when establishing recording budgets. Artists usually want everything, including many musicians (horn sections, strings, etc.), famous producers, and more time. With egos often huge to even outrageous with new acts, labels have to both persuade and negotiate with them to concentrate on the business of entertainment and keep them focused on what is monetizable.

Superstars know the power they have is in their loyal fan base and how well their last recording did in making a profit. Acts often think they are the next “big thing” (which is good) as it’s a difficult business based on rejection. So having a reasonable ego is understood. However, don’t push it and always remember label personnel work harder for the artists who are decent and kind and even harder for the ones who remember their first names. Budgets put realistic constraints on the creative process. Too high a budget and the artist and label may never make any profits; too little money and the quality of the album may suffer. Although the artist is often responsible for submitting the budget, it’s usually the manager or producer who writes it. Still, the process gets everyone in the same ballpark and establishes realistic and solid financial figures. It also puts the artist “on notice” and provides a measure of the financial limits to which the label will respond when hearing the artist’s “creative” demands: more horns, maybe—an aromatherapy infusion system to help them reach the right mood, probably not.

So, now, you need to role-play the part of the label, and Table 8.1 is something you, as a business, live with every day. Think of it as the 30,000-foot view of all you and the act need to agree on and do so you both can be in that win-win-win situation.

Recording Team Member Scales and Session Budget

With the cost sheet, we can roughly determine the cost of one song recorded in a studio and then multiply that figure by the number of songs on the album you, as the label, want to record. By figuring the cost of an average song, we may calculate and, thus, predict the cost of a typical 12-song album at master, low-budget, limited pressing, or demo rates (remember what you learned in Chapter 7 and apply that here). Let’s look at the cost of hiring a producer first.

We want to start by recording one song using a wonderful modern studio (the best), SAG-AFTRA singers, AFM musicians, royalty artist payments (at triple scale), a known producer, and an audio engineer for each stage of a recording session (basic tracks, overdubbing, and mixdown). The full recording budget (shown earlier) combines the three main factors labels use in determining the recording costs—the type of session, the needed personnel-producer, number of musicians, studio—and the per diem expenses to be in the studio. What is the total cost for the album and at what restrictions? Background vocalists are usually the last to be recorded, so no need to price them out until the third session. Also cartage and per diem are paid for the entire day to the royalty artists and musicians, sometimes even if not all are required on all sessions.

Producers—Types of Session Scales/Payments

The producer is paid a per-side rate (one song), which we’re assuming will take four sessions to complete. We’ve got four sessions scheduled for the day as we plan to complete one song a day over the next two weeks.

Audio Engineers—Types of Session Scales/Payments

Audio engineers make or break all types of producers. Once a major producer finds someone who “gets it” and is quick, respectful, knows the software, music, acoustics, board, and mics, and works well with everyone, they usually use them all the time. Audio engineers are hired on reputation and the hit records they’ve cut, plus location and networking with major producers and A&R personnel at labels. Take from this that success is often as much defined by your skills with the tools of audio engineering as it is by your personality, flexibility, and willingness to listen and respond to what artists and labels say they want in the final mixdown. Also remember that your expertise as someone trained in sound and sound environments makes you a creative person, so bring that and a great attitude to the session and you may have steady work for a long time!

Lead Musician (Instrument)—Types of Session Scales/Payments

We’ll hire AFM union musicians, who are the best in the world. They are expensive, yet save money in the long run as they are comfortable in studios and quick, and the final quality of the recording will be much better than if we thought we saved money by hiring nonunion and nonstudio musicians. However, the union musicians are paid on a three-hour call or one “session call,” as each session is three hours long. The producer usually calls the lead musician, who then calls the other side musicians. The lead musician is paid double scale and holds the signature card for everyone to sign after the session for payment.

Side Musicians—Types of Session Scales/Payments

Let’s return to Table 8.2 for the cost of hiring an AFM side musician as the 2015 scale rates are listed. Once you decide on the type of session, then you’ll have to multiply the cost of one musician times the number of musicians required for the session for the basic tracks or overdubs. The way most musicians, as we saw with the engineers, are hired is based on networking and reputation, mostly based on word of mouth, so the work done in a session becomes part of the musicians’ “business card.”

Major Royalty Artists (Vocals)—Types of Session Scales/Payments

The purpose of this “party” is to help our label’s royalty artist hit the big time. The studio is where the magic happens first. The type of session you book depends on the purpose of the recording. For example, the master scale rates give the labels the right to sell as many units as possible, whereas the lower demo rates for union musicians create recordings that can only be given away as demos.

Background (Vocals) Contractor—Types of Session Scales/Payments

The AFTRA contractor is the leader of the background vocalists and is required anytime three or more BGVs perform on the session. Rates are the same based on the number of hours to record one song or the number of songs recorded in one hour. The contractor is the leader of the other singers, sometimes helping with arrangements and the one who carries the signature card for proof of work. Contractor scale is $103 per hour/song, plus 12.5% for health and welfare. The scale is the same for all types of union sessions, and thus the number of vocalists on low-budget and limited pressings is often very low. It’s really rare to find backup singers on demos, because of the cost of the singers and the fact that union demos are not sellable.

Background Singers (Vocals)—Types of Session Scales/Payments

The background vocalists receive a scale of $103 per song or recorded song (whichever is greatest) plus 12.5% for health and welfare, for a total $131.38.

Studio Rentals

Recording studios have sliding scales of rental costs correlated to the purpose of the session. Master studios are usually the most expensive with the newest equipment, plus they can charge based on their outstanding reputations established by the names of the acts, producers, and world smash hits recorded in their facilities. Studios are usually rented on a three-hour sessions call (which is the most expensive) to all-day rate, which is usually 25%–40% less if booked for a week at a time.

First Overdub Session (One Song)

The second session is usually recorded after the basic tracks were recorded in the first session. Usually the bass, drums, two guitars, keyboards, and a scratch vocal are recorded on the basic tracks session. Then, what instruments do you want to add to the basic track instruments? Now is the time to add different instruments, such as horn sections and strings. If we’re doing the one song in four sessions over one day this session is scheduled from 2 p.m. to 5 p.m.

Second Overdub Session (One Song)

Now that we’ve got all the instruments recorded, it’s time for the royalty artists to “do their thing” and prove they’re worth the big bucks. Royalty artists may want to record the vocal by themselves in the studio with only the producer and engineer, while others like to record the vocals with a live band or orchestra during the basic tracks. Some can nail the required vocal easily; for others it’s note by note, or, as the engineers say, punching and pulling second by second. If all else fails, there’s always auto-tune for the famous who can’t sing anymore. Some royalty artists tend to tense up in the situation, so their scratch vocal (they recorded on basic tracks to make sure the rhythm and timing were correct) may be used instead. As an act ages, phase adding mics and acoustics may be used to “capture” whatever small volume of the voice is left. The harmonizing singers are last. Their job is to provide the ah’s and lyrics, but also to cover mistakes and fill in the gaps. Also if the BGVs are recorded before the royalty artist’s track is laid, it’s difficult for the star to sing around them, so the BGVs usually record last. Musicians should be finished with all the tracks, so they will not be at this session. Royalty artists (signed with a label) are usually paid triple scale for their singing. Take the hour scale times three hours for the session times three again for the triple rate and figure what this will cost you. If we are doing one song at master scale in our four sessions over one day, this session is scheduled from 6 p.m. to 9 p.m.

Mixdown Session (One Song)

The night session from 10 p.m. to 1 a.m. is usually for mixdown of the recorded tracks into a two -track master that will then be “mastered” into the matrix to press CDs or uploaded to various sites for sale and streaming. Notice that all the recordings are finished, so no musicians and vocalists are present, just the engineer (sometimes) and the producer. Mixdown involves three issues that need to be considered by the producer and the engineer: the musical mix based on the genre; the stereo effect balancing out what is on the left- and the right-hand side; and the depth of the actual recording, giving it the 3D quality of sound. There is also an increase in the musicians’ scale for the 10 p.m. to 1 a.m. session and, therefore, we are finished with them before this session. As an example, the total cost for a side musician is $469.00 per three-hour session on the first three sessions (including scale at $379.36, plus health and welfare at $24, and the pension fund contribution of 11.99% of scale, in the case of master scale, is an additional $47.64). However, during the 10 p.m. to 1 a.m. session, the basic scale is increased to $463.12 plus the $24.00 for health and welfare, and the pension fund of 11.99% of scale ($55.59), for a total of $542.71. That’s an increase of $73.71 per musician and the lead musician is also paid an additional amount.

Cartage and Per Diem

Additional session expenses include cartage, which is the cost of instrument delivery and tuning, and the per diem expenses budgeted for the royalty artist, such as the hotel or label’s condo expenses, plus limo and food.

Done, Done, and Done!

It is now time for me to tell you that most labels require their recording artist to actually submit what we’ve just done. So, while you may have questioned why we did this and why it is important, here is the reason. If you are the artist, or you are the label, you both have to know how much your recording is going to cost. It helps the artist understand the business and the label grasp its financial investments in their creativity before they step into the studio. Can we all say wakeup call! It is your role to be both the entrepreneur and the executive to be sure you are getting the best deal. Then the very last thing is to multiply the cost of that one average song by the number of songs on your album, and bingo, you’ve got your recording budget ready to give to the head of A&R at the label for approval. This discussion was only about the cost of the recording. Think about what it would cost if we were shooting a feature-length movie, staging a Broadway play, or developing a new computer game.

In the next chapter, we will consider in more detail how the major labels operate, especially how they organize their budgets and their operations to maximize their chances of staying in business in the changing environment that surrounds them.