Selling Sound

An economic overview of the recorded music industry

Where and What do we Listen to?

People’s Polls 2016

Napster late 90s iTunes store 2003

Pandora 2005

SoundCloud, Bandcamp 2007

We’re buying less music . . .

. . . and more of it is digital

Spotify

AppleAmazon

Check out this growth between June 2017 and June 2018

Subscriber growth rate

Spotify 43%

Apple 54%

Amazon 74%

% total US revenues from recorded music sales

KPI = key performance indicator MAU = monthly active users

94% of streamers don’t subscribe, but 76% of streaming revenue comes from those 6% who do subscribe

300 songs are streamed for every one that is downloadedBut 60% of revenue comes from the 0.3% of music that is downloaded

In 2017 the music industry generated $17.2 bil in sales

Top Selling Singles of All Time

Over 130 million views

Song Artist Released Units sold (mil)*

White Christmas Bing Crosby 1942 50

Candle in the Wind (This is the Princess Diana version, not the 1973 original honoring Marilyn Monroe)

Elton John 1997 33

Silent Night Bing Crosby 1935 30

In the Summertime Mungo Jerry 1970 30

* worldwide sales as certified by RIAA

What’s in the future?

• Virtual reality: VRTIFY

• Biometric

– music that responds to the body and moods

– Pietr-Jan Pietr's Sound on Intuition project, which transforms body movement into music.

Music Income Flow

American Society of Composers Authors and Publishers

Broadcast Music Incorporated

American Federation of Musicians

ONLINE

The Recording Contract

• Royalties with advance

– Most common type in U.S.

• Standard for new act is 10% of wholesale

• Established star will get 20% of retail sales

Recording a New Act• Typical Contract

– an advance

– 10% of the wholesale price in each channel after recoupable expenses

• The typical first album will not generate any royalties if it doesn’t go gold (500,000) or even platinum (1,000,000)

• Less than 5% of albums will reach gold

Lee Dewyze American Idol winner 2010

Retail channels

• Record clubs

• Discount stores (Sam’s Club, Costco)

• Foreign sales

• Retail stores (Best Buy) markup may be 80%

• Each channel has a different wholesale price

Recoupable expenses

• Packaging charges and free promo copies

– May account for 25% of royalties

• Recording

• Promotion

• Music video production

• Touring

Other expenses

• Manager/agent fees

– Paid after recoupable expense deduction

– Typical fee is 20%

• Cross-collateralization

– If the first album does well enough to warrant picking up the option but does not cover all recoupable expenses, these must be covered by the second album before royalties are paid

What the producer provides

• Recording studio

• Creation of a master recording

• Produce the “album”

• Sell/distribute/promote

What the producer gets

• Exclusivity– Music, name, band members, images, and likeness for

the duration of the contract

• Merchandising rights– Tee shirts, key chains, action figures, etc.

• Interviews/publicity• Creative control of music• Limit outside work of artist• Band personnel• options

Options• Each option is a contract period for producing an

album– First contract may include as many as seven

• Enforceable at discretion of producer• Recording is property of producer in perpetuity• Lock-out clause prevents artist from re-recording the

material for 5-10 years beyond the end of the contract• Producer may reject an album, requiring artist to

produce another, but retains rights to the music and lock-out still applies

• “live” albums usually do not count toward album requirements

Breaking Down the Price of a CDmusicians' unions

packaging/mfg

distribution

publishing royalites

artis royalties

marketing/promo

label overhead

label profit

retail overhead

retail profit

= Share going to producer

The record and the royaltiesItem quantity income expense

Total sales 500,000 @ $15 $7,500,000

Sales outlet

Record club 50,000 @ $6 $300,000

Retail outlet 250,000 @ $8.33 $2,082,500

Discount outlet 50,000 @ $7 $350,000

Foreign 150,000 @ $6 $900,000

Total royalties (10% of wholesale) $363,250

Packaging (25%) $90,812

Recording, promo, video, tour $250,000

net $22,437

Mgr fee (20%) $4487

Advance $25,000

Royalty base -$7050

Simulated accounting for Ruben Studdard: I Need An Angel 2004 (2d album)

The Impact of Technology

The Impact of Technology• Drastic reduction in cost of recording• Digital recording bypasses need for expensive

pressing of albums or CDs• Internet allows for cheap, easy, global distribution• However, the landscape has become very

crowded– Approximately 3000 songs are released every week– In May 2014 itunes sold its 35 billionth download. The

first was sold on April 28, 2003– Average 100 per second

• The piracy problem

Napster

• Launched June 1999

• Shut down July 2001

• Peer-to-peer file sharing service specializing in MP3 music files

• Metallica filed first lawsuit charging copyright infringement in 2000

• Also in 2000 A&M Records joined by several other recording companies in suit vs. Napster

• Parker’s current net worth $2b

The Solution to Piracy?

• Online streaming

• Credited with dramatic reduction in piracy

• But how does it help the artist?

Remember Rebecca Black?

• The 1.3 million views of her video on YouTube

• At $0.00074 per view

• Have netted her a grand total of $962

• Since its debut in September of 2011

• That’s $10.69 per month

File Sharing: Good or bad?

• Copyright infringement

• Free publicity

– English rock band Radiohead’s first album to hit the top 20 in the U.S. due to it being leaked on Napster before its release

– The indie band Dispatch gained fame and tour bookings as a result of its music’s popularity on Napster

All time top selling digital songsArtist Title Release

dateSales units (mils)

Ed Sheeran Thinking out loud 2014 12

Eminem Love the way you lie 2011 12

Justin Bieber Baby 2010 12

Florida Georgia Line

Cruise 2012 11

Katy Perry Dark Horse 2013 11

Katy Perry Firework 2010 11

Lady Gaga Bad romance 2009 11RIAA certified

The Fate of the Album

Summary

• The recording industry favors the producer

• Until you become a star and escape your first contract

• Technology has changed how and where we buy our music

• The shift from albums to singles

• And from physical to digital

• More units are sold, but revenue is falling

* Worldwide sales

*

You got all that?