With the numerous allocation of expenses and overhead costs, nearly 90% of records that are released by major labels fail to make a profit. (RIAA)
Artists, whether they are educated on the matter or not, bear recording costs, not record companies. Labels, generally, loan to artists (I.e., “Advances”) for these costs and recoup them from royalties.
Note: Advanced monies aren’t for the artist to just whimsically spend on houses, cars, expensive clothing, jewelry etc. It should be understood that it is to “maintain” the artist throughout the creative process.
The average new major label artist recording budget can be between $100K and $500K (minimum) (This does not include: manufacturing, distribution and promotional costs.) Approximately 20% of the annual gross income is budgeted for promotional cost. These costs include (but are not limited to): print and design, packaging, websites, EPK’s, radio promotion, music videos and PR.
Said costs are often recouped from the artists’ royalties.
Breakdown of Profits (source: Diane Rapaport’s “A Music Business Primer”) At common discounts, record companies receive approximately $10.00 per CD ($16.95 SLRP). Thus, projected record company gross income is ten million dollars.
Out of this the record company will spend approximately $625.000 in manufacturing costs; approximately $1,000,000 in promotion (another $1,000,000 will be charged against artist royalties); $1,780,00 in royalties to the artists (at 14% of the SLRP of $16.95, less packaging); and $600,000 in publishing royalties (at 75% of statutory). After subtracting $4,005,000 from its ten million gross income, the record company has a gross profit of $5,995,000.
It will recoup its million-dollar advance to the artist and its promotional costs.