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Music Business 101: Where does the money come from

Where does the money come from in the music industry? Most are aware that it’s split between the label, artist, and songwriters, but publishing companies and distributors also get their piece of the pie.  But what generates the income that keeps our music business going?

Not so many years ago, the music industry worked differently than it does today.  As recently as the ‘80s or early ‘90s, income streams were as they had always been – record sales, royalties, touring and merchandise.

Let’s start at the beginning.

Juli Newton-Griffith, VP of Magic Mustang Music Publishing with Vice President of Broken Bow Records, Jon Loba

Juli Newton-Griffith, VP of Magic Mustang Music Publishing with Vice President of Broken Bow Records, Jon Loba

An artist was signed to a record label, which would spend its own money to record and manufacture an album, typically 12 songs in length. The label would set up the recording sessions in a studio usually owned by the label and would hire the producer, musicians and background vocalists.

The label would also invest heavily in media promotions and marketing to let the world know you were coming as your popularity grew. Their promotions department  would constantly be on the phones to the radio stations working to get your songs played. If they could get you into “heavy rotation,” you were bound for stardom!

At that point, the tables would turn. Instead of spending money on you, the labels began to receive income from actual record sales, termed “mechanicals” or “mechanical royalties.” That was the ONLY stream of revenue for the label, so they had to make sure you got famous so you would sell a lot of records.

The songwriters who wrote your songs made their income off the airplay (via performance royalties), as did the publishers who published them.

The artists made their income through ticket sales and concert merchandise, unless they wrote the songs that made them famous. Then they could share in the income from the airplay, which is likely why many artists began writing their own songs.

What has changed in today’s music industry?

To get some insight, we talked with some Music Row pros – Jon Loba, executive vice president of Broken Bow Records, and Juli Newton-Griffith, vice president of Magic Mustang Music publishing.

Primarily, the sources of revenue for an artist have not changed, with the exception of revenue from sponsorships, which have become an important source of income in the music business. An example of this would be when corporations such as Jack Daniels or Coors Lite pays for the opportunity to sponsor signature events and tours.

What about record sales?

The artists were “not going to get rich off of record sales in the old days,” Loba says. “And definitely not today.”

“The record label relationship becomes a huge marketing vehicle and promotion vehicle for them and their music to be exposed, so they can then go sell tickets and merchandise and get sponsorships. That’s primarily where an artist’s income is going to come from. No. 1, touring; No. 2, merchandise sales; and No. 3, sponsorships,” Loba explains.

Today’s artist income is primarily based in touring, while the biggest changes have been felt by the labels. Since their only traditional income source was record sales, things have changed in the digital age for labels large and small.

“For the artist, the money still comes from sales but in a different way. And things are different for the label these days also,” Loba explains. “On the record label side, the recorded music sales have dropped dramatically, both the digital and the physical, and continue dropping.”

”So because of that we are now having to participate in income streams that we did not before.”

Labels have found their hands tied as the sale of physical product has declined and digital sources of music have grown in popularity.

What measures have the labels taken to ensure they can continue to remain viable? Is it possible to make a profit with the ongoing trend of streaming?

“Out of necessity was born the 360 agreement,” Loba says.

The 360 agreement between the artist and label was created to address the problem of declining record sales. It no longer made business sense for labels to front the entire costs of developing an artist and their music for a declining revenue source. The 360 agreements now are structured so that the labels participate in nearly every revenue source, including concert ticket sales, merchandise and sponsorships.

Pic 2- iHeartRadio_Logo-01There are some pieces of the pie that the label does not receive. They do not receive a cut from “terrestrial broadcast airplay,” or, in everyday language, from music played on the radio. They do participate in music streaming platforms, such as iHeartRadio, which bills itself as an online radio platform.

Where does this leave the publisher and songwriter, now that online streaming is becoming a direct competitor of traditional radio and physical record sales?

According to Magic Mustang’s Juli Newton-Griffith, the publisher and songwriter still get paid from airplay and from licensing – with just a little more creativity now added to the mix.

“Our three forms of income are ‘mechanicals’ which are sales of recorded music, ‘performance’ which is airplay, and ‘sync’ opportunities, [which] is TV, film, commercials, games, anything like that,” Newton-Griffith explains.

“We used to just get our songs cut and then go on to get the next one cut,” she describes. “Now after they’re cut, we really have to focus on getting the most out of the songs. So we work on getting them in a film or game usage, anything…to [build the income] after the fact.”

How does the publisher know where to get this income or who owes it to them? Who keeps up with all that?

You might recognize the names ASCAP, BMI and SESAC. These performing rights organizations (aka PROs) have agreements in place with radio stations, music venues and business establishments. “When stations play a song, there’s an agreed-upon federal rate that song generates,” Loba explains. “So those three licensing agencies collect those monies and distribute them to songwriters and publishers. They also collect on live music performances.”

How do the PROs know which songs are played in each establishment and how many times? Well no one is there with a clipboard keeping track. So each establishment simply pays a blanket license fee to ASCAP, SESAC and BMI that depends on club capacity, among other things.

The publishers have much of their own work to do to assist these PROs. The three PROs “will let you log live performance,” explains Newton-Griffith, who says that publishing companies will “go in and get set lists and log those performances so we can get paid on those performances.“

Why have labels and publishers changed their protocols? Primarily, it’s because of streaming.

Napster was the first to lead the way into the “free music” downloads, infringing terribly on the copyrights of the songwriters or other copyright holders and most definitely depleting the income from the sale of physical product. Thankfully, Apple iTunes started the first “legal” downloading  around 2003, and others followed suit. Artists could actually get paid for every download. Since that time, streaming has become the trend and it’s free, for the most part.

So now what? Well, things work nearly the same – but with much smaller numbers.

The artists make their income from a portion of the concert ticket sales, physical and digital record sales, merchandise and sponsorship.

The labels still make their income from recorded music sales, but they also participate in any income generated from streaming – measured more in pennies than dollars – as well as concert sales, merchandise and sponsorships.

The publishers and songwriters still make their income from airplay but also receive a share of the streaming dollars.

The future?

Juli Newton-Griffith sums it up. “For every stream of a song…we get .0004 cents. We just had ‘I Don’t Dance.’ It was streamed a lot. When you get those kinds of copyrights, it does help,” Newton-Griffith explains.

But “streaming is the way of the future.”

“My day, honestly,” she says, “is just finding where the pennies are falling and trying to catch them any way we can.”