How Do Record Labels Make Money?

Record labels are a big part of the music industry. They are generally defined as the companies who produce and sell an artist's songs and music videos. Almost all singers that you are familiar with are signed with one. Not only do they produce and sell songs, but they also scout for new artists with potential and later develop their skills (otherwise known as Artists and Repertoire).

This article will discuss the various types of record companies, responsibilities of a record label, how record labels make money and everything in between.

Table Of Contents

  • Types Of Record Labels
    • Major Record Labels
    • Independent Record Labels
  • The People Behind Record Labels (And Their Responsibilities)
  • The Money Making Process Of Record Labels
  • Conclusion

Types of Record Labels: Their Advantages and Disadvantages

There are two kinds of record labels that an artist can be a part of: a major label or an independent label. However, the common perception that comes to mind when you hear the word, "record label", are major labels.

Major Record Labels

Advantages

Getting a deal with a major label could be a dream for amateur singers because there are other famous artists signed with the same company that they have a chance in collaborating with. Aside from that possibility, the biggest thing that these big companies have to offer is a big budget. This budget will be invested on:

  • High quality recordings: You will be working with some of the top-of-the-line vocal equipment that other famous singers have used.
  • Production: Engineers will be able to fix and tweak any vocal mistakes with auto tune to achieve that perfect song.
  • Major Distribution: Your songs, EPs, albums, and singles will be made available in major retail stores or online to purchase.
  • Music Videos: In order to boost more sales or to get your songs known, singers are able to make creative and high quality videos with costumes, makeup, and possible choreography.
  • Pro-Photography: Not only will they be able to auto tune your voice to perfection, but they will also photoshop your pictures to achieve a flawless look like the celebrities.
  • Pro-Advertising: Generally, before your songs are made available to hear, the record label will post snippets of your song on major platforms to grab people's interest.
  • Tours: If you are lucky enough, you will be able to share your songs along with your fans, in places you may have never travelled before.
  • Merchandise: Your fans will be able to support you by purchasing shirts, hoodies, caps, posters, and more.

Disadvantages

Because their company holds a big place in the entertainment industry, they are able to get this budget through their numerous resources. Therefore, signing with major labels increase your chances of success.

However, there are some restrictions with working with big record labels. Signing with a major label company basically means that they "own" you for a certain amount of time. Big labels might even strip you of your creative control over your brand, image, and music. Additionally, they will dictate where you need to be and when. When it is all over, you will not be able to claim ownership to the songs you made under them.

Before you jump to conclusions, the big budget to be provided is not a grand gesture by the company. The investment is because they believe that you can be able to give them even more money. Once beginner artists are signed with a grand label, they are considered to have debt to them. Money is no joking matter in the industry and because of that, you need to provide results. However, if you are successful enough, you can negotiate to gain higher percentage on sales.

Signing with a big label can be an exciting thing, but that does not mean that the lime light will be directly on you. There are many small artists listed with these labels, so it will be easy to get lost in the crowd. Starting your career may be a difficult process, but will all be worth it once you get recognized for your work.

Examples Of Major Recording Labels And Their Artists

1. Universal Music Group (UMG):

  • Taylor Swift
  • Rihanna
  • Lady Gaga
  • One Direction
  • Jonas Brothers
  • Queen
  • Mick Jagger

2. Sony Music Entertainment (SME):

  • Michael Jackson
  • Britney Spears
  • Shakira
  • John Legend
  • Backstreet Boys

3. Warner Music Group (WMG):

  • Ed Sheeran
  • Camilla Cabello
  • Madonna
  • Prince
  • Jason Derulo
  • Cher

Independent Record Labels

Advantages

Independent record labels, or "indie labels", operate without the assistance of major record labels, hence, the word "independent". They provide a more subtle way to record music. Although they are not as well-known as major record labels, they do have their perks.

Unlike major recording companies, indie labels want to recruit you because they have interest with you. Receiving an offer from an independent record label is an honor because that means that your image and sound genuinely appeal to them, and they want to give you a platform for it.

Because these companies are much smaller, you can expect fewer people to be signed with them. This means that you have a bigger chance in standing out and building a business relationship with the label. Having a great relationship with the company will open doors to planning and discussing what the next step should be for your career.

As for contracts, indie labels could provide similar to those of major labels but less intense. Some may even include only distribution and promotion deals. Nonetheless, the contracts depend on the company and the artist.

After signing with a small recording company, smaller artists will still be able to stick to the image they desire and are given the freedom to possess creative control over their music, especially when it comes to writing lyrics. A majority of indie labels let their artists own their music after a determined amount of time.

Disadvantages

Although you are more likely to creatively express yourself with an independent label, you may not have the resources to. Smaller companies mean smaller budgets which can increase restrictions for your career.

Due to the smaller amount of money the label will provide, you may have to record in studios that might not give the same quality as the songs that are currently topping the charts. Local producers will be able to assist you with your songs, though they may be new to the industry like you. Lastly, your music will not be as greatly distributed.

Examples Of Independent Recording Labels And Their Artists

1. XL Recordings:

  • Adele
  • Radiohead
  • M.I.A.

2. Domino Records:

  • Arctic Monkeys
  • Bloody Orange
  • Animal Collective

3. Subpop Records:

  • Nirvana
  • Fleet Foxes
  • Beach House

The People Behind Record Labels (And Their Responsibilities)

Whether the record label is identified as independent or a major label, it is not a one-man show. There are plenty of people who work behind the scene to keep the company running.

CEO

To start things off, there is the Chief Executive Officer, otherwise known as the CEO or the President of the company. Their job focuses on what genres their label will handle, as well as which direction the label should take. They handle the politics of business, marketing, and the artists that are signed with them. CEOs communicate with the people under them to improve the company and basically control all departments.

Vice President

Although CEOs have the highest amount of control, it does not mean that they run the label themselves. The Vice President (VP) is responsible for making strategies for the label, which will later be finalized for approval by the CEO. Generally, the VP conducts meetings to make plans with department heads. They serve as the negotiator with the distributors of their music.

Business Affairs / Accounting

Since record labels are businesses, they must have Business Affairs or Accounting to deal with financial matters. Their job handles anything related to accounting, banking, taxes, and artists' earnings. The Accounting department is responsible for bookkeeping, payroll, and general finances of the company, which they will report back to the CEO.

Legal

In order for an artist to work under a music label, they have to sign a contract. This is where the Legal department steps in. They are the company's group of lawyers who deal with vendors and other contractual needs for the label. All legal issues that involve the company are handled by this department.

A&R

Before artists sign a contract, they are discovered. Artists and Repertoire (A&R)'s duties involve searching for a talent that could benefit the company. They are skilled to assist with song selections, choose the producers, and which studio to record in. You can consider them as the link between the artist and the record label.

Artist Development

For an artist to get advice on their image, the Artist Development department will be able to give their input. They maintain the artist's image and brand to help them artistically and financially. Though they are not used as often anymore, they are professionals who can offer crucial suggestions, such as image consultants and voice coaches.

Marketing

In charge of promoting the artists, the Marketing department utilizes different tactics to increase sales and popularity. From being in charge of designing album covers to requesting to play an artist's song on the radio, this department keeps themselves busy. They are in charge of coordinating plans regarding promotion, sales, and publicity.

Public Relations

With relation to the Marketing department, this department gives their artists appearances in interviews, live performances, or magazine covers. New songs are promoted by Public Relations to ensure their success. Their job is to try to get their artist to be as relevant as possible by getting them invited to elite parties, events, and projects. They are capable of turning bad press into good.

The Money Making Process Of Record Labels

As mentioned earlier, all record labels rely on their talents in order for their company to sustain their progress. From a business standpoint, the talents listed under the label are opportunities to gain profits. However, you may be wondering how the exact process works.

1. Contract Signings

Record deals are what allow an artist and a recording label to work together. From this point on, you agree on legal terms that the label is able to produce CDs, make it available online to stream through their distributors, and sell digital versions of it on online music stores. A majority of the profit usually goes to the label, while they give you the percentage you legally agreed with in your contract.

Exclusivity

Labels are selfish when it comes to their talents because they own you for a designated amount of time. The "term" or "release commitment" stated in the contract refers to how long your songs will be owned by the company to ensure exclusive rights.

Advancements

Upon signing your contract, you will receive an advance payment from the label. This investment is often used to fund in making an album. Until you have reached enough to pay the label back, every cent spent towards your music goes to them. When it is paid back, you can negotiate a deal so you can get a higher percentage of sales, which is referred to as "royalties".

Royalties

Depending on your success as a singer, the recording label will be able to give you royalties. The percentage rate is wide and ranges from 15% to 65%. However, a common percentage labels allow once the artist has paid off their advancements is a fair 50%.

2. Releasing Music

Streaming

Once your music is made available to the public, you have plenty of opportunities to pay back the advance payments you owe. Through digital purchases, the artist is given 60 to 70% whereas the retailer gets the remaining amount. The percentage given to the artist is then split in half by the label and the artist. In simpler terms, record labels give their music to the distributor who make sales, keeps a small portion, passes it down to the label who also keeps a small portion, then passed down to the artist, in the form of "royalties".

Licensing and Publishing

Record labels and artists are also able to receive money through publishing and licensing their songs. This means that any time someone uses your song (whether its a cover or as part of a soundtrack) and receives profit for it, your label will receive a portion of it.

Performances

Royalties can also be collected by performing live for an event or whenever your song is played on the radio. Considering that music festivals have increased in popularity recently, labels will gather their connections to get their artists more exposure and potentially more profit.

Merchandise

When you have gained a sufficient amount of fans, they may be looking for merchandise to support you. Similarly with the songs recorded, labels may pay advancements to produce merchandise and will take every cent until it is paid off. Then, you will be able to negotiate for royalties.

Conclusion

Artists and record labels have a symbiotic relationship of sorts. They can benefit from each other and eliminating one from the picture would leave the other non-existent. Artists are able to successfully fulfill their dreams, whereas record labels invest and profit on them.

Whether independent or a major recording label, these companies have different departments to manage company matters. Through their cooperation, the record label is able to gain their profit through an artist's streaming, licensing and publishing, performances, and merchandise. All proceeds usually go through the label before it reaches the artist.

If there is anything to take from the article, it's that if you thought an artist was rich and successful, you should probably think about their label's earnings.