Understand Artist Royalties
Artist royalty calculations can get complicated so it’s best to break things down into the simplest terms and then once you understand the basics of the the budget, the artist and recouping then you can start to learn more about the complicated topics that make up the label’s strategies to reduce how much the label has to pay to the artist.
To start with there’s the budget which is composed of all of the expenses that the label incurs when breaking the song or artist. The budget will usually consist of an artist advance, recording budget sometimes called a “recording fund”, the marketing and promotion budget and finally tour support.
To make things easy let’s just say that the budget for the first single is $100k.
The royalty is what the artist will receive once the budget is recouped. If the artist receives a royalty of 20%, when $1.00 of profit is generated the artist will receive $0.20.
This 20% royalty will also serve as the rate that the artist recoups. So the artist will not receive their royalty until the label generates $500k in revenue.
As you can see above, the label’s profit margins are directly impacted by the artist’s royalty.
Below is a chart showing how many streams, downloads and album sales it will take for the label to recoup the $100,000 budget.
Let’s make it even simpler though.
Let’s look at an artist that has a 50/50 partnership with the label.
In this situation, the label profit margin is reduced to 50% because they only get to make $200,000 before the artist recoups and starts receiving royalty payments.
Once again, these are simplified examples to give you an understanding of how artist royalties work. In reality, the artist’s royalty is usually reduced by paying the producer royalty, management and attorney fees among other things. Likewise, the label’s profit margin doesn’t represent any administrative fees or payroll.
Next, we’ll get into some different strategies that the label uses to increase their profit margin by reducing how much of the artist royalty is actually paid to the artist.