It seems the way money flows at a record label is largely a mystery to most artists who haven’t worked in the music industry for an extended period of time. It’s always interesting to lift the veil a bit on an unknown. Let’s take a look at one side of the economics of an indie record label, getting a new release to market. Below is a summary of the actual expenses an indie record label incurred for a new release:

Recording advance: $15,000
Tour support: $2,100
Mastering costs: $934.96
Marketing: $13,433.23
Advertising: $2,067.50
Publicity: $5,153.34
Manufacturing: $16,581.04
Artwork / photos: $200
Misc: $587.71

Total: $56,057.78

Here is an overview of each of the line item in a little more detail:

Recording Advance – The money for the recording advance is used to cover the cost of recording. Including studio rental, mixing, session musicians, sound engineer and producer.

Tour Support – Artists have traditionally sold more overall units when they tour so record labels will often times financially support a tour. Tour support money can help pay some of the expenses of touring such as gas, insurance, hotels, food and supplies.

Mastering – Mastering is a post production process that takes the final mix of the recording, edits minor flaws, adjusts volume and stereo widths, equalizes tracks, etc. It’s usually expected that the person who masters the recording will be different from the person who mixes it so there is typically a separate line item in the budget.

Marketing – The marketing line item is entirely for retail co-op marketing expenses. Co-op marketing dollars are expenses distributors incur from retailers for special product placement, in-store promotions, listening stations or advertising. The amount of co-op marketing dollars the distributor (and ultimately the label) are willing to spend on a new release has a direct correlation to the amount of product the retailer orders.

Advertising – Advertising expenses can include any print, radio and online advertising the record label incurs to promote a new release (outside of retail co-op dollars).

Publicity – It’s fairly common for a record label to hire an independent publicist for a 90 day period to help promote a new release to press, print and online media, bloggers and anyone else who can help influence music fans.

Manufacturing – The manufacturing costs for a CD with jewel case can vary but is still around $1.00 per unit for a distributor or label with measurable volume.

Artwork – The cost of custom creative and / or photos for the release.

Miscellaneous – Just like the name implies this is the catch “everything else” expense category related to a new release. For example, legal fees or video production expenses charged to a new release could end up here.

For this particular release to break even it must generate $70,072.23 in gross sales ($56,057.78 + the 25% fee of sales paid to the distributor ). The typical deductions a distributor takes on sales including return reserves and breakage (to name a few) further impact cash flow on sales back to the record label.

It’s important for artists to fully understand how the basic economics of an indie label work since they will not get paid any royalties from sales until the record label recoups all the expenses incurred in getting the record to market. This is true of both traditional record label agreements and even “50/50” licensing agreements. It is very common for artists to never receive royalties on sales from their record label since many new releases never fully recoup their expenses.

Being signed to a record label is no guarantee of sales success. Artists need to carefully weigh what a record label is going to spend on a new release to determine the level of sales that will be needed to achieve profitability before signing a recording contract. Even though the artist might sell a lower number of units on their own there is a very real chance they can actually earn more money without a record label being involved. 

Most indie record label owners are simply trying to get music they love heard by fans. They aren’t in it for the money. In addition to the above mentioned costs of getting a new release to market they have to cover multiple other expenses such as insurance, rent, payroll, travel and mechanical royalties . Making money as an indie label is no easy task. Needless to say, label owners give it a great deal of consideration before signing a new artist and committing to releasing their music.

It does take a lot of money and resources to get a new release to market. However, real transparency in accounting for these expenses is still largely lacking. Inevitably this leads to conflict between the record label and artist around recoupment of expenses and payment of royalties. Hopefully, as artists better understand the economics of record labels they will be able to make more informed decisions about when it makes sense to sign with a record label and when go it alone.

David Harrell  is the Editor of Digital Audio Insider and has blogged about the economics of digital music since 2006. With his indie rock band the Layaways , he has self-released three albums. The latest, "The Space Between," is now available for free streaming and download from Last.fm.

The best I can remember, the class was called something like "the scientific method." A graduate biology seminar, it consisted of meeting once a week to watch an old science fiction movie, followed by a discussion about the treatment of science in the film. For the students, it was a low-stress way to add a couple semester hours to our schedules, and for the tenured professor who "taught" the class, it seemed like an incredibly easy way to pad his course load.

But unlike most of my college classes, there's something specific that's stayed with me. It was the professor's contention that there is no such thing as a truly repeatable experiment, at least not for biological sciences. The classic scientific method depends on the notion of repeatable results -- running the same experiment again should give the same results as those obtained in previous experiments. His point was that no matter how careful a researcher was, there'd always be some alteration in a small detail, such as a different batch of food for the lab animals or the health of the laboratory personnel. He wasn't implying that most scientific research wasn't valid, just that there was no such thing as a perfect do-over for most experiments.

Why am I yammering on about science experiments in a music business blog? Well, as anyone reading this post knows, over the past few years, the music industry -- from the largest record companies and the biggest selling artists down to the level of self-released artists -- has been experimenting like crazy. Free music, pay-what-you-want music, "360" deals, exclusive deals with Wal-Mart sans digital distribution, iTunes exclusives, etc. And after every large-scale experiment (Radiohead's "In Rainbows," Kid Rock's no-iTunes strategy, AC-DC's current Wal-Mart exclusive), music industry analysts, the news media, and bloggers attempt to assess the relative success of the approach.

Yet in all of these cases, "experiment" is probably a misnomer --there's no "control group" receiving the placebo treatment. Absent a trip to a parallel universe where you could buy Kid Rock's last album (or the single) from the iTunes store, we really don't know for certain if Kid Rock helped or hindered his total sales.  (It's possible, of course, that some record companies have been using control groups of some sort. You could make an album available in iTunes for a specific country or region, and compare sales to those in non-iTunes regions. Though the demographics and fan bases probably aren't identical across regions, so you're still guessing somewhat…)

And even if we knew for certain if an individual experiment was a relative success, it's not necessarily transferable. Just because something worked for Radiohead doesn't mean it would work for R.E.M. Further, in addition to the non-interchangeable nature of audiences and albums, the music retail environment itself is changing on a daily basis.

Yet music is art, not science, and even if these different business tests aren't controlled, repeatable experiments, there does seem to be a few obvious takeaways. One thing that seems certain is that for acts of a certain stature, deviations from the standard sales approach will result in increased attention, perhaps enough to generate additional sales. Offering free music certainly seems to have helped Trent Reznor SELL a lot of music, music that is readily available for no charge. And maybe AC-DC's new album wouldn't be selling as well without the promotional push behind the Wal-Mart exclusive.

One problem, however, is diminishing returns. Radiohead got the attention it did for its "In Rainbows" experiment not because it was the first act to offer its music on a "pay what you want" basis. Rather, because they were the first act with that level of name recognition and artistic credibility to do so. Post-Radiohead, a similar experiment by a well-known act might not get the same attention.

What's less obvious, however, is if free or pay-what-you-want music has the same impact on the other end of the scale. That is, for self-released acts like my own, who are all trying to figure out how to compete in an environment of seemingly endless listening choices.

If you spend some time on the CD Baby message boards, you'll see that some self-released musicians that are quite indignant over the idea of "free music." They'll point to the both hard work that went into writing and recording their music and the hard-earned dollars that funded the recording, mixing, mastering, and manufacturing of their music. They simply want a chance to earn some of that money back.

But offering free music doesn't mean you don't expect to get paid for it. For musicians at ANY level, the fundamental challenge is twofold. First, you need to get people to hear your music. Then you have to convince them to buy it. For relatively unknown artists, without access to commercial radio and the mainstream music press, offering free music along with paid versions of it seems the easiest way to increase your listening audience and, eventually, your paying audience.

Anecdotally, there are plenty of examples of how free and paid music can co-exist. A few years ago, when the Strokes released their second album, they offered a free 192k mp3 of the lead single on their website. Yet that song remained their top-selling track on iTunes, despite the existence of a free equivalent. And when I look at our cumulative iTunes sales, the two tracks we've sold the most copies of are songs we've made available as free downloads.

These examples don't necessarily prove anything -- there's no way to know if the Strokes would've sold more (or less) iTunes downloads if they didn't offer a free version of the track. Nor do they reveal why some consumers are paying for music they could have legally obtained without purchasing it. Maybe some purchasers of the iTunes tracks were simply unaware of the free versions, or maybe they are deliberately choosing to support the artist by purchasing the tracks.

For our new album, we're taking the free music plunge, inspired in part by a post by David Rose on this blog. For their 2004 release "Conductor," the Comas had a level of critical and promotional success that most small bands would kill for -- things like an 8.0 Pitchfork review and strong support and airplay from KEXP (one of the biggest/best known CMJ-reporting stations).

Yet they sold less than 6,000 total units, including physical CDs and album downloads. Would the Comas have done better with a free strategy? Again, without access to a parallel universe, there's no way to know to know for certain.

But in our case, given our very modest sales, the upside seems to outweigh the minimal downside of potential lost sales. And while it won't be a controlled or repeatable experiment, there are plenty of things we can quantify over the next few months: our number of Last.fm listeners, web traffic, friend statistics for MySpace and Facebook, and -- we hope -- increased sales over our previous release.

Having worked for both venture backed technology companies and record labels I often have friends from one industry attempt to relate to the other by saying something along the lines of “record labels are just like venture capitalists”. It is true both venture firms and record companies invest their time and money into a third party with the intent of making a (large) return on their investment. However, in my experience there are more differences in their traditional approaches to investing than similarities.

Venture capitalists typically understand how important it is for the employees at their investment to have cash to pay their rent and eat. One of the secrets taught in business school is: No payroll = No employees = No company = Lost investment. The traditional record label agreement dictates the artist or band doesn’t get paid any royalties from sales until after the record label has been paid back (or “recouped” in music industry language) from their initial investment in its entirety plus any and all other new release related expenses. Since the advance most non superstar artists receive for a new record is often times just enough to cover the recording costs and they won’t receive royalties from sales for some time (if ever) it’s not uncommon for the lack of income to cause a new band to break up before they have a chance to develop to their potential. It’s doubtful even Google would exist today if their investors demanded to immediately “recoup” their investment and keep every cent earned from ad sales instead of making sure the company had cash to pay their employees and other expenses during their early days.

Venture capitalists don’t demand ownership of the intellectual property the employees of their investments create. With the traditional record label agreement the record label retains ownership of the master recordings the artist or band creates in the studio.

Venture capitalists understand there is more that goes into a successful investment than just a sales and marketing strategy. They are involved with management, product development, legal, staffing in addition to sales & marketing at their portfolio companies. Record labels spend almost all their resources and money singularly focused on their artist’s sales and marketing results and very little on the other aspects of their business. Even the 360° degree deals record labels are now pursuing are really just ways to extend the labels involvement into other sales and marketing related areas of their artists such as licensing, touring and merchandise.

Venture capital firms usually invest in promising new companies along with other venture firms, each firm taking a minority ownership position. Having multiple investors helps spread the risk around and allows for collaboration on making the investment successful. Record labels have traditionally not worked with or collaborated with other labels (outside of their ownership group) on developing new artists.

Venture capitalists are far from perfect and certainly don’t always have the owners or employees of the companies they have invested in best interest at heart when making decisions. But the approach they take gives their investments a much better shot a long-term success than a traditional record label deal.

Some artists, like some startup companies, do need an investor and team of professionals to help them succeed. Hopefully as the music industry continues its ongoing transformation new and more equitable models for investing in artists will emerge and Patrons & Champions will give more of them the chance to build long-term, sustainable careers.

Have you ever found a band (or several) you were convinced would become a success or even destined to be one of the most popular band on the planet if only other music fans knew they existed? Isn’t it always completely baffling when a band you love doesn’t catch on despite their outstanding talent, songwriting and live shows?

This happened to me many times during my tenure at Yep Roc Records while working with such a great artist roster. In 2004 we had a new release from a band called The Comas I was convinced would be one of the best selling indie rock releases of the year. The Comas are a very talented band and Conductor , based on singer Andy’s Herrod’s breakup with Dawson’s Creek star Michelle Williams , was a great release. Additionally, director Brent Bonacorso created an amazing full length video based on the album that was included as a DVD in the CD’s packaging.

I thought once we executed the publicity plan, music fans of the world would have a new favorite band and Conductor would be sitting at the top of the indie charts.

The label committed fully to this release with new media, publicity, radio promotions, and retail marketing to build awareness; plus, provided a tour support budget to get the band on the road. The band and release were embraced by the media, a few of the successes included:

• An 8 (out of 10) rating from indie tastemaker Pitchfork Media

• Named to Rolling Stone Magazine’s 2004 “Top 10 Bands You Haven’t Heard of"

• Magnet Magazine’s # 3 record of 2004

• Multiple songs added into the rotation at KEXP plus a featured interview and in studio performance

• Yahoo Music “One to Watch” selection that included an in studio performance and interview plus a full day feature on theYahoo.com homepage

Conductor sold just over 5000 total units despite strong media coverage and all the other things the band and release had going for them. The Comas moved to Vagrant Records for their next release in hopes of finding greater success. Unfortunately their 2007 release Spells sold even fewer units than Conductor.

How could a great band with a great release and full backing from their label and distributor not be more successful? The harsh reality of this business is that many bands simply don’t catch on with music fans or become a commercial success.

I have come to the realization over the years that there is some type of unseen “X” factor at work for bands that become successful. Some bands hit, some bands don’t and it’s not always clear why. Ask any experienced musician or industry professional and they will most likely tell you the same thing. I’ve taken to calling this “X” factor magic pixie dust since it’s not easily defined and quite elusive. Magic pixie dust isn’t available from a different publicist or found at the newest online music website to be sure.

How do you go about finding this magic pixie dust? No one knows for sure, but I’m of the opinion that it has to find you. The only way to put yourself in a position to be found is to work hard at your craft, play as many live shows as possible, build up your fan base and simply persevere through all the challenges you face every day as an artist pursuing your passion. You never know when a little magic pixie dust might come your way.

John Doe is the founder of the seminal Los Angeles punk group X, a solo artist and actor. Photo by Autumn de Wilde

OK, admitting that I’m a bit of a luddite - I accept that computers are my friend and fully embrace their benefit. However, when it comes to music there is a vast difference between marketing & creativity. When you see a band that has designed their logo-website-tshirt-wardrobe-marketing plan, before they’ve written four or five great songs, and I use that term loosely, you know something is rotten in Denmark.

First, let’s talk about songs. That can be pretty much anything as long as it has a beginning and an end. For lots of good songs the middle is not so important but for great songs, I think it is. I have my own preferences but won’t engage in the debate on what’s better, or more valid, as a song. If you communicate to an audience in person or in some alternate-virtual reality & don’t even have a chance of pulling that off on stage, it doesn’t matter. DJs, et al are included in this communication. Again, I have my own preferences but I recognize there being many ways to skin or get that cat outta the tree. BUT, it’s hard to make an argument for something succeeding if it doesn’t“speak” to some group of people. For my money that is where a musician or anyone in music, must start. Being truthful in some fashion or speaking some truth to others. Whether you’re out to change the world, baring your soul, reflecting your culture or telling a tale, there has to be some truth, even if it’s a lie.

You can make a case for, & give countless examples of, people becoming popular in the indie world on the basis of their talent, determination and ability to communicate to an audience. Anyone from Elliott Smith, Feist, Guided By Voices, Sufjan Stevens, Neko Case, Yo La Tengo, The Sadies to countless underground punk rock & jam bands. Even though I’m less familiar with & interested in the last two groups, there’s no denying their success in carving out a niche and career for themselves. I’m convinced that one of the main reasons for this is quality and making something that means something to others. This applies whether you’re a DJ, a jam band or the next Willie Nelson, wait a minute Willie Nelson is sort of a jam band now-a-days . . . you get my point.

So, I suppose this brings us to marketing. I won’t deny that a great photo or ingenious advert can go a long way in grabbing attention and even establish someone. But what really works in marketing is after the fact and the fact is quality of whatever it is that you create. You still have to look good or weird or the same as someone else or just project what ever it is that made you who you are. People who have longevity come to marketing ideas relative to whatever project they’ve just completed. My experience has been that you, as an artist, can and should have as much of an idea as to how to promote & market your records as anyone else, assuming that you don’t just get in other people’s way. Ask yourself the question, “What’s important about what we just made?” Maybe in the old days all an artist had to do was sing good, look pretty & leave the business up to the company. Not any more and if you have been living under a rock and don’t use DIY methods this is how people become dissatisfied with their record companies. They leave too many of those decisions to someone else & then don’t like the result. This is something to establish at the beginning of the business relationship, which brings us back to the beginning of the discussion...

Write a few great songs & figure out what your MySpace page will look like later.

John Doe – Oildale, CA 9/29/07

John Doe will have a regular blog on KnowTheMusicBiz.com entitled What Would John Doe Do? (WWJDD?) where John will answers questions from community members about music, the music business or life. If you have a question you would like John to answer in his blog please email it to: wwjdd@knowthemusicbiz.com

For more information on John Doe check out theejohndoe.com or yeproc.com