Ever since I was a little kid, I wanted to start a record label – Kevin Abstract
I can relate to Kevin Abstract’s words above. I started my first indie music label while I was a student at Morehouse College, strictly for the passion of sharing my music with people. But soon I started to think about my record label as a business and asked, “How do independent labels make money?”
The days of a music industry controlled by huge, multinational major labels as the sole gatekeepers are a thing of the past. For the last three and half decades, independent labels have commanded an increasing market share of the global profits generated by the music industry. And today, artists have the ability to work directly with music distributors like DashGo and DistroKid.
Governed only by their desire to share music with like-minded fans around the world, rather than operating as a strictly profit-making endeavor, independent labels have changed the face of the music industry.
And the best thing about independent record labels is that anyone with a fervent passion for music can start one.
However, like any other business, if an independent label is going to survive, it needs to make money. But if the way that an independent label operates differs from the way the traditional music industry is run, how does it make money?
Well, even though they’re run on a much smaller scale, and for the most part collectively decided to throw the traditional industry rulebook out of the window, independent labels make money in almost exactly the same way as major labels do.
Table of Contents
Physical Record Sales
While physical sales used to account for the entirety of record label profits, the way in which fans now listen to music has changed dramatically since the advent of the internet.
Physical sales, that is the sales of vinyl, CDs, and to a far lesser extent cassettes now account for roughly ten percent of a record label’s income, which is a significant decrease in market share compared to the same period a decade ago, when they accounted for more than sixty percent of the potential income of a record label, regardless of whether they were a major or an independent.
On average, a record label makes thirty percent of the retail price of an album sold in stores, record shops, or by an online supplier like Amazon.
The percentage vastly increases if the sale (physical or digital) is made through the label’s own website (or Bandcamp page) and the customer orders directly from them, with the label’s share of the retail price then nearly doubling and the rest, the remaining forty percent, being divided between the artist and their publishing company.
In 2015, digital sales of albums overtook physical sales for the first time (mostly thanks to iTunes). The gap between digital and physical has continued to grow, with digital sales now accounting for somewhere in the region of twenty-five percent of an independent label’s income.
The percentage of digital retail sales that independent labels earn from online giants such as Apple and Amazon is in the same ballpark as the amount that they make from physical sales, around thirty percent – so if Amazon sold a digital download of the new Bad Religion album for nine dollars, their record label Epitaph, would make somewhere in the region of two and a half dollars from that sale, which they would then have to divide with the band and their publishing company according to both parties (artist and label) contractual obligations.
With the advent of Bandcamp, a website for bands and labels to sell their music directly to their audience, in both digital and physical formats, the percentage that a label makes from each digital download increases to between eighty-five and ninety percent dependent on the figure (which can vary from artists to artists and labels and label) that Bandcamp takes as their fee.
It’s those kinds of deals, and Bandcamp’s willingness to work with their artists and the labels that want to work with them, that has led to it becoming one of the fastest-growing businesses in the music industry.
Streaming – The Biggest Fish In The Pond
That said, the biggest revenue generator for any label is streaming.
Even though a DSP (a music streaming platform) like Spotify only pays labels and artists somewhere in the region of $.0033 per stream, the sheer size of the streaming platforms’ global audience and the number of plays per track this audience accounts for, can help an independent label to turn over a much quicker profit, no matter how small it may be, than a more conventional sales model would.
While a lot of indie labels used to balk at the idea of allowing their back catalogs and artists to be streamed on Spotify, the publicity that the streaming service can help to generate for labels and their artists makes it worth the risk, and it’s now a rarity if artists or label ISN’T affiliated with Spotify, whereas just two years ago the opposite was true.
Merchandising – If We Can Make It We Can Sell It
An increasing amount of the profit that an independent label makes comes from merchandising.
While merchandising used to be strictly confined to tee-shirts, clothing, and posters, the mantra now seems to be that if a label can make a product and somehow tie it into either themselves or their artists, they can and will and will use and sell that merchandise directly to their, and their artists, fanbase from their websites.
It isn’t unusual to see independent labels selling everything from limited edition vinyl releases of the catalog to coffee mugs, to craft beers that bear their names which were created by artisanal breweries or action figures based on their bands from the websites.
Merchandising is one of the largest profit-making sectors in the music industry and independent labels have seized on it and used it as a way to make money for themselves and their artists.
It used to be simple. Bands would go on tour, labels would provide some sort of support for that tour, which would be either financial or a specified amount of merchandise for the bands to sell so they could generate some sort of income while on the road.
As we’ve already said, times have changed though, and it isn’t uncommon for independent labels to organize their own festivals or insert performance clauses in their bands’ contracts that entitle them to a share of the money that their bands make while touring.
The idea of tour support has now become one that has abandoned the one-way label to band street in favor of a more mutually beneficial quid pro quo model.
How Do Independent Labels Make Money?
Simply put, for the most part, they make money the same way that they always have by following the major label playbook.
And when that doesn’t work, or they need to change the way in which they make money, that’s exactly what they have done and continue to do, and as the music industry evolves, the way in which independent labels make money will undoubtedly follow suit.
How Do Independent Artists Make Money?
Just like their independent label counterparts, independent artists can make money in a number of different ways. The most obvious, and long-established way was, and continues to be through gigging, performing live, and touring.
Most independent artists also sell their own CDs and records at their shows, as the audience gets the chance to see the musician, they already know what they’re buying when they purchase the recordings.
As well as providing a platform for independent labels to sell their physical and digital catalogs, Bandcamp allows independent artists to sell their digital and physical music and merchandise through their platform.
This opens up another potential revenue stream for artists and can be used to sell their music to their audience in conjunction with their own websites.
The internet, in musical terms, has leveled the playing field and given artists almost as much power within the industry as record labels.
What Percentage Do Record Labels Take?
As we’ve already briefly visited this idea, we’ll quickly run over the figures again. From standard physical or digital release sold through a retailer, a record label will make somewhere in the region of thirty percent of the selling price of that record.
If the record label sells the same release through their website, they’ll make around sixty percent of the asking price, and through Bandcamp, they’ll make eighty-five to ninety percent of the retail price that they’ll then have to divide with the artists and publishing companies.
As far as merchandising is concerned, if the record label sells an item of band merchandise through their site or has arranged for said bad merchandise to be sold elsewhere, they will most likely get a fifty percent share (with the artist taking the other fifty percent) of the monies eventually paid to them for said merchandise.
It isn’t uncommon for major labels, or some of the bigger indies to also take a twenty percent cut of live performance fees from their artists.
While the idea that record labels don’t hold as much sway within the music industry as they used to is one that has an increasing amount of credence, they are still, along with streaming services, the major profit-making party within the business.
How Do Independent Artists Make Money Without A Record Label?
Independence grants artists complete creative and financial control over their own destinies.
They get to keep all of the money they make from live performances and, if they choose to self-release their own music through a platform like Bandcamp, they also make all of the profit (minus Bandcamp’s fee of course) that their own music generates.
Any sales that they make through their own websites of their music and merchandise also belongs to them.
While it’s a much riskier endeavor, and road to pursue, by taking control of their own career and cutting out the “middle man” (the record labels), if they’re talented, lucky, and successful artists stand to make a lot more money.
Can You Be Signed To Multiple Record Labels?
Yes, you absolutely can be signed to a number of different record labels at the same time. A lot of artists will sign to different labels for different territories or regions, as each label is more acutely aware of how to market their artists within their own territory.
So, an artist could be signed to one label for North America, one for Europe, and one for Asia, and be part of three different record labels at the same time.
It’s a time-honored practice that the music industry has used, and abided by for more than half a century and will doubtless continue to thrive for at least another half-century.