How Does The Music Industry Make Money?
written by: Chris L.
Once upon a time in 1937, the American-Federation of Musicians in Chicago went on a strike to display their contempt for recorded music.
Today, the America’s music industry was estimated in 2016 to generate around $17.2 billion. It is also expected to generate more than $22.6 billion in 2021.
Considering these astonishing dollars predicted and earned so far in the industry, how does the music industry make money? Well, let’s take an in-depth look into this lucrative yet volatile industry.
A New Era
Following the strike, the source of income for the industry changed from sole earning from live performance to earning royalties from record sales too. This new era saw a boom in the numbers of different record labels while pop stars working for these labels could track their earnings.
For instance, when someone purchases a CD at from Tower Records for $12, after sometime, a royalty of a few dollars will be sent to the artist’s account. To promote a new song, artists ensure it is played often on radio and in addition to this, they go on tour singing in venues where entrance is restricted to those who purchased tickets only.
Record labels are always fighting piracy. To listen to artists songs, aside from hearing it for free on radio, you either buy or rent the label. Even when you purchase, you are not expected to share with others. To maximize profit for them and their artists, they expect others to come and buy too.
Video 1: Why Artists Don't Make Money
Then something changed it all! What? The Internet changed it!
So, how does the music industry make money through the internet?
The internet, just as it revolutionized all other sectors, changed how the music industry makes money. The emergence of iTunes made earning easier again for musicians and their record label. On every sale made by Apple, a percentage is sent to the singer’s or record label’s account depending on the signed deal. The artist does less and earns more using this platform while they can still go on tour and also sell their records at traditional stores.
However, between 1999 and 2011, the industry was reported to have shrunk by 64 percent. The amount spent by listeners reduced from $71 to $26. Why? This is in no small part due to more piracy made possible by the internet. Aside from this, it is worthy to also note that iTunes also has a role in that. Instead of listeners paying for a whole album, they can buy the tracks they prefer only from iTunes at a little fee which the full album sale era did not allow.
A stat revealed that eight years after the launch of iTunes, only 0.25 albums were downloaded in a year by an average music listener! Don’t you think that is too small for a multibillion-dollar industry? I guess listeners were satisfied… just like you.
Digital Era Income
Another way to answer the question, “how does the music industry make money?’’ is to take a look at all possible sources of income and challenges experienced.
Today, it is more complex. More than ever, the internet has made it possible for artists to reach millions of music fans around the world in lesser time. Fans can now download and play free music videos on YouTube, listen to songs live on MOG, Spotify, Radio and even find and create their personal playlist on Spotify and Soundcloud, or listen to tracks on online radios like Slacker, Pandora, and iHeartRadio, among other options that are now available. Leveraging this has made digital streaming the major source of income for artists today.
Online downloads of singles and albums witnessed a decline and are now replaced with subscription and streaming services. Subscription and streaming services generated more than four times single downloads revenue in 2016, accumulating about $24 billion.
To determine how artists earn on these platforms is not as easy as it looks. That is why Jeff Price, the founder of Tunecore said people would rather simplify this and then say there is little money in it.
Tunecore, a site that charges artists who wish to directly place songs into iTunes, Spotify and others, claims royalty generated from the reproduction and distribution copyrights in the United States is $0.091 per song production. For songs with durations over five minutes, a formula rate will apply and the U.S. Governments determines that. Outside of the States, the royalty is as high as 8% - 10% depending on the country. These are, however, in negligence of piracy.
There are more infringers than legal websites to download and stream for free.
Video 2: How artists can (finally) get paid in the digital age
How Does The Music Industry Make Money Through The Internet From Subscription and Streaming Services?
Music streaming service providers offer their subscription either for free (with adverts) or paid. The earned amount by each artist on this platform is dependent on how many times their song was streamed and the total subscribers of the platform. It is estimated songwriters make about $0.004 per stream or 10.5 percent of Spotify or M.O.G revenue.
Earning from iTunes - From every sale made on iTunes, Apple deducts 30 to 40 percent for the use of its platform while the rest goes to the record label. The record label then deducts around 10 percent as a mechanical royalty paid to the artist as well as the songwriter. After that, a typical record contract enables an artist to earn between 12 to 20 percent of the remaining balance. This is, however, effective only after the cost of publishing the album has been offset.
Earning From YouTube and Vevo - The industry also makes cool cash from YouTube and Vevo through the adverts the platforms incorporated into their video. The J.K Wedding Entrance-Dance video with Chris Brown’s hit song Forever as the soundtrack has above 97 million views on YouTube since it was uploaded in July 2009. According to sources, it was estimated that Sony could have made about $97,000 from the video simply because it is possible for an artist like Chris Brown to command $1 for every 1,000 views of his music placed in videos.
Earning From Internet Radio - Pandora and Slacker reportedly pay an annual amount of 25 percent of their gross revenue or $0.001 per song to a music-business collection-agency, SoundExchange. SoundExchange then pays 50 percent to record labels, 45 percent to artists and the remaining 5 percent to performers that are non-featured. Other smaller internet radios pay less than that.
Aside from the huge amount of revenue the industry garnered from the digital market — which accounts for about 45 percent of its total revenue worldwide — it still earns a lot from its traditional markets such as live performance and sales of CDs.
Some artists, however, have developed unconventional means of making money. Nipsey Hussle, famous Los Angeles rapper, released Crenshaw completely for free. But printed 1000 CDs with exclusive content and extras which he sold for $100. He made fans purchase at their own will trending #Proud2Pay on Twitter.
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