Legendary guitarist, Pete Townshend once made headlines when he called iTunes a "digital vampire" that profits from artists – without actually providing support. Townsend demanded that Apple do more to support musicians, the backbone of their music sales.
It could be easy to brush off Townshend as a cranky old timer, but does he have a point?
Look past the musician stereotypes and you’ll see that most receive a tiny fraction of a song’s purchase price. There’s no doubt that making music can still pay off big-time, but you might be surprised to see who's really making money from CD sales and iTunes royalties.
Who Profits from CD Sales?
In the music industry's basic form, an artist simply records his/her own music, reproduces it and sells it to others.
If they want to go the more old-fashioned route, an artist can burn their recorded tracks onto compact discs and sell the CDs themselves at performances or on the band's own website. Or they can put it on an online retail site which doesn't require musicians to have a record company to sell their music.
If they sell the physical CD themselves for $9.99, they keep 100% of the profits. Obviously, this is the best possible situation, but it's not the best way to reach the widest possible audience.
Selling that same album with an online retailer might mean that a website would get a cut of, say, $2.49, while the artist might gain a cool 75% profit. Unfortunately for new musicians, expensive record labels are often the key to getting an artist's brand out.
How Record Companies Make Money
Record companies get a cut of everything that a musician produces, and that’s not a surprise, considering how artists are a risky investment. Once you add in pay advances for recording costs and other expenses, these companies expect a return on investment.
What Cuts Do Artists Get for Album Sales?
Every contract is different, but the average high-end, record company royalty deal pays musicians $1 for every $10 retail album sale.
And it can be a lot worse than that: A low-end royalty deal only pays $.30 per album sale. That’s an amazingly small profit for a CD purchase, especially considering that bands may have to divide that among several members.
How Much Does iTunes Pay Artists Per Download?
If a customer downloads a $9.99 album, the iTunes percentage to artists would likely be a modest $.94 cents – less than a 10% cut. The record company might take $5.35 and Apple would keep the remaining $3.70.
On average, artists receive approximately $.09 for each individual song downloaded on iTunes. To put that into perspective, musicians would need to sell around 12,400 songs every month to earn a minimum wage salary.
How Much Do Streaming Sites Pay Musicians?
Online streaming services like Last.fm, Rhapsody and Spotify pay each time users click play – but the numbers are a pittance. For example, each song stream results in about $.006.
To earn a minimum wage income, listeners would have to stream an artist’s songs 849,817 times on Rhapsody, 1,546,667 times on Last.fm and 4,053,110 times on Spotify, respectively.
How Do Musicians Survive in the Music Industry?
While music sales are an important part of the equation, they aren’t the only ways these artists are paid for their songs.
The real money for musicians lies in touring. Many musicians put up with the exhausting pace of life on the road because tours can be more profitable than music sales. Not only are artists able to promote their music, but they’re also able to expand their fanbase.
Publishing royalties are also one of the most fruitful money makers for artists who are songwriters – though not every performer is a songwriter. For many of the industry’s biggest writers, however, a major frustration is sharing songwriting credit with musicians who never contributed to the track in any meaningful way.
Going It Alone
After becoming famous and obtaining a loyal following, it often makes the most sense for artists to dump their record company and go at it alone. Many entrepreneurial artists start their own record companies. Since Jay-Z started his label Roc Nation, he's signed some of the biggest names in music, like Rihanna, Big Sean, and Alicia Keys.