The Business of Music: How Record Labels Make Money

The music industry has undergone significant transformations in recent years, with the rise of digital music distribution and the shift towards stream

00:04 08 April 2023

The music industry has undergone significant transformations in recent years, with the rise of digital music distribution and the shift towards streaming platforms. 

Despite these changes, record labels remain an essential part of the industry and continue to play a significant role in the success of artists. In this article, we will explore how record labels make money in the business of music.

Basics of Record Label Business

Record labels are companies that produce, distribute and promote music. They sign artists to contracts, oversee the production and release of albums, and work to market and promote music to a wider audience. In return for their services, record labels take a percentage of the revenue generated by an artist’s music.

The primary source of revenue for record labels is through the sale of recorded music, whether physical CDs or digital downloads. When an artist signs with a label, the label will typically advance them a sum of money to cover the costs of recording and producing an album. 

Once the album is released, the label will recoup these costs from the revenue generated by sales. The label then takes a percentage of the revenue, usually around 15-20%, and the remainder is paid to the artist.

Streaming Changes Everything

In recent years, the rise of streaming platforms like Spotify and Apple Music has led to a significant shift in the way people consume music. As a result, record labels have had to adapt their business models to take advantage of this new market. 

Streaming platforms typically pay labels a percentage of the revenue generated by streams of an artist’s music. This revenue is then split between the label and the artist, with the label taking a percentage typically ranging from 50-70%.

More Than Just the Music

Record labels also make money through licensing deals. This involves licensing an artist’s music for use in films, TV shows, commercials, and other media. 

Record labels typically negotiate these deals with production companies or advertising agencies, and the revenue generated is split between the label and the artist. Licensing deals can be particularly lucrative for labels as they offer a way to generate revenue from music that has already been released.

Live On Stage (and at the Merch Table)

In addition to selling recorded music, record labels also make money from live performances. Many labels have their own booking agencies that work to secure gigs and tours for their artists. The revenue generated from these live performances is split between the label and the artist, with the label typically taking a percentage ranging from 10-30%.

Record labels also make money through merchandise sales. This can include everything from t-shirts and hats to vinyl records and posters. The label will typically work with the artist to design and produce the merchandise and then handle the distribution and sales. The revenue generated from merchandise sales is split between the label and the artist, with the label typically taking a percentage ranging from 15-25%.

Finally, record labels also make money through publishing deals. This involves the ownership and control of an artist’s songs and the revenue generated by their use. Record labels typically have their own publishing divisions that work to secure publishing deals for their artists. The revenue generated from publishing deals is split between the label and the artist, with the label typically taking a percentage ranging from 50-70%.

Do Artists Need Labels to Succeed?

Artists do not necessarily need record labels to succeed, but having the support of a record label can significantly increase their chances of success in the music industry. 

One of the primary benefits of signing with a record label is that they can provide financial support to cover the costs of recording and producing an album. Labels can also offer access to professional recording studios, top-notch producers and engineers, and marketing and promotion services to help artists gain exposure and build a fanbase.

While record labels offer many advantages to artists, there are also downsides to signing with a label, and some artists choose to go the independent music distribution route instead.

The Music Business Lives On

Record labels make money in a variety of ways in the business of music. Their primary source of revenue is through the sale of recorded music, whether that be physical CDs or digital downloads. They also make money through licensing deals, live performances, merchandise sales, and publishing deals. 

With the rise of digital music distribution and the shift towards streaming platforms, record labels have adapted their business models to take advantage of new markets. Despite these changes, record labels remain an essential part of the music industry and continue to play a significant role in the success of artists.