Investing in Music

Music is an investment-intensive business. This is clear when comparing music companies’ global 16% gross investment in A&R to the spending on research and development (R&D) by other industries.

Discovering, developing and promoting talent can be extremely expensive. These are the major costs and investments shouldered by music companies, yet they are largely invisible to the consumer. The only visible elements, by contrast, are in the distribution of music – the packaged CD or the delivery of a downloaded or streamed track – and these represent a small share of the overall cost of bringing recorded music to the public.

As a result, the digital era has not substantially reduced record companies’ costs of doing business. Indeed, the fragmentation of distribution across many different physical and digital channels has often brought extra costs, particularly in servicing hundreds of formats and distribution partners across online and mobile channels. In addition, there are other important “invisible” costs – for example, sales tax, which averages 18 per cent of the retail price in Europe – and the retailer’s mark-up, which will differ from one physical or digital store to another.

The funding of talent – how it breaks down

Broadly, the music industry invests in music in a few principal forms. They include:

Payment of advances to the artist

Competition between record labels to sign an artist can be intense, and market forces can drive advances to some new artists as high as US$1.5 million. Advances paid at any level are a crucial investment in the creative work, allowing the artist to concentrate on writing, rehearsing, recording and performing music. Advances are recoupable from an artist’s sales, but not recouped if sales do not reach certain levels. Thus it is the record company that bears the risk of the investment.

Financing of recording costs

Recording costs can vary widely depending on the genre of the artist and the type of producer used to work on an album. Employing a top producer can drive this cost above US$45,000 per track. Hiring large numbers of session musicians or an orchestra can also drive up the budget. In this way, investment in recordings benefits a wide community of musicians and technicians.

Production of videos

Video costs can range widely. Some of the most expensive can involve days of filming and editing and cost around US$1 million. In one recent example for a campaign to launch an album in the UK, each of the first three videos ranged in cost from £30,000 to £130,000.

Tour support

New artists in particular need to be heavily supported by record companies. The level of tour support required is highly dependent on the nature of the artist. Typically, rock acts require heavier investment in tour support than pop acts, while artists who require a backing band or orchestra could receive up to US$450,000 in tour support.

Marketing and promotion

These are often the biggest budget items for a record label taking an act to the public. Marketing builds the brand identity from which artists can earn money from numerous sources, such as live touring to merchandise. Record companies often work with broadcasters, news media and specialist advertising and PR companies who also benefit from this investment. The budget for such campaigns can run to more than US$2.3 million to promote superstars.

Royalties

Payment of royalties is usually based on a percentage of the dealer price, or licensed or synchronised income revenue streams. Teams in music companies are responsible for tracking, collecting and distributing royalties to featured performers, producers and copyright owners. Revenue distribution has grown more complex as the number of distribution channels has soared in the last decade from simply physical retailers to a range of digital services, from download stores to streaming  subscription services. There are around 400 different digital music services globally and a range of new revenue streams and partners, including technology firms, mobile operators, ISPs and handset makers.

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