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The Money Flow for Major Label Artists
For bands and artists signed to major label contracts, we have some reservations about just how much they will benefit financially from iTunes. While we would expect that Apple will faithfully pay the labels their appropriate portion for each song sold, just how much money will end up in the artists' pockets? That answer is contingent on the contract that the artist signed with the label.

In the terrestrial world, artists' royalties for sales are computed as a percentage of the record's suggested retail list price (SLRP). The SLRP is an approximation of the price charged by retailers, usually about $16.98 for a new release for a mega artist (note that this is just a suggested price for retailers -- you know you've seen CDs priced lower than this). Most artists get paid between 10 and 14 percent of the SLRP. But wait! First the record label deducts a packaging cost -- usually 25 percent for CDs -- since, in theory, artists are being paid for the music and not the packaging,  So now it looks like this:

$16.98 SLRP
-$4.25 25% packaging deduction
$12.73 royalty base price

But wait! There's ANOTHER deduction. Most major labels also hold money in reserve to cover "breakage". This a ridiculous, antiquated deduction that goes back to the days when vinyl records could actually break during shipping, but it still exists. Now our formula looks like this:

$16.98 SLRP for a CD
-$4.25 25% packaging deduction
$12.73 royalty base price
-$1.27 10% breakage deduction
$11.46 new royalty base price

But WAIT. There's ANOTHER DEDUCTION. Despite the fact that CDs have been around for about twenty years, they're still considered a "new technology" in many major label contracts. And because new technologies imply some sort of "risk" to the labels, they feel like it's within their right to hold some more of an artists' sale royalties. The standard "new technologies" deduction is 25%, so that makes our formula look like this:

$16.98 SLRP for a CD
-$4.25 25% packaging deduction
$12.73 royalty base price
-$1.27 10% breakage deduction
$11.46 new royalty base price
-$2.87 25% new technologies deduction
$8.58 new royalty base price

So now the artist gets 10 to 14 percent of this price -- or somewhere between $0.86 and $1.20 -- per retail sale. And, of course, artists only get this money AFTER they've recouped the costs of making the album which, in many cases, never happens at all. [note: This is a simplified version of things using averaged figures and not dealing with other common deductions like "free goods" and "reserves". For a more nuanced explanation we suggest you read Donald Passman's All You Need To Know about the Music Business].

The question is: how does the contracted royalty rate jibe with the iTunes model? Unlike traditional retail sales with the iTunes Store there is:

• No overstock

• No breakage

• No returns

• No packaging costs

...thus making all of those ridiculous deductions listed above even more pointless.

So, in theory, musicians signed to major labels should be getting 100 percent of their 10 to 14 percent royalty rate since all of those antiquated deductions are totally illogical. But even at that price, these standard contracted rates seem dismally low. If the same contract terms apply to digital sales as terrestrial sales, at the $9.99 retail price for albums on iTunes, an artist would get somewhere between $1.00 and $1.40 per sale. For a 99 cent single download, an artist would get 10 to 14 cents.

Could Deductions Still Apply?
Once we open this digital can of worms there are other contract clauses that may affect the rate at which you're paid. Will the major labels try to say that electronic transmissions are a "new technology" that, like CDs, kicks in a 25 percent deduction per sale? Will the labels consider online album sales as "top-line" sales, or does the price of $9.99 mean that it's considered a "discount" sale? If it's a discount sale that may mean you only get HALF of your contracted rate (5 to 7 percent from our example above). We'll have to wait and see.                                         

Remember the artist still has to pay TAXES!  Don’t forget Uncle Sam has to get his cut!  Also, don’t forget the Personal Manger, the Attorney, the Accountant, the Agent and other numerous expenses.

However, there are many other royalties that an artist can acquire.  They include, Record Clubs, Compilation CDs, Samplers (low-priced albums in which a few artists are featured), Premiums (albums sold with other products, such as cereal), Film Soundtrack Album, Music Video Sales, Greatest Hit’s Album, Foreign Royalties (song played in some foreign country radio stations pay royalties, unlike the US), Master Use License (music used in a movie, television, commercial, the Internet, CD-ROM and DVD), etc.

 Of course because of the Internet, the rules royalties are changing. Many people now buy their music via the Internet.   Just think, no packaging required and no distribution to traditional retail stores needed.  Some websites allow customers to buy individual songs as oppose to an album.  Changes are currently taking place on how royalties are calculated because of the Internet.  Many attorneys are pushing to have royalties be based on each song sold as oppose to each album sold.  So stay tuned!

The band is now 1/4 of the way through its contract, has made the music industry more than 3 million dollars richer, but is in the hole $14,000 on royalties. The band members have each earned about 1/3 as much as they would working at a 7-11, but they got to ride in a tour bus for a month. The next album will be about the same, except that the record company will insist they spend more time and money on it. Since the previous one never "recouped," the band will have no leverage, and will oblige. The next tour will be about the same, except the merchandising advance will have already been paid, and the band, strangely enough, won't have earned any royalties from their T-shirts yet. Maybe the T-shirt guys have figured out how to count money like record companys guys. Some of your friends are probably already.