Record companies commonly pay advances to enable artists to concentrate on writing, rehearsing, recording and performing music. Advances are recoupable against future royalties from sales and streaming, but are not recouped if revenues fail to reach a certain level. The record label is therefore bearing the risk of the investment in a highly competitive marketplace.
The growth of streaming services in many markets has adapted but not reduced the financial role of the record company. Investment in successful artists has traditionally been recouped from sales of their album, typically within around 18 months of signing a recording deal. Under the streaming model, recoupment typically takes place over a longer period of time, making the label's upfront financial investment potentially more important.
A typical advance from a major record company to a new pop act in a significant market is estimated to be between US$50,000 and US$350,000 and this rate can be much higher in competitive situations. In other cases, advances may be very small or non-existent, with the artist benefitting from more revenue-sharing than upfront expenditure by the record company.
Recording costs can vary widely between individual projects, with the average being driven by projects that involve superstar producers and the most sought after session musicians. Recording costs for an emerging pop act in a major market are estimated to be between US$150,000 and US$500,000.
Video production is more important than ever in an era where many consumers access music through audio visual services such as YouTube and Vevo. Record companies typically produce two or three videos per album. Costs can vary widely between individual projects, with some superstar artists' videos costing well more than US$500,000, while some innovative low budget videos can cost as little as US$10,000. The average cost of video production for an emerging pop act in a major market is estimated to be around US$50-300,000 for three videos. Such high expenditure is not always needed, of course, and videos can be produced much more cheaply. The approach will depend on the needs of the individual project.
Emerging artists often require significant financial support for their touring commitments. Record companies want their artists to break in markets around the world, so often commit to international tour support payments. The average amount paid in international tour support for an emerging pop artist is US$50,000-US$150,000.
Marketing and promotion
Marketing and promotion costs are the largest single item of spend for a record company on emerging artists. Breaking an artist to a significant audience unlocks a wide range of revenue opportunities, from live to merchandising. This requires a significant investment.
Record companies have generally switched their marketing spend towards digital platforms in, which enable them to more tightly target individual groups of consumers. Yet the costs of online marketing are increasing, and record companies also have to continue to advertise across television, radio, print and outdoor media to drive awareness of their artists. Some record companies have also increased their spending on consumer insight and research to enable them to take advantage of new marketing platforms.
Record companies have the contacts in TV and radio. In countries around the world, broadcasters trust them as a source of new music. Artists rightly expect support from this network when they sign a recording deal. Exposing performers to audiences in different markets is a vital way of reaching a mass audience. This activity also incurs a significant cost for record companies.
A record company can spend between US$200,000 and US$700,000 trying to break an emerging artist in a major market.
Broader rights deals
Broader rights deals reflect the evolving nature of the partnership between artist and record label. . Some labels now write in a broader rights element to virtually every deal they sign. Sometimes these deals involve the record company getting highly involved in a wide range of activities. In some cases, record companies also run in-house booking agencies or merchandise firms to service these deals. Other broader rights deals are passive, with the record company providing financial backing but taking a much lower percentage of income from broader rights.
Brand partnerships are an increasingly important way for artists and record companies to generate income - particularly in regions such as Latin America, where physical sales have fallen and use of licensed music services is relatively limited. Respect for the artist' wishes in brand partnerships is vital to make deals work.