Your Favorite Rapper is Poor: The Royalty Breakdown Posted by Nathan S. on 12/01/10 | Filed under Top Stories, Features, Your Favorite Rapper Is Poor

Throughout "Your Favorite Rapper Is Poor" I've been constantly convinced that y'all will get bored by all the behind-the-scenes details, but instead RefinedHype Nation has eaten up every post like Fat Joe at a taco truck. Well I thought I'd truly test the limits of your interest and really break down how royalties work - yep, that means some math. Do the good people out there really want to get into the details? We'll find out soon.

And before I continue, I owe a huge debt to Donald Passman's "All You Need To Know About the Music Business", a must read for anyone serious about entering the game. Buy it here.

Basic Concept:

You have the most delicious cookie recipe in the world. Your friends and family always love them, so you figure that if you starting selling the cookies you could make some serious money. The only problem is you have a tiny kitchen, and can't possibly bake more than a couple dozen cookies a day, let alone sell them anywhere but your block. So I step in and say tell you what, I've got an enormous kitchen and trucks that can ship them around the country. We make a deal - I keep 80% of the money from sales in exchange for mass cookie making and distribution. You agree because even 20% of the large scale sales will be vastly more than 20% of the pennies you'd get baking and selling yourself.

Music = cookies. Got it?

Now even 20%, which by the way is really high (see below), isn't a whole lot. Shouldn't artists be able to at least get something closer to 50% for their music? After all, without them there would be no product. In a just world yes, but the labels control(led) distribution, so they have/had all the power. You could create the best album of all-time, but without the labels and their processing plants, fleets of trucks, etc. no one would ever hear it.

Wait, what's that? A little thing called the internet came along that's slowly but surely erasing the distribution leverage the labels had? (Why give a label 80% when most of your sales will come online, and you can distribute online for pennies on the dollar?) Wow, sucks to be a label. They'll probably start doing something desperate soon.

Real Numbers:

I used 20% to make the initial math easy, but the truth is no one but the super stars (Jay, Eminem, Beyonce) can command a percentage that high. A brand new artist can expect something close to 12%, and an established artist, or a new artist with huge buzz like Drake, will find themselves closer to 15%.

So let's do some quick example math. We'll say you're a brand new artist (MC Scared of Bees) who landed a deal based on your smash single "Don't Buzz Round Me". You sign to RipOff Records and after some intense negotiation they agree to 13%. Your album hits the stores and...

Price Per Album: $10
Royalty: 13%
---------------------------
$1.30 per album.

Pretty simple right? And it looks like you could make some serious money. Even if your album only sells 100,000 copies over the course of an entire year (which in today's market would be a success), that's over $100K. You're not flying in private jets, but it's better money then you'd make almost anywhere else. Yeah, not so fast.....

Industry Rule #4,080:

This is going to shock you, but labels have been spending the last few decades figuring out how to nickel and dime artists off even that meager royalty. After all, those nickels and dimes add up.

Packaging: Guess what MC Scared of Bees, you're chipping in on the cost to package and ship your album, but since you don't have the money upfront, we'll just deduct it from your royalty (or more accurately, the base price of the album sale). So before you were getting 13% of a $10 album, and now you're getting 13% of a $7.50 album (original $10 minus the 25% packaging fee = $7.50).

Free / Promo Albums: In order to get stores to stock an album, or get media outlets to cover the album, record companies routinely give away free copies of an album. So even though 10,000 copies of an artist's album may leave the warehouse, they won't see a dime.

But that's not all. It didn't take companies long to figure out that they could cut deals with record stores to raise the price of each album in exchange for more free copies. It's a little complicated, but bear with me (I'll make the math as simple as possible):

The record company sells 100 albums to the record store at $7.50 a pop. They make $750, but then have to pay royalties to the artist on all 100 of those albums.
or
The record company sells 75 albums to the record store at $10.00 a pop, then throws in 25 free copies. The record store still gets 100 albums, the record companies still make $750 on the same 100 albums, but only have to pay the artist royalties on 75 of those 100 albums (remember, those 25 albums were "free/promo" so don't earn royalties). Crafty mofos.

Reserves / Returns:

Record companies routinely promise record stores that they'll take back any copies of an album that don't sell. To insure themselves against having to eat a large number of albums that don't sell, they institute what's known as a reserve. Under a reserve, the company will only pay the artist upfront for a percentage of the albums that get shipped out (usually somewhere in the neighborhood of 60%). If every album sells, they'll pay the remaining 40% later. And if they don't sell, too bad for you.

Long story short, by the time all of the above factors have kicked in, MC Scared of Bees is only making a fraction of the $100K he once was for the sales of "Don't Buzz Round Me", and we haven't even gotten into the specifics of advances and recoupment yet.

So how about it folks? Asleep yet? Still interested? If so, what do you want to see tackled next? Should we delve into royalties for singles/online downloads, or skip ahead to recoupment/advances?