One of the most significant costs a record label will have is its staffing cost. A&R people need bonuses for luring you, executives need bonuses for seeing your project through, and the chief financial officer needs a bonus because of the work he or she will have done keeping track of everyone else’s bonus. Seriously, people cost a lot of money!
Picture the situation: You’re a hot new band, and you have two record labels interested in you. One has its offices in the heart of town. These are the plushest offices you could imagine—the latest designer furniture in the lobby, hand-stitched carpets, and receptionists manicured to within an inch of their lives.
When you get through to the meeting rooms, the tables are inlaid with hand-carved detail, and the chairs are covered in the softest leather you have ever felt. Needless to say, the audio-visual facilities are to die for.
The executives who show up to meet you are dressed in smart (but casual) expensive designer suits. Their jewelry (both the men and the women) is discreet, but you know it is about as expensive as you can get.
Now think about another label with its offices about an hour out of town. Unfortunately, you’re an hour out of town too, but in the other direction. Inside, the offices are painted white, and the carpets have seen better days, showing signs of wear. There are no meeting rooms, so you all congregate in the A&R guy’s office, which is a mess, piled high with demo CDs from other acts. The A&R guy apologizes for the mess, but doesn’t apologize for the state of his Metallica 1997 tour T-shirt.
Okay, which of these two labels impresses you more? Which label says “success?”
The following expenses are in connection with any property that you use for your business:
- The cost of purchase or renting (including taxes and lawyers’ fees) Local property taxes.
- The cost of amenities, such as water and electricity.
- Insurance costs, both for the property itself and against anyone injuring himself or herself while in the property.
- Maintenance costs, which may be as low as a door hinge or a coat or two of paint, but could get as high as extending or rebuilding part of the building.
Record labels spend a lot of money on their computer systems. There are many elements to these systems, including the computers themselves (both desktop computers and servers), licenses for the software that runs on the computers, cabling and network gizmos, a bomb-proof backup system that cannot fail, staff to run all of this stuff, and training for all of the staff on how to work the computers. This is before a cent has been spent on customized programming for the accounting and royalty payment systems.
Even using free software (such as Linux), you’re going to have to spend money installing and running a computer system.
Record labels get hit with a range of taxes. These include taxes on the profits that the label makes, employment/social taxes (such as National Insurance Contributions in the UK), and sales taxes (such as VAT). Some of these charges get levied on a regular basis (for instance, corporate taxes and employment taxes), while others (such as sales taxes) are incurred as part of the daily business of the label. (For instance, manufacturing costs will include sales tax if this is charged in the jurisdiction within which the record label is operating.)
There’s an old cliché that the three certainties in life are birth, death, and taxes. However, this is only partially true. At the time of writing, birth and death are both certain, and while the need to pay taxes is absolute, the amount that will be paid in taxes is far from certain. If you are smart, there’s a lot you can do to avoid taxes.
I briefly mentioned shareholders. By their nature, corporations have shareholders (people who own the business). Shareholders tend to come in two forms:
- People and institutions (such as banks, insurance contributions, and retirement funds) who own shares in companies.
- Other companies, where one company will be a subsidiary of another company.
Whatever the nature of the shareholders, they have one thing in common: They want to be paid for owning shares in the company. The way that companies pay their shareholders is by distributing an element of their profits. This distribution is usually called a dividend, and its amount is determined by the executives of the company.
Getting the Product to the Customer
There are other costs that a record label will incur that are directly related to your product. The main costs are manufacturing, distribu- tion, and marketing. If you self-release a CD, you will incur these costs too, although you may want to spend less than a record label would, and you are likely to employ other distribution options (such as mail order) to a greater extent.
A record label will probably be able to get your CD produced for a lower unit cost than you can. This is because a label will put far more business with a pressing plant than you will and so can negotiate much better deals. Also, a label will expect to sell a lot more CDs than you could and so will get many more CDs pressed. Unless these CDs sell, the record company will not generate any income, so the next step is to get the CDs to a place where they can be sold.
Once your CDs are in the stores, then they need to sell. If they don’t sell, they will be returned.
If you’re lucky, some people will buy your CD on the basis of the cover. However, how often do you walk into a record store and buy a CD by an artist you’ve never heard of? My hunch is not very often. If you, as a musician, don’t buy other musicians’ products without hear- ing them, what expectation can you have that an average punter will go into a record store and buy your music? It is for this reason that you need a marketing campaign. A good idea is to promote your music online.