Recording and Selling Music 101

“Aside from the creative and technical aspects of recording an album, there are legal and contractual issues that must be considered before even entering the studio. The artist or label paying the expenses of recording must be sure that everyone is on the same page regarding whether fees and/or royalties are to be paid and, if so, how much is to be paid to each party.”

–Howard Hertz, Entertainment Attorney

Depending upon the individual focus of their practices, attorneys may take cases that involve Intellectual Property and Contracts in respect to the music industry. Very often, composers and performing artists are neophytes when it comes to the economic and legal issues of this industry. Therefore, in this article, we will address the basics of recording, manufacturing, and sales to break even on a CD of recorded music. I (Dr. Sase) will address the economic issues.

As well as being an economist, I am a musician who has released original music and has produced/engineered the music of other artists. In addition, I own and operate a small recording studio. For the legal elements in this article, we welcome Howard Hertz, Entertainment Attorney at Hertz Schram PC in Bloomfield Hills, MI.

For the benefit of our readers, we will keep the techno-speak and accounting math to a minimum. Instead, we will present the big picture and will offer a basic understanding of what is involved in this market. In this way, we hope to help attorneys to educate clients, family members, or friends who may wish to attempt a career in this field. (Some of our readers may be interested in putting out CDs, vinyl, and downloads of their own music.) Therefore, without ado, we present “Essentials of Recording Music” for your reading pleasure.

Producing Recorded Music

In starting, it is good to make a “low-fi” recording at every rehearsal and gig. Often, performers use a pocket digital recorder, the type employed to record lectures and meetings. As the newer digital models can hold six hours or more, one can turn it on and let it be. If the material and its performance sound acceptable under such primitive conditions, the recording passes the 1960s pocket-transistor-radio test. Importantly, any verbal notes about changes to song structure or arrangements will be included for future reference.

A digital video recorder serves well for the same purpose. In the world of the Digital Audio Workstation (DAW), the video recording also provides an excellent scratch track. Being able to watch and follow movement and changes frees musicians, producers, and engineers from the old mechanical-sounding click track and helps to achieve a more natural and expressive feel in the multi-track overdubbing process.

Led Zeppelin guitarist Jimmy Page acted as the band’s producer. He got massive drum sounds from drummer John Bonham by recording him in the hall of Page’s medieval home, Hedley Grange. Forests, beaches, living rooms, practice rooms, bathrooms, and other places provide wonderful places to experiment and develop new musical parts. Generally, the recording studio does not. Even if you have your own studio that allows you to work off of the clock, it is usually best to do the work-up somewhere else, just to maintain perspective.

In the early 1950s, guitarist Les Paul invented multi-track, sound-on-sound recording–with the assistance of his friend, crooner Bing Crosby–in Paul’s garage. In an interview, Paul emphatically stated, “I never walk over to that machine until I know what I’m going to do and I never use the machine to find it. I find it and then go to the machine and use it. I never let the machine tell me. I tell the machine what to do.”

Therefore, prepare all of your instrumental and vocal parts in advance and develop a work schedule that includes contingency plans when you enter the studio, which is the final place in which you may be able to maintain creative control. If you need to make last-minute changes, you can keep them to a minimum in order to avoid excessive pressure and confusion during a session.

We can borrow a good parallel of detailed planning from the motion-picture industry, the one that interfaces the most with recorded music. Filmmaker Alfred Hitchcock worked as a director in the studio system. He was responsible not only for his own time but for the time of many other professionals working together on the same project.

In advance of shooting, “Hitch” storyboarded every shot of a scene before stepping onto the sound stage. For example, in the famous shower scene in the film Psycho starring Janet Leigh, there are fifty-two individual shots in the course of three minutes and ten seconds (Famous Shower Scene from Psycho (1960) Dissected in 52 Shots, on YouTube).

The master storyboardist worked out every detail, including chocolate syrup for blood, and framed each shot in advance of rolling the cameras. A major part of Hitchcock’s greatness came from his ability to maintain creative control in exchange for tight management of budget through planning. Planning pays when time is money.

Returning to the recording studio, it is a good idea to have more material prepared than you intend to record. Life happens. Sometimes, with a bit of good fortune, you move through the tracking faster than expected. At other times, a piece does not come together satisfactorily. When this happens, the piece needs to be shelved until it can be reworked. Given the time and physical cost of preparation, travel, and coordinating the schedules of the producer, recording engineer, musicians, and other participants in a session, contingency plans constitute a valuable asset.

On this point, the Time-Is-Money factor spills over to the matter of equipment by having spare cables, batteries, and fuses available on short notice. One of Murphy’s Laws states that such items have the notoriety to fail at critical times.

When it comes to recording, experience remains one of the best teachers. Practicing against previously recorded tracks that one will hear during the actual recording session is often the most economical way to prepare for a take. Usually, sound-on-sound projects will gel best when they are built upon percussion that is recorded against a scratch and/or click track. Then, the track is followed upward through the spectrum of pitch (lowest to highest frequency) with the addition of bass, keyboards, guitars, background vocals, and other instruments before the lead instrument or vocal is tracked.

Offering an instrumentalist or vocalist a copy of the best mix to date without the scratch or click tracks (i.e., the one that s/he will record against), saves confusion, frustration, and time. This work mix allows the musician to develop parts creatively and to get acclimated to nuances of tempo, rhythm, and volume before the session. Usually, this results in more productive takes and fewer of them. The additional cost to the project for this preparation is the minor cost of burning a CD or making an MP3 copy of the mix. The benefit of time saved for all involved far outweighs this cost.

Whether or not you are paying out of pocket for studio time, you are making an investment of your own time as well as the time of other musicians, producers, engineers, and techies working together on the project. Therefore, everyone should show up, should arrive on time, and, if possible, should get there a bit early.

The studio is a professional work environment. Please give the other music professionals the same respect and courtesy that you would give to your attorney, medical doctor, or dentist. If you must delay, postpone, or cancel, please do so in a timely manner.

Professional time for postponements or cancellations is usually twenty-four to forty-eight hours. Equal to the importance of showing up and starting on time is to know when to stop work on individual tracks as well as on the session as a whole. Tiredness is a vague and relative term. However, sensing the point at which the marginal net benefit of tracking an additional take reaches zero is a professional trait worth developing.

If you are not acting as your own producer and/or engineer, make the time with this person(s) to share your vision, needs, and concerns in advance. Use this time to go over production notes, equipment requirements, and other mundane items before the session commences. Everyone involved should understand the depth and scope of their responsibilities before the session begins. Delays eat up time for all and… Time Is Money. Therefore, make sure that you are on the same page with your producer and engineer.

Furthermore, note the limitations of the studio and its equipment. It is wise to know the kind and amount of tracks, microphones, signal processors, and other essentials. If you plan to use any unfamiliar equipment, make the time to research it. If possible, work with this equipment beforehand. A recording session is no place for unpleasant surprises. For optimal planning, you should know of any limitations in case you need to simplify your planned mix.

When the red recording light goes on, it is important to be technically precise in performance in order to remain within budget. However, bear in mind that we are making art. Playing with feeling and emotion from the heart is of paramount importance. Producing art commercially requires walking a fine line between the pragmatic and the ethereal. As a result, the genius in producing music is 99% perspiration.

Work with the technology, not against it. Generally, it is best to keep playing through a flop rather than to stop and start over. Part of the art of recorded music is “punching in” a short section of retake or digitally copying and molding a few notes into the track in a seamless manner. As long as most of the take has the necessary artistic integrity, the pragmatism of “time is money” works out.

In shaping the sound, remain focused on the lead line that prevails at the time. Usually, the vocal takes the lead except during intros, outros, and solos. Developing the accompaniment against a preliminary take of the lead line is a way to achieve a fluent and natural sound. Also, such an accompaniment provides a solid understructure that gives flexibility and independence to the musician who is rerecording the final takes of the lead lines.

This being said, it remains most economical to achieve a desired sound during the original tracking. Usually, it is more costly to return to a mix in order to rebuild or repair parts of it before the final mix-down to stereo. It is better to record clean and then to add effects and other “sweetening” afterwards.

Treat the production of recorded music with the same regard with which any other successful professional or business entrepreneur would treat their concerns. As in many competitive markets, the revenue per downloaded track or CD collection remains relatively constant across the span of all artists. The album Born This Way by Lady Gaga, one of the top-ten sellers of the year, hit the market at an equivalent retail price as the album MDNA by Madonna, one of the bottom ten.

As a result, the economic task of controlling the profit per unit falls fully on the cost side of the equation. Since music production is mostly about time cost, any action that can safely shave cost without destroying the integrity and quality of the product should be considered seriously. Note: these actions include keeping guests out of the session, making backup copies of takes frequently, and keeping thoroughly written notes throughout the course of the project.

In order to finish a good product, expect editing, mixing, and other post-production work to take the lion’s share of budgeted time. When we add together all of the production and post-production time, we should anticipate an investment of forty to fifty hours per track. In other words, a total of 500 hours for the entire album can be considered the norm. This is why having open access to a home studio for most of post-production is highly valued.

Part of this value comes from the fact that ears tire easily; consequently, prolonged post-sessions that require acute listening produce diminishing returns. Any work beyond mundane cutting, splicing, and adding fades and plug-in effects demand the perspicacity of fresh ears. Tired ears usually result in a substandard mix that will require costly reworking.

When do you know when the mix is done? This question is like asking a chef if the soup is done. It is a matter of knowing. We could define that point in a commercial recording as the one at which a constrained optimum is reached. It is the point at which the artistic vision is achieved subject to practical budgetary constraints; you know that the soup is done.

For some engineers, this point comes when they play it through a pair of crappy old car speakers. For others, this point may be defined as when you play the recording for others who have not heard it previously and it feels right to them as well. In any event, you will have gotten the best vocal and instrumental takes, have used your studio wizardry to achieve maximum sound, and feel that the music is ready to be unleashed on the world.

Complementing the technical and economic side of recording is the legal perspective. My guest contributor Howard Hertz explains that a tangible contribution to a recording (known as the master) or song (the composition) may result in copyright ownership or performance rights being held by any person contributing to the work.

In order for the artist or the record label to emerge from the studio with an album that s/he or it fully owns and therefore may distribute for sale to the public, agreements should contain proper “work-for-hire” language. (Essentially, a work for hire means that the contributor relinquishes ownership claims on the master or composition by stating that all work was performed for equitable compensation.)

Hertz emphasizes that these agreements must be signed by all producers, engineers and side-person musicians who have worked on the project. Typically, the artist or label should own the copyright to the master recordings contractually. On the other hand, the copyright ownership in the underlying composition may be owned by multiple writers of that piece of music. However, if agreed to in writing by all parties involved, the artist or label may “buy out” these rights.

Often because of the potential complexity of such agreement, a “split sheet” for each work is filled out after the recording of the composition. This sheet lists the determined percentage of the song or instrumental that was written by each contributing party as well as the percentage of the publishing rights that is owned by the publisher of each party involved. Then, the split sheet is signed by all of the contributing parties, thus making the determined, assigned split a binding agreement.

This is a very important point. It is often overlooked by many casual or informal musical groups that lack the understating of business law, which will treat them as a General Partnership. Operating as such an entity implies that all partners are held to have equal shares if no written agreement exists. In respect to the business of music, Mr. Hertz iterates that, if there is no written and signed agreement to the contrary, then a composition is owned in equal shares by each writer who contributed words or music irrespective of the percentage of their actual contribution.

Hertz provides this illustration: “[I]f three writers contribute to a work and have no signing to the contrary, they each own one-third of the copyright, even if one of the writers only contributed one line of lyrics and might have likely agreed to a five or ten percent share of the song if it was put in a split sheet.” A word of wisdom to all musicians and audio producers and engineers: have a qualified entertainment attorney on your side to guide you through these choppy waters.

Replicating and Marketing the Final Product

The 500 hours of time, energy, and artistic angst discussed thus far buries itself as a sunk cost, which is the non-retrievable fixed cost associated with producing recorded music for sale. In producing recorded music, most of the cost is upfront, fixed, and sunk. This includes all costs incurred to the point of making the glass master and cover artwork that is used to replicate the CDs commercially.

The amount that an artist needs to invest to get to this point depends upon the location of the studio (New York or Los Angeles versus everywhere else in the country), its amenities, and its reputation. Reportedly, the current high end is about $3,000 per hour. Ignoring incidentals, this would necessitate a project budget of $1.5 million (500 hours x $3,000 per hour). Based upon sales expectations to recover this cost, there are not many artists who would go “Gaga” over this price tag.

The average studio cost per hour in urban areas outside of New York and L.A. seems to fall in the monetary range of $75.00 to $150.00 per hour. This brings the average cost down to about $50,000.00 for the project, assuming that the artist(s) does double duty as producer/engineer.

If an artist is also a producer/engineer, s/he may be able to get the music out for around $20,000.00. This can be done by either using a budget-conscious studio priced at $50.00 per hour or by investing the $20,000.00 in his/her own Digital Audio Workstation, some good microphones, pre-amps, and acoustic sound-control material.

For many musicians entering the field of recorded music, the latter has become a very viable option. Given the simplicity of the style of music and the musical arrangements that they use on their recordings, some artists do manage to get their music ready to go out the door for about $10,000.00. For the sake of comparative discussion, let us work with these last three figures and assume that the artist works as an entrepreneur and manages the entire release.

The replication of CDs has become a highly competitive business. The price per 1,000 copies has dropped to around $1,000.00 depending on the type of packaging chosen. This gives us a unit fabrication (making the physical CD) cost of $1.00 per CD. However, there are promotional costs involved. A major but effective promotional cost is giving away free copies strategically to radio stations, clubs, and individuals as a way of priming the proverbial pump. Also, using social media like YouTube and Facebook is “free” advertisement.

For the sake of simplicity, let us assume that the promotional cost for a CD that contains ten songs averages $.50 per CD. The more CDs that are manufactured, promoted, and sold, the more money that must be invested in the project. In other words, the manufacturing and promotion costs vary with quantity. Therefore, we refer to these costs as variable costs that, on average, total $1.50 per CD.

In our example, let us say that the artist averages net revenue of $10.00 per CD. This suggests that the CD could be priced at $14.00 for sale through one of the popular online stores, distributed as digital downloads, or sold at live performances. We can phrase our economic question as a break-even analysis. In the business world, a break-even point of three to five years is considered reasonable. Therefore, looking at our artist as a start-up business, let us anticipate a break-even point at four years, forty-eight months.

What we want to know is this: How many CDs will our artist need to sell over the next forty-eight months to break even? How many CDs will s/he need to sell per month to achieve this goal? As the variable cost per CD is taken to be $1.50, the key determinant in this calculation is the upfront sunk/fixed cost of producing the master recording. If we take this fixed amount and divide it by the difference between the price at which the CD is sold and the combined cost of manufacturing and promoting each CD, we will arrive at the break-even quantity that must be sold.

If the recording costs amount to $50,000, then a total of 5,882 CDs must be sold at a rate of 123 discs per month. If our artist economizes or sets up his/her own project studio for $20,000, then only 2,353 CDs must be sold at a rate of 49 discs per month. If our artist is able to achieve a product of marketable quality for only $10,000, the break-even amount drops to 1,176 CDs sold at a rate of 25 per month, about one per day. If an artist has sufficient musical talent, and recording skills, and experience, s/he may be able to achieve this goal at a barebones studio that charges $25.00 per hour.

The Great Beyond

We have focused on what may be called an Entrepreneurial Indie Label, one in which an artist or group does everything from production to direct sales (e.g. merch tables at gigs) except for two chores. The first is fabricating the CDs through a company such as Discmakers, Inc. The second is selling some of these CDs with the help of a music-marketing service such as CDBaby Inc. These CDs then will be sold online, as digital downloads, and at brick-and-mortar stores.

The next step up the ladder is for the small entrepreneurial music company to sign with a major or minor label. At this point, a good entertainment attorney to represent the artist(s) becomes indispensable. As Mr. Hertz stated in our opening quote, “The artist or label paying the expenses of recording must be sure that everyone is on the same page regarding whether fees and/or royalties are to be paid and, if so, how much is to be paid to each party.”

Currently, the record industry is reinventing itself in the Digital Age. This age has brought affordable means to artists in order to accomplish what only million-dollar recording studios could do previously. Online distribution has become feasible and preferable to many artists through CDBaby, iTunes, Amazon, and other venues. What these turns in events leave to major labels is what they continue to do best-finance, promote, and distribute product to large markets.

In her blog, recording artist Courtney Love, Love’s Manifesto, she states, “If a record company has a reason to exist, it has to bring an artist’s music to more fans and it has to deliver more and better music to the audience. Previously undiscovered artists benefit from the huge promotional break a major has to offer. It takes a ton of funds to break a new artist–funds most artists don’t have on their own.”

In determining which artists to sign, labels consider the sales potential of an artist. This decision usually is based on what the artist accomplished before. A rough rule of thumb remains that major labels sign artists who have made verifiable sales of at least ten thousand albums on their own. In addition, labels consider plans for touring in order to market product to a wider audience as well as feedback received on the artist’s music through social media.

Rerecording/mastering, fabrication, distribution, tour support, and other promotional investments all require capitalization. Nonetheless, the business is comparable to a roulette wheel. A wheel has thirty-six black-and-white numbers plus a green “0” and a “00.” The gambling houses win on these last two. Their odds of winning are 5.26%–the two green numbers divided by the total of thirty-eight numbers on the wheel. In the record industry, only 10% of all recordings released make it to the break-even point. Only about 5% of releases turn a profit. This subsidizes the 90% that lose money.

Therefore, cash advances bestowed upon artists are determined by the ability of the artist, the costs that may be recoverable from an artist, and the probability of success in a marketplace that ultimately relies on the 5% of releases that eventually become profitable. An advance is an ADVANCE. Essentially, it is a loan that is repaid through royalties (percentage of the sales) that hopefully are earned on future record sales. Under their contract with an artist, the record label is going to want to be paid back, and paid back first.

The label will keep all artist earnings from sales until the various costs are repaid. Furthermore, in multi-album deals, the repayment can be recovered across multiple albums and advances. This method of securitizing the investment made by the record company is known as cross-collateralization. Apart from a few exceptions, every cent invested on promoting an album, from video-production costs, radio promotions, and billboard signs to tour support, is recoupable from artist-royalty points. As a result, most artists make $0.00 from their royalty points until recoupment by the label is complete.

So, how do artists go about making money from their recordings? Very simply, they can achieve this goal by remembering that what they are involved in is a business. Furthermore, this business takes place in what economists refer to as a perfectly competitive market-the market sets the price for similarly situated products and that price is relatively constant at any point of time.

Due to this market quality, revenue increases at a constant rate as greater quantities of a recording are sold. As a result, there are only two ways to increase profits. One is to sell greater quantities of the product and the other is to decrease the costs of production, manufacturing, promotion, and distribution.

We hope that we have edified our readers about the physical, economic, and legal aspects of the recorded-music business. Thank you to my guest contributor, Howard Hertz, for his enlightening contributions to this article.