Concert versus Record Sales Revenues to Artists

I recently posted some musings, on a moderated blog called “Thinkernet,” regarding business models for selling music online. In response, several comments suggested that record sales were largely irrelevant and that concert touring has been by far the main source of income for musical performers, compared to revenues from record sales. I was surprised at how frequently this claim, about the irrelevance of record sales to artists, arose. I was particularly surprised because I found the claim hard to believe.

If sales of records were so unimportant, then why did getting recording contracts play such a central role in the mythology of rock and role stardom? What were artists and record companies fighting about in court? What were those stories in the late 1990s about super groups getting mega deals from record companies? Why were artists promoting their newest albums on television?

After looking at the statistics I conclude that concerts are not the dominant source of income for artists. I say this knowing that it seems to contradict a minor point in the paper by Connolly and Krueger (C&K). I have contacted C&K to see if they disagree with anything I present below and will report on any of their comments.

I use US numbers in the period prior to the period of file-sharing, since the decline in record sales since then, due in large part to piracy, has skewed income more toward concerts.

Concert Revenues

According to Pollstar, national concert revenues in 1999 totaled $1.5 billion. According to Passman’s All You Need to know about the Music Business, artists tend to get about 65%-70% of the concert gross (after paying the promoter and the venue). The artists net revenue then subtracts the costs of the tour (equipment, trucks, food, etc), but also should add revenue from merchandizing profits. Let’s assume that these last two items are about equal, although my guess is that the tour costs outweigh the merchandise profits.

These numbers indicate that the performers, in total, would net about $1.0 billion from concerts, before subtracting out the cuts to the agents, managers and so forth.

One might object that the Pollstar numbers only refer to “major” concert tours. Total concert revenues should be larger. There are three responses. First, even if concert numbers were doubled, the thrust of the story below would not change. Second, like everything else in this industry, the revenues must be highly skewed toward the superstars and leaving out the tail from these calculations shouldn’t leave out much. Third, according to Passman’s book, record companies used to subsidize concert tours for new artists. The subsidy was needed because tours for relative unknowns were generally money losers even though they generated positive revenues.

 

Net Revenues from Sound Recordings

Figuring out the payments from sound recordings is more speculative.

We can do this in either of two ways.

Method 1

The easy way is to use statistics on how much of the retail price of a CD goes to artists/composers. Billboard says 12% and Rolling Stone says 10%, so we can split the difference at 11%. Apply this percentage to the $14.6 billion retail-price-based RIAA calculation of industry revenues in 1999 and out pops $1.6 billion as the payments to artist/composers, who we assume are one and the same. These payments, by the way, include both mechanical rights, which go to the composer(s)/lyricist(s) of the music, for each CD sold, and record royalties, which go to the artists under contract to the label.

1.6 is larger than 1.0, so artists would seem to gain more from sound recordings than they did from concerts (in 1999). Certainly, these numbers are nowhere near the apparent advantage in favor of touring found in Table 1.1 in C&K (which itself seems to come from Rolling Stone). But C&K did not claim that this table was representative of the industry although they may have underestimated how far from representative it was.

Method 2

Think that Billboard and Rolling Stone don’t know what they are talking about? We can go through the raw numbers and see whether the magazines’ numbers seem reasonable.

Let’s begin with mechanical payments. Since most artists also compose their tunes, this can be viewed as largely a payment to artists. This amount was $573 million in 1999 according to a NMPA survey (p. 34). Mechanical payments are directly tied to CD sales and is not split with the record company (it may be split with the music publisher but the publisher take is on average very small since most successful artists are their own publishers).

Mechanical payments ($573 million) appear to be slightly more than half the net concert revenues ($1 billion). By itself, this claim largely discredits the notion that concert revenues are much more important than CD sales when it comes to dollars going into the pockets of artists.

What about revenues from record contracts? Remember, industry revenues were $14.6 billion in 1999.

The low end of royalty rates is about 10% of the retail list price (with escalators as sales increase) and the high end is about 20% for the most successful artists. It seems plausible that a weighted (by sales) average of royalty rates, before deductions, might be 15%.

But there are lots of expenses (known as recoupable expenses) that are deducted from these revenues, both real (advertising) and imaginary (e.g., breakage). It is the fact that these expenses are deducted from nominal royalties that provides the horror stories we hear about artists receiving no royalties.

But we know that some artists do make money from CD sales. Otherwise they wouldn’t bother having a contract with record companies and they certainly wouldn’t be fighting about it. And we know that artists sometimes receive large advances, in the millions of dollars per new album.

Let’s take what seems to me to be a fairly severe assumption. Assume that these recoupable costs take up 10% of the price of a CD, or 2/3 of the average royalty. Assume that all the unsuccessful artists, 90% according to this article, get nothing. The average net royalty is now 5%, much smaller than the gross royalty. Even with this low net royalty, those relatively few artists who receive net royalties would receive $730 million.

Even with this seemingly conservative estimate, artists would receive slightly more ($1.3 billion) from CDs (both mechanicals, $573, and royalties, $730) than from concerts ($1.0 billion). The Billboard and Rolling Stone numbers indicate that this is somewhat too conservative.

Conclusion

Sound recordings provide substantial revenues to artists. It seems likely that these revenues are, or at least were prior to vast pirating, greater than concert revenues. At the least, we can say that net concert revenues are not vastly larger than sound recording royalties, as has sometimes been suggested.

If there were a way to run a record company without funding so many unsuccessful albums, successful artists would be able to take home a larger share of the pot. The fact that this has not happened indicates that up until now a better model has not been found. After all, there have been many independent record labels. None of them has struck gold with an alternative model. That probably means that record company business model, loathed by so many, was actually efficient. Maybe the Internet will finally allow a superior model to arise.

Maybe.