How The Industry Tracks CD Sales

Have you ever wondered how the music industry knows how many albums an artist has sold? How can we be sure that Joe Smith actually deserves that platinum record hanging on his wall? After all, just because one million copies have been shipped to stores, it doesn’t mean that one million copies have necessarily been purchased.

You can thank Nielson Soundscan.

Nielson Soundscan measures music sales reported by retail establishments through their POS systems. It’s the official industry standard for tracking sales. It’s actually the reporting system that Billboard uses for the charts. In addition, the RIAA uses Soundscan as their source of sales figures in order to dish out silver, gold, platinum, and diamond record awards to artists. Yes, diamond is a real award. You can earn your very own by selling just ten million copies of your next release. See, you learn something new every day.

Soundscan is not a perfect system but it’s reasonably accurate and it’s the best one available. The big music retail chains are very consistent and accurate with their reports. However, some of the smaller independently owned stores, maybe not so much. For some of the independent stores, sales figures may show up a little lower than they are in reality.

This might push the music industry even further into the digital market because the small music stores are the only ones selling CD’s anymore. The big chains are reducing their music inventory to make up for lost sales by making room for other products like DVDs, posters, black lights, washing machines, etc. This might make you feel uneasy at first but don’t worry too much. Online sales are growing and they are much easier to track than physical sales. Not to mention, they are far more profitable if your label is running their business intelligently.

Recording Contracts-Recoupment

Before signing a recording contract my first and most important advice is to hire an entertainment lawyer. But for educational purposes I want to tell you about one of the most important concepts worked into your contract. Recoupment is the process in which the record label will keep the artist’s royalties until all recoupable costs are paid back to the label.

This isn’t as bad as it sounds as long as you are aware of what you are getting into. Recoupable costs will pretty much always include advances and recording costs. As far as other costs go such as touring, manufacturing, etc. it can be any complicated combination because after all every contract is different. So again, you should get an entertainment lawyer.

As far as advances are concerned you won’t have much luck trying to negotiate this one out of the recoupable list. Let’s say the label pays the artist $100,000 as an advance. This is a one-time lump sum. Since it is recoupable, you won’t be seeing any royalty payments until you’ve sold enough copies of your album to recoup the entire amount plus other recoupable costs. If you become an overnight hit it will happen very fast. But if your like most artists you probably won’t recoup that kind of money on your first album so don’t get a superstar ego and blow it all in a few short months.

The recording studio is probably where most artists really start racking up the recoup bill. If you’re using the studio’s guitars to record your songs it’s probably a good idea to know what they are charging the label for instrument rental. Yes, instrument rental might also be recoupable in your contract as well. So figure everything out ahead of time before you go blowing money without realizing it. Also, I know the studio is a fun place but it’s important to stay focused on finishing the album. Now that you understand recoupment a little better, you probably have put two and two together and realize that it’s actually your money that you’re spending per hour on that studio.

The final point I want to educate you on is that your recoupable costs are more than likely cross-collateralized. Let’s say your first album is still short $7,000 in sales from recouping by the time you finish recording your second album. If your second album recoups you start earning royalties right? Wrong. Your second album now has to make up the $7,000 you were short of recouping on the first album before you start seeing royalties from the second album. This is why an artist who hits it big on a 3^rd or 4^th album may not actually be rich after all. The good news is that once both albums have been recouped by the label, you earn royalties from the new sales of both.

So what's the moral of the story? Money is never free so be smart with it.

The Future of Record Labels

Are record labels dying? Is the Internet going to give musicians the power to sell platinum records and achieve ultimate success all by themselves? Not even close.

On a bad year the music industry still generates such obscene amounts of money that it makes my mouth water. That doesn’t happen because of magic social networking elves. It happens because there are record labels full of professionals with the talent, drive, and resources to connect millions of people with the music they love.

If musicians are going to be able spend their time writing, recording, and playing music for a living then somebody else has to spend time running the business affairs. I haven’t met very many musicians who are passionate about brand development, accounting, law, marketing, negotiating, booking, etc. Most musicians are either bored or stressed by those things. The reality is that it takes many full time professionals to make an artist successful much less keep them that way.

I often end up in conversations with people who have bought into the hype that artist self-promotion on the Internet is going to revolutionize the entire music industry. Don't get me wrong. Self-promotion is great for new artists and those who don’t have the mass appeal for large-scale success. But, it’s just not enough for anybody who's trying to carve out a career. 

Name three independent musical artists, out of the several million on MySpace, who can support a family off of his or her music career without the help of a label. An independent artist who has already achieved success thanks to a label (cough Trent Reznor cough) doesn’t count.

What if sports teams went “indie”? What would happen to that part of the entertainment industry? What if there were no team owners, no sponsors, no advertising, no mass media, no coaches, no arenas, no hot dogs, and the paychecks were about as good as minimum wage? Would Facebook Man fly in to save the day? 

Like it or not, labels aren’t going anywhere.