InformationIsBeautiful has another interesting graph up. It compiles information about how much musicians earn through various music sales. I had no idea CDBaby was paying so much to the musician. Another interesting detail: musicians earn about 9% from each sale on iTunes or Amazon, and on the sale of retail CDs, labels earn 20% while musicians earn between 3% and 10% depending on the royalty deal. I assume this means that big-name artists can negotiate bigger percentages because they have more negotiating power. While some people get angry that the labels earn so much compared to the musician, I’m always hesitant to share their view because I don’t know enough details about the situation. For example, if a musician is earning $30,000 a year, and then he signs with a label so that they earn 100% of the music sales, but make him famous by pouring money into marketing, and the musician ends up making 10x as much money because his fame has increased his concert sales dramatically, then is earning a no money from each sale bad (assuming it comes with a dramatic rise in ticket sales)?

The other surprising thing about the chart is how little money anyone makes from streaming music services. In order for a musician (and this is a *single* musician, not a band) to make the equivalent of minimum wage by having his/her music on Rhapsody, Last.fm, or Spotify, they have to get between 850,000 to 4.5 million plays per month - which is shockingly high. And, it’s not because the record labels are taking it. It’s because there’s so little money flowing to the record company or musician.

Click the image to see the full chart.

On a related note, one of the members of OK Go was on yesterday’s “Planet Money” podcast, commenting on a recent Op-Ed piece he wrote in the New York Times. He had mixed feelings about the record industry, but he said one good thing about the record companies is that they fund a lot of bands. 19 out of every 20 bands who get signed go nowhere. So, when 1 out of 20 make it big and earn money, the record companies take a lot of the sales revenue. Given the economics of the situation, they have to. Kulash argues that record companies are “risk aggregators” (or, at least, they used to be until they started losing so much money over the past ten years). What is a “risk aggregator”? It means that they spread-out the risks that bands take over lots of bands. It’s kind of like insurance. The bands who get rich pay money to support the less successful bands, except that it happens through the balance-sheet of a record company who only accepts bands into the group if they think they might be successful.

…It’s decisions like these that have earned record companies a reputation for being greedy and short-sighted. And by and large they deserve it. But before we cheer for the demise of the big bad machine, it’s important to remember that record companies provide the music industry with a vital service: they’re risk aggregators. Or at least, they used to be.

To go from playing at a local club once a month to actually supporting yourself with music requires big investments in touring, recording and promotion — investments young musicians can’t afford. My band didn’t sign a contract with EMI because we believed labels magically created stars. We signed because no banker in his right mind would give a band the startup capital it needs.

Record companies, on the other hand, didn’t used to expect that all their advances would be repaid. They spread the risk by betting on hundreds of artists at once, and they recouped their investments by taking the lion’s share of the profits on the few acts that succeeded.

At least, this was all true when we signed our deal in 2000. Today, as the record industry’s revenue model has collapsed with the digitization of its biggest commodities, companies are cutting back spending on all but their biggest stars, and not signing nearly as many new acts. If record companies can’t adapt to this new world, they will die out; and without advances, so will the futures of many talented bands.

In these tight times, it’s no surprise that EMI is trying to wring revenue out of everything we make, including our videos. But it needs to recognize the basic mechanics of the Internet. Curbing the viral spread of videos isn’t benefiting the company’s bottom line, or the music it’s there to support. The sooner record companies realize this, the better — though I fear it may already be too late.

Most people complain that the record companies are taking too much from the musician - but they’re only looking at how much they take from the successful bands, without looking at the full economic picture. I’m not really trying to be an apologist for the record companies. For all I know, they’re like ticketmaster - who unfairly harvests way too much money from ticket sales and does it’s best to drive competitors out of business or buys them to preserve the monopoly. I’m just a little skeptical about the whole narrative that gets passed around the internet. It’s also interesting to hear OK Go express the opinion about record companies that, while not all good, aren’t all bad, either.