Where the Money Goes

Orin Kerr at the Volokh Conspiracy points to Terry Fisher’s data on where the $18 paid for a typical music CD goes: $7.00 to the retailer, $1.50 to the distributor, $9.31 for record company expenses (including performer and composer royalties of $2.85), and $0.19 for record company profit. Kerr comments:

I understand that the record companies have done some pretty bad stuff in the past, and of course they are the industry that every one loves to hate. If I understand Fisher’s figures correctly, however, record company profit makes up only about one percent of the price of a compact disc. If record companies decided to operate on a not-for-profit basis, the average price of CDs would drop from $18 to $17.81. This is certainly news to me. Am I missing something, or does downloading hurt local retailers the most– with artists, record companies, and manufacturers all taking their share of the hit as well?

The $7.00 cut for retailers is surprising. If a download replaces an in-store sale, there is a big hit for the retailer to absorb. In the long run, though, it looks like in-store sales of music will not recover from the impact of the Net, as illegal downloads will be replaced by legitimate on-line downloads (if they are replaced at all). Most of today’s in-store retailer revenue will be swept away by technology, one way or another.

Nineteen cents of record-company profit is surprisingly low, but on further reflection, I don’t think the profit numbers, by themselves, rebut the proposition that record companies are parasites. Even if the record companies made zero profit, their expenses and overhead would still account for a sizable share of a CD’s cost. According to Fisher’s data, record company overhead, A&R expenses [i.e. talent scouting and artist relations], and marketing add up to about $5 per CD. This is what pays for executives’ salaries, parties, big shiny buildings, and so on.

All of this expense is reasonable if the record companies add enough value to the process, for example by developing artists’ talent and packaging the product attractively for listeners. Whether the record companies add this much value is open to debate. The answer to that question will someday be clear to us in hindsight, but I’m not sure we know it now. In any case, record companies consume much more than nineteen cents per CD.

In all this quibbling about numbers, we mustn’t lose sight of the big picture, which Kerr sees clearly. If the revenue per song is zero, it doesn’t matter what share of that zero goes to the artist. No matter what future you hope for, if you want to enjoy recorded music it had better involve some kind of payment.