How to Sell a Million Records (and Still Owe the Record Company Money)

Every music contract contains a few key provisions that can have a big impact on your career. In this series, we break down one concept at a time, in simple terms, so you can understand why it matters.

Selling a million albums sounds like success. Actually, it sounds like enormous success. Imagine you're a new artist. You've finally signed the record deal you've dreamed about for years. The label gives you an advance. You make an album. The label spends money marketing it. The record takes off.

A million units. You’ve arrived now, right? Now, you finally have the money you need to quit your day job.

Well, maybe.

Welcome to one of the strangest parts of the record business. A record can generate millions of dollars, and the artist gets no royalties. Ouch.

How Can That Possibly Happen?

It happens because your royalty percentage isn’t what you get paid. It’s what is credited to your account. It’s not the same thing. If you focus only on the percentage, you’re only seeing part of the picture. 15%. 20%. 25%. A 50/50 split.

Those numbers matter, but there's another question that's just as important. What does your royalty get spent on before you get paid?

That's where the concept of recoupment comes in.

What Is Recoupment?

A record company takes a financial risk when it signs an artist. It may provide money for artist advances, recording costs, producers, mixing and mastering, music videos, marketing, promotion, tour support, or other costs associated with developing and releasing the artist’s music. Depending on the agreement, some or all of those expenses may be recoupable.

What that means is that the label gets to recover those expenses from the artist's royalty account before the artist receives additional royalty payments. Pay attention here—not off the top. Not from the label’s share. From your account; and just your account.

So your record can be making money. Your royalty statement can even show substantial royalties. And you can still receive nothing.

Let's Do the Math

Suppose your record generates enough income that your royalty calculation results in, say, $300,000 in artist royalties.

Sounds pretty good, right? But now let's look at your account. The label paid you a $50,000 advance. It spent another $150,000 recording the album. Then there was $50,000 in expenses associated with videos, album art, and other content. And $100,000 of other expenses (marketing, etc.). So that’s $350,000 in expenses.

That means they take $350,000 from your $300,000, and your left $50,000 in debt to the record company.

That’s right—if you are supposed to get, say, a 25% royalty, that means the record company makes $900,000 and you are sitting at a $50,000 loss.

Wait. Does That Mean I Owe the Label $50,000?

Sometimes, this is where artists panic."You mean I have to write the record company a check?"

Not usually. In a traditional royalty structure, an unrecouped balance is nonrecourse. In plain English, that just means that, while the record company considers all of that money they spent to be a loan to you, there is only one place they can get it back from—your royalties.

So if the project ends with a $50,000 unrecouped balance, the artist doesn't necessarily pull out a checkbook and pay the label. But that doesn't make the balance meaningless. It means future royalties may continue going toward recoupment instead of going into the artist's pocket.

The agreement determines the answer.

The Advance Isn't Free Money

This is another concept that might surprise you. If the label offers a $150,000 advance, that sounds like a windfall. However, an advance is exactly what the name suggests. It’s an advance against future income—not just a bonus.

That doesn't mean advances are bad. Advances can provide money to record your album. They can provide extra funds to hold you over until you can generate live performance income. It can give you more runway.

But an advance and a gift are two very different things.

Higher Advances Might Not Be Good

This is where you need to be aware of what is going on to make good decisions. If the label promises you a $100,000 recording budget that is recoupable from your royalties, that means the label is taking the risk. If the album doesn’t generate enough money to cover those costs, it is the record company that is out the money. If you were spending your own money, that loss might be catastrophic.

So that may make it seem like the more money they pay, the better off you are. Why not ask them for $150,000? $200,000?

But that’s the downside. The upside is where you lose. The more money you take up front, the more money the album has to make before you see any return. That's why a bigger recording budget may not be better. Another $50,000 might make the album better. It might also put you another $50,000 away from receiving a royalty check.

The Old Record Business Made the Math Worse

When I originally wrote about this subject years ago, the illustration was built around physical album sales. Back then, a hypothetical million-selling album might begin with an $11 retail price and appear to generate $11 million.

But artists weren't simply paid their royalty percentage against that $11 million. Traditional recording agreements could reduce the price the royalty percentage was applied to by deducting returns, reserves, and packaging and by paying on wholesale price instead of retail. By the time the artist's royalty was actually calculated, the number could bear remarkably little resemblance to the money consumers had spent buying the albums.

Streaming and digital distribution have changed much of that accounting, but some of the optics are similar. Digital streams, for instance, pay a revenue of a fraction of a cent. That means thousands of streams can result in only a dollar or two of income.

The underlying lesson hasn't changed. Never assume big numbers mean big money.

And Then There Were 360 Deals

I remember when record labels first changed over to 360 deals. Traditional record companies primarily made their money from recordings and, sometimes, publishing. As physical record sales started declining, the industry changed. To keep profits up, labels started taking revenue from other areas. That's the idea behind what became known as the 360 deal. Some labels started sharing in not only the recording income but also tour revenue, merchandise sales, and endorsements and sponsorships.

The justification was that the label's investment helped build the artist's entire career, not merely record sales. From the artist's perspective, however, it means something important—the economics of your record deal may extend far beyond your records.

Why Successful Artists Can Remain Unrecouped

And that’s where we are now. An artist can have millions of streams, a successful tour, a growing fanbase, and a hit record…

…and still be unrecouped.

That's because commercial success and contractual profitability aren't necessarily the same thing. The contract controls the math, and labels are going to make sure they get a return on their investment before you see any income—and because the risk is substantial, the return is expected to be substantial, as well.

The Reality

Record deals aren't automatically unfair deals. A label may invest thousands—or millions—of dollars into developing an artist's career. That investment can create opportunities an independent artist could never afford alone.

And a label taking financial risk has every reason to expect a financial return. The problem comes when an artist doesn’t take the time to understand the economics.

This Week's Takeaway

Record deals come in all shapes and sizes. Whatever the deal, if a label is spending money on you, they are going to want it back. They are taking a risk, and they will want a reward.

So your royalty percentage is an important part of the deal. However, just as important, you need to understand what is deducted before your percentage is determined and what is deducted from your royalties. Those questions aren't nearly as exciting as talking about advances, recording budgets and hit records. But they're the questions that tell you what you’re giving up in return for the record company’s investment—and when you can expect to see a positive balance in that royalty account.