A Million Dollar Contract

So last night Kelly won a "million dollar recording contract" by winning the American Idol competition. What does that really mean? Basically, Kelly will get nothing. If she's really lucky and the record is a huge hit, she'll probably get a chance to make her 2nd and 3rd albums, from which she might actually get to keep some money. Where does this math come from? During the Napster/piracy/infringement debates and handwringing, Courtney Love gave an impassioned speech decrying the actual economics of the recording industry and how musicians are basically shafted. The complete speech is well worth the time to read. Here's a paraphrased excerpt from the first page that outlines what happens to a 4 person band:

What happens to that million dollars?

$500,000 - cost of recording their album.
$100,000 - paid to their manager for 20 percent commission.
$25,000 - lawyer fees
$25,000 - business manager.
$170,000 - taxes
Leaving $180,000, which comes out to $45,000 per person. That's $45,000 to live on for a year until the record gets released.

Let's say the record is a big hit and sells a million copies.

So, this band releases two singles and makes two videos. The two videos cost a million dollars to make and 50 percent of the video production costs are recouped out of the band's royalties.

The band gets $200,000 in tour support, which is 100 percent recoupable.

The record company spends $300,000 on independent radio promotion. You have to pay independent promotion to get your song on the radio; independent promotion is a system where the record companies use middlemen so they can pretend not to know that radio stations -- the unified broadcast system -- are getting paid to play their records.

All of those independent promotion costs are charged to the band. Since the original million-dollar advance is also recoupable, the band owes $2 million to the record company.

If all of the million records are sold at full price with no discounts or record clubs, the band earns $2 million in royalties, since their 20 percent royalty works out to $2 a record. Two million dollars in royalties minus $2 million in recoupable expenses equals ... zero!

How much does the record company make? About $6.6 million. Read the full speech to see how.