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The music industry is full of opportunity, but you don’t have to be a performing artist to hold a career that focuses on your love of music. You can start a record label even if you aren’t an artist, yourself, helping to support and guide other artists in their careers. If you are a performing artist, then starting a record label could help you to reach new audiences and take control of your music. In time, you could expand that label to sign on other artists, too. Whether you have dreams of having a big business or want to keep things small, starting a record label could open up exciting avenues in the music industry.
Record labels help to develop, record, and distribute music throughout the world. Traditionally speaking, record labels selectively sign artists that they wish to represent, focusing on the artists that the label believes to be most promising. Labels earn royalties off of not only the albums that each artist sells, but also off of music downloads, radio plays, concerts, merchandise, and more. Most record labels handle everything from licensing to recording to production and marketing.
While the industry is dominated by major labels, there are also plenty of independent labels. Independent labels can be large corporations, or individual artists may set out to create their own independent labels. While independent labels don’t have access to all of the resources and negotiating power that major labels do, independent labels also operate at lower budgets and may be able to regain their investments in an artist more quickly as a result.
According to Statista, the record label industry has gone through flux over the past five years. The emergence of music streaming led to revenue stagnation, but in 2018, the industry revenue grew to $18.9 billion. In 2017, streaming alone accounted for $4.3 billion in revenue, equating to about 38% of the music industry’s entire revenue that year. In 2019, the recorded music industry’s revenue was $7.3 billion.
The record label industry is dominated by three major labels: Warner Music Group, Sony Corporation, and Universal Music Group. Walt Disney Records is the most successful independent music label in America.
The music industry changes rapidly, and that will continue in 2020 and beyond. Soundcharts predicts that technology will continue to change the way that we consume music. With voice queries, consumers can instantly access playlists of any type of music they seek. As more and more people stream music from all over the world, streaming trends will also become increasingly linked to the local markets. These new local markets will be rural areas in locations like Africa and Asia, and they stand to further transform music trends.
We’ll also continue to see the decline of the album and the rise of the individual song. The increased value and emphasis on individual songs has led to more productions with remixes and acoustic versions available of a single track. This also spells a change for the music production cycle. Previously, artists would spend years working on an album which would be expected to satisfy their fans for years until the next album was released. Now, labels have the ability to easily and economically release single songs, allowing artists to put out new music much more regularly.
We’re also seeing an exciting melding of multiple art forms, and the lines that previously existed between music, movies, and fashion are becoming blurred. Musicians are increasingly crossing over into acting, developing their own fashion lines, and even hosting their own shows. Record labels are also embracing this trend, and more labels are financing biopics and documentaries that feature their artists. The music industry faces entertainment competition from other services like Netflix and Hulu, so featuring musicians on these platforms can result in increased music sales and popularity.
A record label’s target market consists of the people who consume the type of music the label produces. These target markets can vary widely and will depend on the label’s specialization, marketing, and niche. A label may target kids, teens, adults, or a combination of audiences.
Skills, experience, and education useful in running a record label
Starting a record label doesn’t require a business degree, but certain skills and experiences are important within this industry.
Detailed understanding of the music industry. An understanding of how the music industry works is essential in running a record label. Ideally, having held an internship or employment at a record label will give a business owner a comprehensive understanding of how labels operate and what can make them a success.
Knowledge of music trends. Record labels face the challenge of identifying artists who will be popular in the coming years. A knowledge of music trends and an eye for musical talent can help a label to secure artists who will drive sales and become successful.
Organization skills. Running a record label is a complicated endeavor. A label owner needs to be well-organized and able to balance multiple projects and priorities, especially as that label grows.
Management experience. Most record labels will need multiple staff, so experience hiring, training, and managing staff will be valuable.
Basic legal understanding. While a lawyer is an essential part of a record label’s team, a business owner who has some basic legal knowledge will be able to understand some of the concepts behind contracts, royalties, and other elements of the industry.
Marketing experience. Even though a label owner may not do the marketing themselves, marketing knowledge and experience will be valuable when assessing potential artists, managing distribution channels and outlining potential marketing plans.
Startup costs for record labels vary widely. A musician with access to home recording equipment can start their own label out of a spare room for about $1,000. A larger label that will represent multiple artists and be staffed by multiple employees can cost closer to $50,000 or $100,000 to start.
Common startup costs for a record label include:
- Home recording equipment or studio rental costs
- Website development
- Office equipment like computers and printers
Recording and Production Costs
Recording expenses for labels can be significant. Assuming that a record continuously signs new artists, recording costs will be ongoing. Recording Connection reports that smaller labels may spend $15,000 and up per album on recording, while larger labels’ recording bills can be $100,000 to $500,000 for a single album.
Once an album is recorded, the label will also need to cover production costs. A smaller label that buys less than 10,000 CDs each year will pay about $1.20 per CD. Labels that buy orders of more than 100,000 usually pay $0.50 to $0.55 per CD.
Steps to Starting a Record label
Step 1. Write your Business Plan
After coming up with the idea, the next step in starting your business should be to write a record label business plan. Not only will a bank require you to have a business plan, but multiple studies have shown that a business plan helps increase the odds of starting a successful business.
Step 2. Form a Business Entity
A business entity refers to how a business is legally organized to operate. There are four primary business entities to choose from which include the sole proprietorship, partnership, corporation and LLC. Each type of entity has its own pros and cons such as liability exposure, costs and administrative requirements.
Related: Comparison of Business Entities
Step 3. Select your Location
While it’s possible to start a small record label out of a home, when it’s time to sign on artists, having an established space will add to the label’s trustworthiness, increasing the chances that artists will sign. Rental costs will depend on a space’s size, location, and amenities, like the availability of parking.
Related: Choosing a business location
Step 4. Apply for Business Licenses and Permits
While there aren’t licenses specific to record labels, a record label owner will need to obtain certain business licenses and permits. These permits and licenses can vary based on the state and town where the label is located.
Some of the common local, state and federal registrations most businesses need include a sales tax permit, Employer Identification Number, Occupancy Permit among others.
Step 5. Find Financing
Coming up with a good business idea and having the skills to run it are one thing, but getting the funding to start a record label is another as a lot of the start-up costs go towards expenses that aren’t backed by assets. In order to get a loan, the borrower(s) will need to have good credit and be able invest 15-25% of their money towards the total start-up costs.
Step 6. Get your Marketing Plan in Place
Record labels need to market themselves to attract the quality artists that they hope to represent. Common marketing activities include social media marketing, online advertising, and even networking at industry events. Marketing costs will depend on the type and volume of activity performed.
Step 7. Get Insurance
A record label needs several types of insurance for full coverage:
- General liability insurance protects the record label if artists or customers are ever hurt on the business’ property or as a result of the business’ work. This type of policy helps to cover expenses like legal fees or medical bills.
- Professional liability insurance would help to protect a record label against work-related errors, like copyright infringement. This policy can cover legal fees and damages.
- Commercial property insurance helps to cover expenses like the loss of a business’ equipment or building in an event like a fire.
- Worker’s compensation insurance protects the business in case any employees are ever injured while on the job.
The costs of insurance policies will vary depending on factors like the value of a business’ equipment and building and the number of employees on staff. To get the best idea of what to budget for insurance, request quotes from multiple companies. When you compare the quotes, look not only at the differences in premiums, but also at how coverage limits, exclusions, and deductibles compare.
Step 8. Hiring Employees
A label owner may be able to manage the label as it grows, but eventually it will be time to hire staff. ZipRecruiter reports that independent record label salaries average $52,230 per year, though salaries can range from $19,500 to $102,000.
Record labels often hire a variety of professionals throughout the year, but those professionals are often hired on a freelance basis. Graphic designers, album producers, sound engineers, and marketers all play a role in the launch of an album, but hiring them on an as-needed basis can help labels to keep employment costs down.
Related: Hiring your first employee
Amazon has several good books for starting a record label such as:
- The Music Business Advice Book: 150 Immediately Useful Tips From The Pros
- Music Money and Success 8th Edition: The Insider’s Guide to Making Money in the Music Business
- Social Media Promotion For Musicians – Third Edition: The Manual For Marketing Yourself, Your Band, And Your Music Online
How much can you potentially make owning a record label?
Record label income varies vastly, and signing on a hit artist can greatly boost a label’s profits while also encouraging additional talented artists to sign with the label. A report from Music Business Worldwide revealed that in 2019, Universal, Sony, and Warner made a combined average of $19 million per day from streaming services alone.
But those profits aren’t typical, and independent labels tend to make much less. DJ Mag reports that no labels make profits during their first few years in operation, but as they develop a body of work, record labels start to enjoy multiple revenue streams which can lead to increased profits. If a label owner has an eye for great talent, understands how to curate that talent to appeal to its audience, and has a bit of luck, the label can be profitable.
Things to consider before starting a record label
The record label industry is saturated and many musicians start their own labels as a labor of love. If you’re considering starting your own label, having internship or work experience in this industry is highly valuable and can also prepare you for some of the challenges that you’ll face. Be prepared to spend years developing your label and focus on what value you can give to the artists who sign with you. By studying the competition, you may be able to find something that other labels aren’t doing. If you do things a little differently, you may have a profitable business venture on your hands.