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Running Your Own Record Label: Part 5

On The Record
By Tom Flint

The earlier parts of this series explained how to set up your label. Now it's time to start looking at ways to get your work out and on sale to the public.

Last time we discussed how PR agents, publicists and pluggers can be used to promote your label and its recordings. Naturally, a successful promotional campaign will result in numbers of people looking to buy your records, but all efforts will have been wasted if your music is not readily available. What you need now is a distributor — in the most basic of terms, the company who takes the freshly-pressed records and gets them out into the nation's music stores.

On The Record header artwork.It's well known in the industry that many of today's record shops are finding it hard to stay in business, particularly with stiff competition coming from large supermarkets, who can afford to undercut the specialist shops. As a consequence of this situation, music shops have become a battleground where shelf space is the holy grail, and sales reps have to use all the tricks of the trade to persuade the chains to spend their cash resources on a new batch of records.

Looking at it from the point of view of shops fighting for survival, they naturally want to make sure their shelves are packed with the music that will sell the fastest and attract the most customers. This is bad news for relatively unknown artists hoping to get their records in the racks alongside Madonna or Eminem, but at least a good distributor has the sort of experience and bargaining power that a humble label does not. A distributor will also have the infrastructure to deal with the logistical nightmare of shipping CDs and albums across the country, and warehousing them ready for departure.

Wheeling & Dealing

It is sometimes possible for a label to strike what is known as a 'manufacturing and distribution' deal, in which the distributor co-ordinates and funds the process of having the records pressed. Deals like these are vital for labels who can't afford a large and costly pressing, but in such cases the distributor's risk is larger, so their percentage is bigger too. It's not hard to find lists of distributors; the Showcase Music Business Guide (as mentioned last month) is one source, and the web is another, but unfortunately, like all good things, securing a satisfactory distribution deal is not so easy. Large distributors will have many labels on their books, and if they are going to put money up front, or at least assign some of their staff to the job of looking after label business, they need to ensure that they will get a return on their investment.

If your music is somewhat esoteric, you may do best by searching out a distributor who specialises in your style of music and can get your records into more specialist shops. There will be more on the intricacies of niche distribution next month, but for the time being, let's assume that you have impressed your distributor so much by your talk of loyal record-buying fans that you've persuaded them to take you on. At that point you will need to negotiate a contract, and your lawyer will be the first person you need to call for advice. Toby Marks, owner of Disco Gecko records, reveals one of the things to watch out for.

"The bigger music retail shops, and chains, negotiate with the distributor for the right to return. That means that if they can't sell the records they can send them back after a few months! The distributor is doing the work of sorting the CDs, putting them into vans, getting them delivered, and then having to get them back into the warehouse when they're returned — and obviously they need to cover themselves for that expense — so most distributors charge labels returns or stock movement fees.

"The deal that I've done with Pinnacle includes a five-percent returns-handling fee. That's fairly high, I suspect, but there are various points where you can 'trade' when negotiating your contract, and that's one point I conceded."

Unwelcome Return

Once you have arrived at a deal outlining the distributor's cut and the agreed percentage for returns and any other services, it's time to stop worrying about your deal and start worrying about how potential return stock will affect your cash flow. As Toby explains, if you're not careful, you can end up spending money you don't actually have, because of the way the system works. "You often find that the big retail chains will do a 'scale out' deal which means, that, for example, the central buyer for Virgin will decide to take 1000 albums in July and put a percentage of those in every Virgin shop in the country. By August or September you get paid for them. The problems is that, for example, there may be no Banco De Gaia fans in Wigan, but the Virgin store in that town have still been given 20 albums by head office. Come November, when Elton John, Kylie and Cliff Richard have their greatest hits albums coming out in time for Christmas, the Wigan store will want to make space, so they pick the albums that haven't sold and send them back under the sale-or-return agreement. So traditionally November is a bit of a scary time, because you may find that none of your supposed sales actually went over the counter, and you get them back, together with a big bill. You firstly have to refund what you've been paid and then you get the percentage on top for returns-handling costs!

"One thing that may or not be a godsend is that distributors tend to hold back a certain percentage of your money against returns, so if, for example, you sell 1000 albums, they may only pass on the money for 750 and sit on the rest of it for several months. Then, if there are returns, the money is there to give back to the shops. Distributors are actually protecting themselves, because if too many labels spent the lot and then couldn't pay for the returns, the distributor would go bust. When I released the Magical Sounds album, Pinnacle held back a pretty large chunk of money against returns, but I needed money for cashflow and I couldn't afford to have that much sat in their bank account, so after negotiations they agreed to reduce the withheld amount. In the end, I got quite a few returns and it worked out about right, but at the time, I thought none would come back. In retrospect, they saved me from a potential financial crisis."

Pleasing Your Masters

Before you can have your records 'printed', there are a few technicalities that need to be taken care of. For a start you need to check that all the relevant coding is in place, not least of which are the ISRCs (International Standard Recording Codes), as explained in Part 3 of this series, which ran in the November 2002 issue. There are many other formatting considerations too, such as PQ coding and copy protection, but to get the full rundown on these it's worth reading part three of Paul White's Stereo Editing series, from SOS March 2000.

You will also have to make sure that your artwork is ready and saved in a suitable file format, complete with barcodes and all the text for printing on the CD itself. The 'New Label' info pack provided by PPL (Phonographic Performance Limited — see part three of this series, as above, for more details) contains, amongst other papers, a Copyright Protection leaflet showing exactly what text needs to go on your CD and what to do with the ubiquitous 'P' and 'C' symbols.

As part of the general preparation process, you may also decide to have your work properly mastered so that (audio-wise) it is optimised for release. Toby Marks explains why he chooses to have his albums professionally mastered. "So far, all my album tracks have been edited together to run continuously, but before I mix them together I take the individual tracks to the mastering suite to EQ and level them. Then I load them into my computer and do the crossfades and the general compiling of the album back at my studio. Lastly, I return to play the final 70-minute master back into the mastering system.

"I do use Emagic's Wave Burner Pro on my G4, in which I can handle all the edits, PQ codings, ISRCs and copy protection, and I can also do all the compression, limiting and expansion that an expensive production suite does, but I don't fully trust my ears, my monitoring or my acoustics, and I don't have 30 years' experience as a mastering engineer. There are some things which I know other people can do better, which will vastly improve the final result, and mastering is one of those: I couldn't handle listening to one of my CDs and knowing it was wrong."

" I am also not convinced that your average computer drive is necessarily that good at writing audio CDs, even in real time, and that may be an overriding reason to get a mastering studio to do it all. At least that way you can be pretty sure it will all be OK. I have heard tales of people getting their masters sent back from the manufacturing plant, having been told that there were too many errors to go into production."

If you are confident in your mastering skills, you may wish to save cash and deliver your finished coded file and artwork direct to the manufacturer. They will have charges, including one for the glass master, which has to be created before any CDs can be manufactured. The other main cost is for the manufacturing itself, and that will vary depending on the size of the production run. Toby provides some guideline figures. "It's all to do with economies of scale: a production run of about a thousand CDs with reasonably good artwork costs about 60p per CD plus VAT. £600 for 1000 CDs isn't much compared to what you might have to spend on recording or on a designer to create the artwork. I spend more than that on mastering, which costs me from £1000 to £1500 quid an album, but I'm fortunate to have access to very good mastering suites. If you sell 10,000 CDs, it's worth spending £2000 on the mastering process, but for 500 it's probably not.

"Marketing could potentially be the most expensive part of the whole process. If I stick to the principle of spending one pound per copy, I'm spending more on marketing than manufacturing. On a £15 CD in the shop, the government takes £2, VAT will be £2.30, the shop will take about £4, and the distributor will take about £2, so suddenly 60p doesn't seem a lot. If you could sell your stuff on the web and take out all those other people, suddenly your 60p CD can be sold for a hell of a lot less than £15."

The New Order

On The RecordPPL's free documentation tells you what text needs to appear on your CD if you are to safeguard your rights and comply with regulations.PPL's free documentation tells you what text needs to appear on your CD if you are to safeguard your rights and comply with regulations.On The RecordOn The Record

Finding a sympathetic distributor could potentially be a sticking point for your label, especially if you are not a well-known DJ or band. Fortunately, thanks to the power of the Internet, hiring a traditional distributor is no longer the only option available. Selling CDs from your own web site by mail order is now a very economical proposition, and a good way to get a foothold in the market — and ultimately it may help you build up enough of a following to pique the interest of a major distributor. The point has to be made here that web surfers are not going to stop off at any site to buy music without being attracted by advertising and promotion, but on the plus side, a web site makes music available to anyone in the world, in a way a traditional music shop could never do. These benefits also apply to merchandise and back-catalogue releases, which can be made available as mail-order purchases.

To get started the first thing to do is contact an Internet Service Provider, from whom you can rent server space. Simply typing the phrase 'Internet Service Provider' into a search engine will provide a list of suitable candidates. Depending on the quality of services on offer, prices vary, although a basic service may only cost a few pounds per month. You also need to think about your site's design. You may wish to design the site yourself (if so, take a look at the six-part SOS 'Designing A Web Site' series which started in July 1999, but bear in mind that a web site, like anything else, needs to be maintained, with up-to-date news and general content written and posted regularly. What's more, someone needs to be on hand to get things up and running if there is a server problem or software failure. With this in mind, you might wish to hire a third party to design and manage your site. Naturally, the web is full of professional-looking agencies offering their design services, but for the sake of keeping costs low, you could try to develop a symbiotic relationship with an enthusiastic fan of your music. There are always a few technical wizards out there who are more than willing to run a site for their favourite band, or who are prepared to work for free so that they can use the project as an advert for their design skills. Regular contributor to this series and owner of Scopitones Records, David Gedge, has a site hosted by one company, Cyberjack, and maintained by another, called the Starfish Consultancy.

The web site of designers Cyberjack.The web site of designers Cyberjack.

Gedge explains how he found them. "Every other person you meet these days seems to be a web designer so I didn't have to do any research to find someone to do my site. Cyberjack is actually the company of a friend who once interviewed me for a fanzine. I hadn't given it much thought until she offered to design the web site for free because she wanted to put her skills into practice. After it was all up and running she became bored with that side of things, so the Starfish Consultancy took over the maintenance and design. They were also people I knew, so they run the site for free too, even though I offered them some money for it! So really I have no idea how much it should cost — I suspect quite a lot. I wouldn't mind learning to do it myself but it's finding the time when I have other things to do, like making music and running a label."

Setting Sales

From his web site, Gedge sells Cinerama CDs, vinyl records and merchandise, including T-shirts and sweatshirts. To keep costs down, everything ordered on the site is processed and posted by Cinerama's keyboardist and backing vocalist, Sally Murrell. "There's not really a problem doing it on a day-to-day basis, because we only get two or three orders a day," explains Gedge. "But when we've been on tour it gets put on the back burner. We've just been to the US for a few weeks and there are loads of orders to sort out, which is a bit bad, but there is no other way to do it without getting outside help. Sally usually cashes the cheques and postal orders and waits for everything to clear before sending the stuff out, particularly if it's an order from a new customer, although it's rare we get a cheque that bounces.

Part of the mail order section of the Cinerama site.Part of the mail order section of the Cinerama site."To make sure we have enough stock, I contact the distributor whenever I have an album or single release, and I put in an order for a small number of records. I find that it takes about six months after a single has been released before people start calling up because they can't buy it in the shops any more, but I don't mind keeping it here for that time."

Another DIY aspect of the mail-order operations is the slightly unusual points table for calculating the cost of postage and packing. Gedge explains how and why he devised the system. "Being a mathematics graduate, I thought it was logical to use a system of points so that people could work out how much their particular order would cost. It's probably much more complicated than it needs to be but I wanted it to be fair. Most people understand it, although a lot of Americans don't seem to realise it's not in dollars! I basically collected a selection of Jiffy bags, CDs, tapes, sweatshirts, 12-inches, CD singles and T-shirts, found some really accurate scales and weighed everything. Then I looked to see what the Royal Mail postage rates were for different parts of the world. There doesn't seem to be any problems sending everything via Royal Mail, although if they were more expensive packages, Customs and Excise might have something to say."

Playing The Card

The one obvious thing lacking from Gedge's setup is the facility for people to use their credit cards to purchase Cinerama's merchandise, although the majority of sales are via traditional distributor/shop channels, so the limitation has not been an issue until now. Nevertheless, if you are intending to use the Internet as the main outlet for your records, card handling will be a higher priority. There is an ever-growing number of companies offering card-handling services on the Net. For a commission fee, these companies will provide a secure server, screen customers for possible fraud, approve their credit-card details, and provide them with all the necessary communications and verifications. The order information is then passed on to you, the distributor, and then all you have to do is make sure the CD or record is posted. Traditionally it was necessary to set up a merchant account with a bank in order to process card orders, although there are some newer services — like the eBay-owned Paypal — who require no setup fees and no merchant account.

Toby Marks' Disco Gecko label site.Toby Marks' Disco Gecko label site.

Toby Marks has also been distributing Banco De Gaia merchandise from home. Unlike the Cinerama website, Disco Gecko now takes credit-card orders. The incentive for Toby to set up a card service was his acquisition of the rights to his old albums, which were previously released by Planet Dog, and then sub-licensed to Ultimate Records (the full story of how the liquidation of Ultimate led to a legal dispute over the ownership of Banco De Gaia recordings was featured in part one of this series). By gaining the rights to his old records, Toby also obtained a lot of stock which had been held in distributor Pinnacle's warehouse for several years during the legal case, so it made sense to set up a credit-card system to cope with orders from long-waiting fans.

Toby explains how he picked a suitable service: "I knew that if I could get on-line credit card handling sorted out I could do a lot more direct sales and I would gain from having no distributor's fees. I talked to the bank about it first, but it was really expensive — something like £20 a week minimum maintenance fee, plus the setup fee — so I ruled out that possibility. I then spoke to people at other labels I knew to see how they were doing it. One friend used a company who take the stock from Pinnacle, and do the mailouts and all the card orders, but because my wife and I have been handling our own mail-order stuff for a long time there was no need to pay somebody to do that part of it. We just needed someone to process the orders on the credit cards and then pass the orders on to us. Another friend recommended the company that I now use, which is run by an ex-tour manager who had realised that every band he'd worked with has a certain amount of merchandise to sell. He decided it would make sense to offer that service to all the bands that he knew. He's providing the card handling, technical backup and a secure server, and he's also running the web site. In practice, he sends me a weekly list of the orders they have received, which we then mail out, and every month I get a cheque for the amount they have received, less their commission. I don't know how the cost compares to other companies, but he's taking 25 percent net. That means that if an album is £10, then 17.5 percent VAT is taken off the £10 to leave £8.50 and the 25 percent is taken from that. I charge £1.50 postage on top of the £10, so the customer actually has to pay £11.50, but the postage bit is accounted for separately and not included in the 25 percent. We thought about making it 20 percent of gross, but it made more sense to take it from the real revenue.

"It is a couple of quid for every £10 CD, but I'm making more from those direct sales than I am through a distributor. In the past, some people from overseas didn't know what International Money Orders were and we got endless enquiries from people begging us to take dollar cheques, but with credit cards you can take the order from anywhere in the world and the bank will do the conversion from the UK price on that day, at whatever the exchange rate happens to be."

Looking After The Pounds

One of the key issues for a label selling its releases on-line is how to price them so that they bring in enough revenue to pay for all label expenses. At the end of this article, the 'Breaking It Down' box explains how a CD can be priced for retail, but selling on-line cuts out the retailer and therefore offers a label the chance to either make more money or sell cheaper.

Toby's pricing decisions are complicated further because some of his releases are not only available on his web site, but also on other web sites and in the shops too, having been sourced directly from Pinnacle. Toby explains why this is a problem. "I figure it would be crazy to charge high-street prices on-line, so I try to keep them low, but you can easily order from Amazon US or CDNow, or one of the US retailers, and their stock is invariably cheaper. Ironically, even Amazon UK have undercut me! When I re-released my album Maya for £9.99, Amazon were doing it for £7.99, because they get a massive discount from the distributor. I won't go into where that leaves Disco Gecko, but it meant that we were getting practically nothing from every copy they sold! It's nice that people can buy the records cheaply, but unfortunately it was at the label's expense. All HMV or Virgin shops, and the other chains, get good discounts, and a lot of the independent shops will too, if they are good customers. I just have to accept the prevailing discount offered by the distributor to its customers."

Breaking It Down

Now that this series has covered artist and writer royalties, manufacturing costs, distribution deals and various other running expenses, it's a good time to see how all those expenses are paid from the price of a CD. Toby Marks provides an example of a typically priced album.

"These days, £12.99 is a common retail price, so I'll start there. From that figure, 17.5 percent VAT is paid to the government by the shop, so subtract £1.93 and you have a net of £11.06. Shops generally mark up about 50 percent on the wholesale price charged by the distributor, so in this case the dealer price is £7.37, of which 17.5 percent VAT is paid to government by the distributor. Many shops get a discount due to their buying power; small Independent labels might get a few percent, while big chains like HMV or Virgin might secure around 10 or even 15 percent. I'll assume an average discount of eight percent, so the net to the distributor will be £6.78. The distributor takes usually between 20 and 25 percent commission, but for this example I'll say 25 percent. That means that the net to the label is £5.09, of which 17.5 percent VAT has to be paid to government by the label, if the label is VAT registered.

"The MCPS (Mechanical Copyright Protection Society) take 8.5 percent of the published dealer price, which, in this case, is 8.5 percent of £7.37. (Bear in mind that the set dealer price declared by the label is not necessarily what they actually receive from the retailers if a discount deal has been struck.) In this example the MCPS collect 63p. This is eventually passed on to the publisher, if there is one, or the songwriter(s), less MCPS commission, which I think is around seven percent. If there is a publisher, they will then take 20 to 30 percent before eventually, many months later, passing the rest on to the songwriter or writers.

"Manufacturing costs vary hugely, depending on quantity and packaging, but if you keep the artwork and packaging simple, a fair figure for a run of 1000 CDs is 60p each. Promotion costs can theoretically be unlimited but, as a very rough guide, £1000 will buy one quarter-page B&W ad in DJ and Muzik magazine, and will pay for 2000 flyers, and a mailout to about 500 people. That works out at £1 per CD for a batch of 1000.

"After these expenses, the label can expect to receive about £2.86. Out of that they will have to pay for recording and mastering, the latter costing anything up to about £1500. You also have to budget for artwork, unless you do it yourself, and the glass-mastering process, which is the actual master the factory creates to produce copies from. To put it into perspective, if you were signing an artist and they were on just a low-ish royalty rate of 14 percent of dealer price, the royalty would work out at £1.03. Paying for that from £2.86 would make it hard to stay afloat at this level. The other option is a profit share which, in my experience, generally means splitting what's left after the label has paid for all of the above expenses, including artwork, promotion and mastering costs. On a run of 1000 CDs, I wouldn't expect to see much profit — in fact, I wouldn't expect to break even. Managers vary, but in my experience they take about 15 to 30 percent of the band's income before tax (in this example, 1.03 per CD). In my case it used to be 17.5 percent of what I received, excluding VAT.

"Be aware that if you are not VAT registered, you will be paying 60p plus VAT (70p) per copy for manufacturing, £200 plus VAT (£235) for glass mastering, and £1000 plus VAT (£1175) for your adverts and flyers. But you will still only be receiving £5.09 from the distributor. What's more, if you did want to increase the price to earn more, in order for the label to receive an extra £1, the retail price has to go up by £2.80!"

If you'd like to see how that breakdown works on paper, here's how the calculations can be done:

Retail Price£12.99
17.5% VAT paid to government by shop£1.93 (£12.99/1.175 = £11.06)
Net to shop:£11.06
Shop marks up 50 percent of official Published Price to Dealer (PPD)£11.06/1.50 = £7.37
PPD£7.37
Shop gets eight percent discount£7.37/1.08 = £6.78
Net to distributor£6.78
Distributor takes 25 percent£6.78 x 0.75 = £5.09
Net to label:£5.09
(Label pays 17.5 percent VAT to government if it is VAT registered)
8.5 percent of £7.37 PPD to MCPS£7.37 x 0.085 = £0.63
(20 to 30 percent of £0.63 taken by publisher)£5.09 - £0.63 = £4.46
Manufacturing cost of £0.60£4.46 - £0.60 = £3.86
Promotion cost of £1.00£3.86 - £1 = £2.86

So the label gets £2.86, less any artist's royalty at 14 percent of PPD (£7.37x0.14 = £1.03), and less mastering, artwork, and wages for freelancers.

Home And Away

As a small label, you might not need international distribution if you are happy to deal with foreign orders by posting them one by one, but if overseas sales grow to the point when posting Jiffy bags to far-off places is no longer viable, it becomes necessary to hire some outside help. One option is to sub-license your recordings to a foreign label, so that they can take care of the sales and royalty collection in that country, but there is also the possibility of hiring a trader to export and distribute your home-produced records abroad. David Gedge tells how he gets Scopitones releases out to the world.

"I've been exporting finished product, because it is more cost-effective and you get more per CD than you would from the percentage that a licensee would pay you. In Spain I have a separate deal with a company called Disc Media who export so many thousand Cinerama CDs and do a bit of their own marketing and promotion as part of the deal. However, it can get complicated if you have a deal for every country in Europe, so I also use a company called VoicePrint who do an overall deal for Europe and take care of all the export tax and shipping for a small commission. In North America I have a licensing deal with Manifesto Records, because exporting finished product to the USA is expensive and there are tax problems. They also licensed a few Wedding Present records from RCA, so it's an ongoing relationship. Manifesto do the equivalent of Scopitones here, so we hand them the artwork and the finished audio file for an album, and they press over there. I know the Manifesto staff really well, so we can co-ordinate release dates and touring schedules. The songs are also published in North America, because otherwise I wouldn't be able to keep track of all the royalty agencies over there."

Next month, in Part 6, we'll finish off the subject of distribution by focusing on some of the smaller niche distributors, to find out how they can be of use to you.

Published January 2003