RE: Comments please

From: Jeffrey Kay (jkay@ENGENIA.COM)
Date: Fri Mar 09 2001 - 15:07:16 PST

Tony --

Great find --

> Table 14: Breakdown of Average CD Sales Dollar
> - Major Labels, 1993

If I'm reading these numbers correctly, then the retail markup is 30%. The
rest of the numbers are actually fairly telling. The Label costs are
actually where you can see what I'm talking about. Using the Canadian Major
column (most appropriate for this exercise), royalties paid total $2.60,
including those to the artist, the publisher, and the author/composer. If
you drop off the $2 manufacturing cost and most of the $0.55 for obsolete
inventory, you essentially are left with costs of $5.60. This doesn't
include the cost of the studio for recording and mastering, which the report
seems to indicate costs around $220k. Usually this amount is deducted from
the artist's royalty (as Table 15 indicates) and therefore isn't part of the
label's costs. This is actually very similar to how the software industry
treats R&D costs for software development. The only question in my mind is
whether the cost of marketing stays at $3. I'm guessing that this is really
probably less without the retail requirements. Promotion probably becomes
highly digital and the costs drop there also. I'm generous, though, and
I'll suggest that cost savings in marketing will convert into a record
label's profit, the record label essentially taking on the role of promoter.

That means that the $5.60, about 33% of the $16 of a CD cost, should be the
going rate for a downloaded audio CD, or about $0.35 per song assuming 16
songs per CD. That number still seems high to me; I'd bet there's more to
squeeze out of there than that.

What do you think?

jeffrey kay <>
chief technology officer, engenia software, inc.
"first get your facts, then you can distort them at your leisure" -- mark
"golf is an endless series of tragedies obscured by the occasional miracle"
-- sports illustrated
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