You are a musician and you want to sell your music on digital retail sites. You are deciding between two digital distributors to deliver your new album to retailers. The two distributors, Distributor A and Distributor B, have different payment terms and fees.
- Distributor A charges a one-time album set-up fee of $20, plus an annual “maintenance” fee of $20, and takes no percentage of your sales (Distributor A passes 100% of the sales revenue it collects on to the artist).
- Distributor B does not charge any set-up or annual maintenance fees, and takes a 10% cut of your sales revenue (you the artist keep 90%).
Assume both distributors will deliver your content to the same stores and offer identical service except for the payment terms. Which distributor do you choose?
Do the math!
The answer, as you may have guessed, depends on how many albums (or single tracks) you think you can sell. If you passed junior high algebra, you’ll find the math here quite straightforward:
Let’s suppose the average revenue per album sold that your distributor collects is $7 (this is what iTunes would pay out on a $10 album, after Apple takes their 30% cut). X is the number of albums sold.
Artist earnings from Distributor A in Year 1 = $7 * X - $20 set-up fee - $20 annual fee
Artist earnings from Distributor B in Year 1 = $7 * 90% * X = $6.3 * X
Now we can find the number of albums you’d have to sell in Year 1 to earn the same amount from Distributor A and B:
7 * X - 40 = 6.3 * X
0.7 * X = 40
X = 57
And there you have it. If you sell more than 57 albums in your first year, you’ll earn more money with Distributor A. If you sell fewer than 57 albums, you’re better off with Distributor B. Using the same calculation, you will see that for every subsequent year after Year 1, you need to sell more than 29 albums per year to earn more with Distributor A.
Beware of “small” percentages
In many business situations, a commission-based model between a client and service provider makes perfect sense. There’s nothing inherently unfair about a distributor taking a percentage of an artist’s sales for their services. However, it’s important to understand how commissions impact an artist’s earnings over time, especially if there is a flat-fee alternative for essentially the same service.
Returning to our example, let’s look at what it would cost you to distribute an album for 2 years using Distributor A and Distributor B.
Under Distributor A, the cost is $60 ($20 set up + 2 * $20 annual fee) regardless of how many units you sell.
Under Distributor B, the “cost” is 10% of your sales, which in our example is $0.70 per unit. The table below shows some examples of what Distributor B’s fee would be depending on your sales numbers over a 2 year period:
|Albums Sold||Distributor B’s Fee|
As you can see, 10% of revenue adds up quickly. Distributor B’s model becomes significantly more expensive than Distributor A’s $60 flat rate, even for a relatively modest level of album sales.
Again, there’s nothing wrong per se with a distributor taking a percentage of revenue. But when a distributor says “We only make money when you make money!”, remember that they also take more money as you make money.
Choosing the right distributor for you
There are other factors besides payment terms that you need to consider when choosing a distributor. Which stores they deliver to, how frequently they pay royalties to artists, data reporting/analytics, reputation, reliability, and promotional services are all important factors to think about.
Ultimately, you should be able to answer the following questions before selecting a distributor:
1. How much will it cost me (in upfront payment and/or % of revenues) to work with this distributor, based on the number of albums I think I can sell?
2. Is this distributor more expensive than the next best alternative?
a) If so, how much more expensive?
b) Do they offer enough extra services/value over the next best alternative to justify the higher expense?
You can use this spreadsheet to compare how different assumptions about revenue per sale, album sales, and distributor terms impact artist payout: