How To Start A Record Label

If you’ve been thinking about quitting your day job and getting into the music business, you’ve picked an interesting time to do it, and I do mean that in the "ancient curse” sense. As fallout from new distribution models continue to baffle the music industry, the role of the record label is being hotly debated by musicians and industry pundits alike. The issue is, who needs a record label to not sell records, when they could be not selling records all by themselves?
But don’t let’s be cynical: bands can’t do everything by themselves. The band’s job is, first and foremost, to be a great band live and in the studio. That leaves plenty of jobs for record labels to do on behalf of the bands they represent. These include financing, manufacturing and distribution, marketing, promotion, and publicity, artist development, and so on. Which, come to think of it, are pretty much all the things labels have always done. So, if you’re going to start a label, those are the jobs you need to know how to do.

Financing, Manufacturing and Distribution
The basic things you look for in a record label are cash to pay for a project, and the means to get it into shops. At the indie level, record labels can provide cash advances for recording, mastering, artwork and other expenses related to creating the masters for an album. Labels are also expected to pay for manufacturing and packaging costs, and to find a distributor to get the record into stores. Better-off labels will sometimes pay for rehearsal time, space rentals, van rentals, and sometimes even grocery and phone bill type expenses. Generally speaking, these costs should be considered recoupable, meaning they should be paid back to the label out of revenues before anyone else gets a share.
If you are going to be a label that offers cash advances to your artists, it is of the utmost importance to be clear as to how much you can offer, and how you’re going to get paid back. You’re essentially loaning the money, like a bank, except at a much higher risk than any bank would tolerate, because the only way money comes back is from sales of the record. For that reason, advances are usually100 percent recoupable; in plain English, if you give the band $1000 to record, then the first $1000 of sales revenue should go toward paying that back. You’re also at risk for the money you pay toward manufacturing, and you should take care to get that paid back first as well.
After that, you need to agree with the band as to how future revenues get split up. There are two common means of doing this. The most typical is to offer the artist 50 percent of "net revenues” — meaning that you as the record label get to deduct advances, manufacturing and other costs and expenses first, and whatever’s left gets split between you and the artist. Labels like to use this formula because it gives them the widest margin of recoupment and staves off having to report to the artist. That may sound dodgy and in some cases it is, but the truth is that most records take forever to recoup, if they ever do. Another strategy is to offer the artist a flat sum or percentage per record sold after recoupment of the initial advances and whatever other amounts are agreed on. You should only do this if you know how much the cost of doing business really is, taking into account distribution fees, shipping, marketing costs and so on.
Realistically, in the early days (i.e., the first five years) of your label’s life, cash flow is going to be really tight and no one is going to make any money. If you are only manufacturing small quantities and selling them off the stage, then clearly you’ll make your costs back fairly quickly. But once you’re into retail distribution, the gap between paying out and bringing in gets very long indeed. Record stores will want a bare minimum of 30 days, and often terms of 60 days or more to account for your sales. They’ll also require a "holdback” of 20 percent or more — meaning they will not render account on that percentage of stock in case they have to return it. Very typically, you may sell ten copies the day after the record comes out, but you won’t get a check for a couple of months.
Before you launch any projects, research the costs thoroughly and then add 50 percent. You need to be very realistic about how much money you can afford to float, and given the sketchy nature of the music business, always be prepared to wave bye-bye to your cash altogether.

Marketing, promotion and publicity
This part of a label’s job is probably the most difficult. You can’t sell a record, or develop an artist, by just throwing money around. Marketing is about selling records by building an audience for your artist, so to be successful, you should be using marketing to build a meaningful connection to your artist.
A full-page ad in your local arts magazine may be splashy, but unless your artist already has an audience, most people are going to ignore the ad altogether. For that reason, with new artists you’re best off spending less money, and putting what money you do spend on promotion and marketing into anything that will get the word out in your scene. Touring, touring, and more touring is still the best way to build an audience. Build your marketing campaign around the tour: book in-stores and local radio shows whenever possible. The point is, the audience must come first; sales will follow.
As the label, you’ll often be the first point of contact for media. Media coverage is an important part of audience-building. A surprising number of artists are terrible about the whole media thing: they give crappy interviews, or don’t show up, or can’t be bothered to get decent photos done. The point is, as a label, you’ve got to manage the situation. It’s in your best interest to have a band that gets along with the media.

Artist development
Unless you’ve got a magic ear for the one-hit wonder, or you can afford to lose money hand over fist, your most important task as a label is developing the artist’s career. You don’t just want to chuck a grand at some kid: you want to be backstage when that kid wins a Grammy for her second album, and front-row-centre when she’s inducted into the Hall of Fame. Evan Newman, founder of the Baudelaire Label, says, "You need to have a good sense of humility and patience. You probably think you have the best bands in the world, and it’s tempting to compare them to some other band that’s selling really well. But what you don’t see is that it takes a lot to get to that point.”
Because many of their bands are either unmanaged or unmanageable, most junior labels end up doing a lot of things that managers do. Undertake this job only if you have a tolerance for being whined at, yelled at, and Blackberried 673 times a day.
For all these reasons, starting a label just to put out your friend’s, or your brother’s, or your friend’s brother’s band, is probably not going to work. Most baby labels do everything for their artists in a sacrifice of time, money and energy that you should undertake only if you’re dead serious about making a go of it. If reading this article hasn’t put you off, I recommend you go intern for a while with an existing label to learn the ropes, including keeping the lights on while rarely getting paid.