This article on who derives profits from album sales is worth reading:

And that explains why huge megastars like Lyle Lovett have pointed out that he sold 4.6 million records and never made a dime from album sales. It’s why the band 30 Seconds to Mars went platinum and sold 2 million records and never made a dime from album sales. You hear these stories quite often. …

So, back to our original example of the average musician only earning $23.40 for every $1,000 sold. That money has to go back towards “recouping” the advance, even though the label is still straight up cashing 63% of every sale, which does not go towards making up the advance. The math here gets ridiculous pretty quickly when you start to think about it. These record label deals are basically out and out scams. In a traditional loan, you invest the money and pay back out of your proceeds. But a record label deal is nothing like that at all. They make you a “loan” and then take the first 63% of any dollar you make, get to automatically increase the size of the “loan” by simply adding in all sorts of crazy expenses (did the exec bring in pizza at the recording session? that gets added on), and then tries to get the loan repaid out of what meager pittance they’ve left for you.

Oh, and after all of that, the record label still owns the copyrights. That’s one of the most lopsided business deals ever.

So think of that the next time the RIAA or some major record label exec (or politician) suggests that protecting the record labels is somehow in the musicians’ best interests. And then, take a look at the models that some musicians have adopted by going around the major label system. They may not gross as much without the major record label marketing push behind them, but they’re netting a whole lot more, and as any business person will tell you (except if that business person is a major label A&R guy trying to sign you to a deal), the net amount is all that matters.

The graph accompanying the article sums it up pretty well.

I would just like to point out that the lawyerly fees seem quite respectable in comparison to the other charges incurred.

The music industry is the best example of why copyright laws today are unsustainable, draconian, and by far the biggest hindrance to innovation in the creative industries.

The primary — only? — contribution made by record labels is to promote and advertise music groups. In a prior age, this may have been defensible — there just were not any other available channels, no method by which a new entry into the market could gain enough exposure to make a respectable profit.

But in the internet age, it’s hard to see what record labels actually contribute to the economy, what value it is they are possibly adding to the product. We no longer need a company to decide what the Next Big Thing is, and then promote it to us. We can browse and sample all the music we want, listening to a few seconds here and there until something grabs our fancy. Or until our peers decide something is Cool and we start listening because they are. But where is the value added by the RIAA’s members? What benefit do they actually confer on the consumer? “They tell consumers what is worth listening to” is no longer a valid explanation; bands can publish their songs online, and we can decide for ourselves what is worth listening to.

In the modern music economy, the direct creators of pop music do not make a significant return from album sales. As a result, removing even a large chunk of the profit from the third-party purchase of CD or MP3 would not significantly disincentive the creation of music. Besides, we already know that musicians can make a decent return based on concert sales alone — because that’s essentially what almost all musicians today already do.

Record labels are a dead weight loss, and they have undesirable cultural implications to boot. Their business model is dead, because we no longer need a large, centrally organized entity in order for a market for pop music to exist. Thanks to their influence over Congress, however, they continue to distort the market, and make a profit based far more on legislation skewed in their favor than upon actual supply and demand for their product.

-Susan