I'm familiar with the argument. Courtney Love did a similar article called Courtney Love Does the Math.

http://www.salon.com/2000/06/14/love_7/

The argument is wrong.

I'm generalizing, but more or less here is the issue with record companies. Only a small number of albums released come close to making a profit. The vast majority of albums generate very little revenue, and don't even come close to covering the costs of producing the record.

So the business model of the record company is to fund a bunch of albums in the hope that one of them becomes a hit, and generates enough revenue to cover the production and marketing costs of all the others too. Whatever is left after that is the profit.

The contracts are structured to reflect this reality. i.e. very low royalty rates, like maybe 10% of the gross sale price per album. From this small royalty, it doesn't even kick in until the entire costs of the production and marketing have been "recouped" from this royalty!

The artist has an "account" at the label to keep track of how much they have recouped to date. Usually the costs hold over from project to project as well, so the artist can get deeper and deeper in the hole if they release a series of poor selling records. An artist can wind up a situation where they have a massive hit, but receive no royalties on sales as they haven't recouped earlier releases

As an example, let's look at a hypothetical album release. (This model doesn't apply as much anymore as the role of the album is much smaller in music sales, but the principle is the same).

let's say the cost of production and marketing the album is one million dollars, and the artist royalty rate is 50 cents per unit on a wholesale price of $5 per unit.

That means the artist won't see a penny of royalties on record sales until they sell two million units. After that they get their 50 cents per unit. The record label "advances" the funds to make the record to the artist.

While it does look like at first glance like such an agreement is horribly unfair, and can only be explained as exploitive, this is really the only viable business model possible if you want to have a business producing and releasing music.

Why would an artists sign such a contract, with so little hope of making money. The main reason is that if the record fails to recoup, once the contract is over they are not personally responsible for the debt. The record company pools the projects under a business umbrella, which allows the individual artists to pool the risk.

Here's another way to look at it. If you are an artist under a recording contract, you are guaranteed access to the capital you need to make an actual business of being a professional artist under a much less risky structure.

Only a few number of serious musical artist who might be able to fund the project through sources where profit is only possible if the project is commercially successful. If you had to, say take out a personal loan for $500,000 to make and market a record, given that the odds of success are incredibly low, that would be pretty much insanely risky.

The reality is that most musical artist never come close to creating a viable, marketable product, as the talent and capital required are too scarce. Even the few that manage to make a really good product independently do not have access to the capital and organizational resources to market it properly.

Another factor at play, is that there are other ways of making money as an artists outside of record royalties. Having a "record deal" gives you much greater access to those opportunities. For example, there what's called writer's royalties which are connected to the copyright on the composition, not the recording. These are not subject to the same agreement, and are paid on every sales. There are also opportunities for performances, personal appearances, endorsements, merchandise sales, sales of back catalog, etc...

At a minimum, while you are under contract, if your advance is large enough, you can also at least cover living expenses.

From the point of view of a record company, here is how the vast majority of their deals look: They put up a significant chunk of cash, and they take a virtual total loss on their investment.

There are cases where artists can successfully sell records independently. Often, this will be an artist who has had significant commercial success in the past, and who has access to other sources of capital (personal or otherwise). In such a case, if everything goes well, they can make a profit at a much lower number of sales, as their business will get the entire wholesale price of the product as revenue.