Hey, I have knowledge here (Worked for a small label with 3 employees which signed Belle & Sebastian and Snow Patrol. Also worked with Elastica and Pulp back in the day).

15 cents on a dollar... not a bad cut to be honest.

So where does the money go? Well the majority goes to retail and distribution. The label is not earning 75%.

In the UK a CD album used to cost 30p to produce including artwork and case. To get that price we'd have to make 20,000+ copies.

We had a dealer price of approx' £4 per album. This is the amount an album is sold for by a record label and includes the cuts for: the band, the distribution, the MCPS (mechnical copyright), the label and production.

At this point the £4 is split something like this:
30p = Production of CD
40p = Copyright (goes to the artist via the MCPS who take a cut for the collection of the royalty)
£1.20 = Distribution (covers sales into shops, temporary storage and physical distribution to shops)
£2.10 = Artist and label cut.

The £2.10 first has deductions... PR, marketing, etc... take off 60p per album.

So we're at £1.50 per album. At Jeepster Recordings we split 50/50 with our artists on domestic sales and 75/25 (in the artist favour) on overseas sales (which were mostly contractual as licensees did the work in that region), so they got 75p per album, and we got 75p per album in the UK, and they got £1.12 per album overseas and we got 38p per album.

Now that's all based on a £4 dealer price, yet the album would retail for anything from £9.99 (indie shops) through to £16.49 (at HMV). So retail were taking the lions share of the cost of the album, and only a very small slice actually made it to the label.

Interestingly, a 50/50 split is too small a cut for the label to work.

We learned this the hard way as we were not viable based on that contract even with successful bands. The high production quantities resulted in warehousing costs, and the nature of a small business having overheads for an office and wages puts a strain on the money we did make, then you include the cost burden of artists that don't make it and we were unable to make a profit even though we made no substantial losses. Cash flow eventually killed us... I think 60/40 in the label favour (for all sales globally) is actually the minimum viability of a label.

The question asked was: What have the labels done to deserve even a 60/40 cut of the revenue.

The answer is that the label is a bank playing a high-risk game. They are no different from venture capital firms in the tech world. The band have the talent and vision, but need from the label investment in equipment (instruments, and studio time) and time (the ability to only work part-time so that they can work on the music and recording it). So the label have to act as a bank, and considering the rate of failure of bands (consider them small businesses) they need to make enough of the successes to cover their losses from their failures.

The labels also perform a secondary role. Just like YCombinator has a network of press people at the ready, and an alumni of entrepreneurs... so a label has a network of contacts and friends who a band gains access to. A band can get a high profile producer or access to post-production mastering that makes the difference between make or break. This is invaluable to the artist, it's a hard enough business without access to these networks and a good label should have a good network of contacts and friends to help the artist out, to keep them focused and to help give them a leg up when the time comes.

And finally the label plays a more critical day-to-day function: Paying rent for the artists, covering studio costs, etc. This stuff can be extremely costsly, one album for Belle & Sebastian cost more than £150k to record and £30k for post-production and this was whilst they were still relatively small. It's all betting on future success. Importantly for the artist, not only will a label lend the artist this money (unlike an actual bank) but the label will write it off if the band is never successful (very unlike an actual bank).

So the label does perform an invaluable role in general, and one that like the VC world can make the difference between the artist owning the whole of a pea, or the slice of a melon.

Not all labels perform these roles well, I'm extremely critical of the larger labels who abuse their position and don't help, support and nurture their artists and most importantly under-fund them and still expect a huge slice (more like 85% to the label and 15% to the artist). The smaller independent labels, however, are populated by the Paul Grahams of their industry and perform a really vital role in bringing bands through and making them viable.

The music, unfortunately, isn't enough by itself... just like building a great product isn't... you need support to do it, and you need marketing to tell the world about it.

Going back to digital now, how does that traditional cutting of the pie work in the download world? Well, the biggest costs are removed: Retail and distribution. Sure iTunes and Amazon are still getting a very large slice of the pie, but more notably even with reduced prices compared to physical medium the percentage of overall revenue for label and artist has increased.

So you have a situation where there is actually a higher percentage of revenue going to the artist and label, and the lack of physical production reduce some of the overheads and risk involved (such as no long-term warehousing of CDs in an attempt to get lower production costs). This has meant that a lot of the smaller labels (just like the angels, super angels and small funds) are booming. Those small labels are booming as lower costs and the lack of minimum production runs, mean that they are able to sign and support a greater number of artists who can all be just about viable.

Weirdly, the music scene looks pretty good today from that perspective. Assuming you aren't talking about large labels who haven't yet figured out all of this and still have an incredibly heavy structure to them.

This is all before you factor in the publishing rights (extremely lucrative) and revenue from performance and merchandise (that really does go to the artist more directly than anything). Artists nowadays are in a very good position, being able to benefit from having their thumbs in all of these pies at once (traditionally... in the 60s... the major label would own all of this).

For the smaller labels and artists... it really has never been so good. Only the big guys haven't yet worked out how to fully adapt to this landscape (they're still mourning the death of their 40yr cash cow).

tl:dr

The biggest cut is taken by retail and distribution. Of what remains think of the startup world: the indie labels are your YCombinator and angels, the major labels are the large venture capitalists and investment banks... you can make it without that stuff, but just like the support given to a YCombinator in the form of nurturing, contacts and cash, similar is true of the label and what it can do for the artist. Finally think of banks, the labels act as a bank as well as other stuff and not only are they willing to lend to a high risk venture, they can write it off if you fail without you having to declare bankruptcy.