Audiotalk-business

The Studio Business
What does the client want?
Economic Reality
Real Life Business Models
Additional Income
How to save money
Your Market Survey
The Digital Time Bomb
Advertising and Sales
Marketing means to listen!
The Future Studio
Record industry crisis
Band Legal Status
Myths of the Industry

           Economic reality          

Cl;ick here to go to the introduction!

Click here to find out about the studio building!

Click here to go to the studio business chapter!

Click here to go to the chapter on studio types!

Click here to go to the chapter on people!

Click here to go to the index!

Click here to find out about types of equipment!

Click here to go to the project chapter!

Click here to go to all the links and downloads!

Are you really a commercial facility?

 
Some time back, an old friend  who had made good in icecream or cheese or something like that, called me.  He told me that he wanted to build his own home studio and was looking for advice on the usual questions of acoustic treatments, what gear to buy, where to buy it and that sort of thing.
 
"I’m converting the outbuildings behind the main house." he told me.  "It’s not going to be anything very professional." he assured me.  "Just be a cool place where I can jam with a few friends and try out musical ideas and record them."
 
I asked the obvious question.  "What’s the budget?"
 
"About 250,000."  he said and then asked cautiously "D’you think I’ll be able to get anything decent for that kind of money?"
 
I assured him that he will get a very nice studio indeed and have something left over to add to his vintage keyboard collection.
 
Shortly before my friend called, I visited one of the leading sound design studios in Mainland Europe.  Given their long list of prestige customers, I expected to find some pretty fancy kit.  They said they were all-digital, so I was hoping for an Icon at least, maybe even something better.
 
It turned out, they just had ordinary offices, each with a PC, an M-Box and a few other budget-priced bits and pieces.  Even the monitors and the handful of microphones available were at the cheaper end of the market.
 
So, let’s face it.  Things really have changed dramatically and the words ‘amateur’ and ‘professional’ no longer mean what they used to.  More and more people from within the industry are beginning to ask the question "Is there really any future for the conventional commercial recording studio?"
 
If you ask someone in the business that question, they may scoff at the idea, but the market is changing rapidly and those musicians we spoke to claimed to be spending an increasing proportion of their budgets on recording gear.  Also labels and other key players are just no longer prepared to pay for a band to make a demo and many smaller labels are beginning to look more like a cross between vanity publishing houses and distributors as they expect the artist to meet all costs.  So artists are investing in their own studios and even lending out their facilities to friends.
 
But one person who sells studio equipment for a living told me that he could not think of a single studio that genuinely makes a profit.  "If you mean by commercial, making a genuine profit and being able to pay its way like any other business, I cannot think of a single one.  The commercial recording studio isn’t dying, it’s dead and has been for some time!"
 
In my role as business adviser, I am sometimes asked to look at the profitability of recording studios and all too often, even the most rudimentary analysis of the business shows that, if the word ‘commercial’ is to mean an activity in pursuit of profit, then most recording studios fall short of that definition.  In order to explain, I have to indulge in a little very basic economic theory.
 
Opportunity Cost
 
I want to introduce you to the economic concept of Opportunity Cost and if that phrase is a stranger to you, let me explain.  Opportunity Cost means to express the cost of an item in terms of what you could have obtained for the same amount.  So if bread costs twice as much as milk, the opportunity cost of a loaf of bread could be expressed as two pints of milk.
 
The same applies to investments.  If you have one possible business investment, then the opportunity cost of that investment is the lost revenue of the most profitable alternative.  If the opportunity cost (i.e. lost revenue of the best alternative) is lower than the revenue obtained from the actual investment, then you have made a good investment.  But if the opportunity cost is higher, then you have made a bad investment. 
 
The quality of that investment can be measured by comparing the actual investment to the best alternative and quantifying that comparison as a ratio.  So if you open a bun shop, but you could also have open a cheese shop and the bun shop earns twice as much as you could have earned with a cheese shop, you have made a good investment by a factor of 2:1.
 
Elsewhere in this chapter, we look at real life business models.   One was a demo studio that looked like a real basket case.  The other was a residential studio and small hotel, started with just 250,000, that after ten years was worth nearly one million. Let’s look at them again, but this time look at them in terms of opportunity cost -
 
1. The residential studio in the countryside began as a slightly run-down eight-room hotel and licensed restaurant with outbuildings, a 100% mortgage and 250,000 start capital.  The whole business had a net worth of over 900,000 after ten years and its two owners a combined income of about 50,000 p.a. gross.  It was a husband and wife team with the husband running the studio and the wife in charge of the hotel and pub.  At first sight, that studio seems to have been making a profit and complementing the hotel and pub side of the enterprise.  Analysing the business in terms of opportunity cost showed that not only was it not making a profit, but it was holding back the future development of the far more profitable hotel considerably.  
 
More about them later!
 
2. The demo studio was originally intended for a rented room in a rehearsal complex. Fortunately for the owner, this studio was never built.  A simple calculation showed that after three years trading, the demo studio owner would have made a total loss of 1,000 if he had been foolish enough to go ahead with his scheme.  His total earnings after ten years would have been at best just 30,000.  
 
In the end, he was able to get planning permission to build a chalet at the bottom of his garden which he turned into a studio and he now regards recording music as a hobby that turns a small profit.  
 
But the dream of a full-time demo room earning enough to provide its owner with a living crumbled in the cold light of economic reality.  The chalet was a rather nice wooden building that enhanced the value of his house.  It cost him just 7,000 to build and a further 5,000 to equip his hobby studio with used equipment and a semi-pro DAW.  If we were to look at his hobby as a business and remember that in that ten year period, he will earn at least 200,000 as an electrician, then he made the right decision by a factor of about 7:1.
 
Or as Donald Trump said, "Sometimes your best investments are the ones you don’t make!"
 
Now, let’s have deeper look at that residential studio and see why I can say that the studio was bad for business.  The balance sheet at first glance looks rosy enough, but on closer examination, most of the income came from the hotel and restaurant and most of the increase in equity of the two businesses as a whole came from the increase in the value of the property and the hotel building in particular.  The cost of renovating the hotel came to just 25,000 and was earning almost that amount within one year.  
 
The total cost of the studio equipment and conversion came to 200,000 and over ten years, interest payments on that sum came to 55,000.  The total operational profit (turnover minus running costs, but not counting the labour of the owner-operator) in that ten year period came to 180,000 and after ten years, goodwill and equipment was worth 100,000.
 
Stated simply, on the plus side, the studio had generated 180,000 worth of operational profit and was worth roughly 100,000 after that ten years.  On the minus side, it had cost 200,000 and a further 55,000 in interest payments.  So our owner-operator had earned 25,000 in ten years, or 2,500 a year.
 
But there was far worse to come.  Not only had the husband been working for next to nothing, but the studio had actually damaged the hotel by preventing its growth.  The alternative to converting the outbuildings to a studio was to convert them to six self-catering holiday units.  The conversion costs would have come to about 50,000 and there would have been a further 14,000 in interest payments.  At an occupancy rate of 40%, they would have generated a total of 300,000 operational profit over the ten year period.
 
The opportunity cost of investing in a studio was the 236,000 that the outbuildings would have earned as a series of holiday lets.  The owner had made a poor decision by a factor of almost ten-to-one!  The scale of the mistake was disguised and hidden by the rise in property values.
 
Conclusions
 
The two studios we have looked at are more similar than their owners might have imagined; both ended up not making a profit.  The difference was firstly scale and secondly, the fact that the owner of the demo studio at the bottom of the garden knew that he was just indulging himself in a hobby.  
 
The owner of the residential studio honestly believed that he was running a profitable, commercial venture.  But when presented with the facts he said,  "But over the years I have worked with rock stars, famous composers, musicians and all kinds of fantastic people.  You can’t put a price on that!"
 
And the owner of the demo studio told me  "Over the past few weekends, I’ve been recording my eldest son’s rock band.  I spent all day with him and with his mates and we all got to know one another in a whole new way.  You can’t put a price on that!"
 
I hope that you can forgive me for turning the cold light of business economics onto the cosy world of recording music, but if a business is to survive, the owners must know where they stand and see things as they really are.  Perhaps you are not really running a commercial studio after all. 
 
Or as Scottish poet Robert Burns wrote "Oh, wud some power the gifti gee us, to see oursels as others see us!"
 
 

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The Byre Recording Studio