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The manufacturing of the Cd's and the distribution is quite cheap, however, lots of other cost must be covered by the sale of the CD. The cost of recording eg. studio fees,possibley studio musicians, sound egineers and producers. Then come marketing and promotion costs -- perhaps the most expensive part of the music business today. They include increasingly expensive video clips, public relations, tour support, marketing campaigns, and promotion to get the songs played on the radio. For example, when you hear a song played on the radio -- that didn’t just happen! Labels make investments in artists by paying for both the production and the promotion of the album, and promotion is very expensive. New technology such as the Internet offers new ways for artists to reach music fans, but it still requires that some entity, whether it is a traditional label or another kind of company, market and promote that artist so that fans are aware of new releases.

Less than 10% of CDs are profitable, and these profits ideally must cover the costs of the others.
for alot more information, a reliable source is http://www.riaa.com/news/marketingdata/cost.asp