I spent several years in the record business, and this scenario is so true. You left out one additional cost: "packaging." The labels actually charge back a marked-up cost for the label design, printing, packaging, etc. against the band's royalties!
You correctly pointed out that the label holds the copyright to the performance. When an act ends up "in arrears" on royalties, the label, in effect, repossesses the masters and can use them without further payment to the artists. I worked for a compilation label that would buy these masters from the record labels...we could then release them without any payment to the artist except songwriting royalties.
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