Haha yeah that's technically true, because if that scenario actually happens that artist/band is effectively ruined, blacklisted, radioactive, whatever. Practically speaking though, are you aware of the "Sophmore Slump" concept at all? It's well known that after the first big success the record company wants MORE SUCCESS and that rarely happens. There are outliers like Adele, but far more often things go the way of Sisqo and "Return of Dragon" which famously had a $1 million video budget, banking on the success of "Thong Song." Guess what: Didn't recoup for the label.
"Didn't recoup" doesn't necessarily mean the label didn't get its money back.
More commonly it means that artist royalties - which are a small proportion of label income - don't exceed the initial advance.
Book publishing works the same way. Labels/publishers can be comfortably in profit on a project, but the system is set up to make sure that artists don't get a share of that profit.
Now - labels played all kinds of games to make sure they paid artists as little as possible, up to and including outright lies about the sales and income. (Some writers have discovered that publishers sometimes still try this.)
Even so, most traditional label deals were far more generous to artists than today's streaming deals. Labels also spent significant money on PR, publicity, and payola, which Spotify and YouTube obviously don't.
Even fairly minor bands could live comfortably for a few years from radio play and royalties from a single mid-list album. Top sellers could afford castles, private jets, and custom-built recording studios.
This was partly a feature of scarcity, when there were far fewer artists selling music to a public that was more interested in music.
But it was also a direct result of more generous accounting/royalty options, and the fact that once artists crossed a certain threshold they had enough spare capital to start developing alternative stand-alone businesses.
