So Why Can't Major Record Labels Provide Accurate Accounting To Bands?

from the because-that-would-mean-paying-them-accurately dept

The more you learn about the way major record labels work, the more ridiculous it seems. Unlike pretty much every other creative deal making situation, musicians who sign major record label contracts basically hand over all their rights to the label. The label gets the copyright. It gets to determine the type of music the musician plays. It handles much of the marketing and promotion. And… the biggest thing of all is that it handles all the accounting and payments (if there are any). Over the years, that’s resulted in many, many accusations from artists that the labels are flat out lying about how much an artist actually earns. That’s why you hear stories of artists selling millions of albums and never seeing a dime in royalties or of artists suing record labels because of sneaky accounting tricks to hide how much an album has earned.

Dave Stewart, from the Eurythmics, has written an article for Billboard where he points out that any retailer in the world has access to amazingly detailed technology and tools to track transactions and settle details with credit card company merchant accounts. He notes how ridiculous it is that such systems have been available for nearly thirty years… and he still can’t get an accurate transparent accounting of what a record label has sold.

In the past, the major labels could get away with this, because they were the only real game in town, if a band really wanted to get big. But that’s changing. This, of course, is the major labels real concern over new innovations and technology. It’s not piracy. It’s that new technologies take away the biggest scam they’ve had going for ages: the ability to keep tons of money that never belonged to them. And that’s changing. As Stewart notes:

In the future, all incoming revenue streams will be reported in real time, with transaction costs pre-defined and competitive with the market. In the old model, content distributors have been slow and/or reluctant to adopt new media. Distributors frequently take significant portions of creative control out of the hands of the artist, placing restrictions on format, functionality, interactivity and other components. Copyright controls inherently limit the models and methods of release and distribution of artist products. Digital distribution and rights management methods have failed to leverage technological and business advancements to serve consumer, artistic and corporate interests. With many distributors, the feedback loop on consumer usage is also limited. Buyer profiles, habits and usage patterns are not shared with artists, who are then forced to use other means (surveys, focus groups) to determine how their content is being received by the fan. Especially troubling is that, in many cases, artists are not entitled to any control over precisely what happens with their creative work, or to apply some of the new and innovative ideas in the digital landscape due to restrictions from rights holders. Digital media technologies for distribution, asset management, security and monetization have matured to the point that an easy-to-use, scalable, fully featured digital media gateway and financial tracking system is now possible and should be demanded by all artists.

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Comments on “So Why Can't Major Record Labels Provide Accurate Accounting To Bands?”

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46 Comments
Auditrix (profile) says:

Re: Er...

Dark Helmet,

You hit the nail on the head when you pointed out that it isn’t in the record companies’ interest to account correctly.

Not only would the record companies have to hire enough competent staff and fix their royalty systems to accomplish this, but they would end up paying much more than they do under the current system, where the burden is on the artist to hire an auditor – and sometimes go to court – to get paid just some of what he is due. When you consider that probably less than 5% of artists ever conduct an audit, it is amazing to think of all of the money the record companies improperly pocket, unchallenged.

There really just isn’t any incentive for the record companies to do the right thing.

Anonymous Coward says:

Considering that the records are sold in literally hundreds of different markets over the world, with the money collected at various levels, moved up, consolidated, moved around, etc, it is probably very close to impossible to say exactly how many sales any single record gets in a week with any certainty – on a worldwide level.

If you check, most of the lawsuits discussed here involve sales in smaller markets, often places that don’t have the same infrastructure as the western countries. Example would be the Sonny and Cher hits album that Cher is suing about (9 years later… hello?). That is a record that isn’t even sold in the major western marketplaces.

Are the record labels playing fast and loose with the numbers? Who can really tell? I am sure that Mike could enlighten us with actually examples, right?

Designerfx (profile) says:

Re: Re:

PUH-LEASE. I’d bet anything you’re with the industry or paid to write for them.

Banks have handled hundreds of millions more transactions more accurately than the RIAA ever has. Sure hasn’t been too hard for them, has it? Then again, they have an incentive for accuracy while the RIAA has every incentive for inaccuracy: they get to keep the difference.

I’m pretty sure a college kid with a finance background could do more accurate accounting handling the RIAA’s transactions than the RIAA in a month. There’s software, established tools, and established businesses to do so.

It’s not hard at all to be accurate with sales.

WisconsinGod says:

Re: @AC

“Considering that the records are sold in literally hundreds of different markets over the world, with the money collected at various levels, moved up, consolidated, moved around, etc, it is probably very close to impossible to say exactly how many sales any single record gets in a week with any certainty – on a worldwide level.”

Most contracts have nothing to do with the actual price the record sells for. Royalties are based on volume. Volume is a universal number, that has nothing to do with the country.

I have a gold record (sold 500,000 albums worldwide). My contract states that I make $1 per album sold, therefore I should get $500,000…. with the RIAA math in there, you have a gold record, and they hand you a check for $100… That is the type of situation that is occuring.

Killer_Tofu (profile) says:

Re: Re:

Hello Coward.
What are you on the internet on?
Don’t think too hard on this one.
It is called a computer.
Here in the 21st century we use them for lots more purposes than surfing the web.
Lots of companies use them to track numbers.
This is part of a process called Accounting.
That way they know how much money they are making and they can track if they are doing a good job or not.

If the RIAA would fire a couple of lawyers and buy a couple computers with the outrageous millions they are making by stealing from the artists they would NO problem at all keeping track of the numbers.
Its really simple.
Even little mom and pop stores do it.

OtherKevin says:

Re: Re:

Considering that the records are sold in literally hundreds of different markets over the world, with the money collected at various levels, moved up, consolidated, moved around, etc, it is probably very close to impossible to say exactly how many sales any single record gets in a week with any certainty – on a worldwide level.

Don’t be ridiculous, it’s easy to tell how many copies of what were sold and when and where. Record Companies deal in finite, physical goods. The only way they can do so efficiently is via supply-chain management. They need to know what the demand for a particular CD is for each market that they serve so that they can provide the appropriate supply. Not only that, but they need to be able to accurately forecast demand so that they don’t run out, and they can’t do that without detailed sales and market data. It really shouldn’t be that difficult at all.

Of course, if they fully embraced the digital distribution model they could not only reduce distribution costs, but they could simplify their supply-chain model because they are distributing infinite digital goods. And they would probably have more up to the minute demographic and sales data as well.

Auditrix (profile) says:

Re: Re:

Hi Anonymous Coward,

You are correct that it is challenging to get affiliates in every country of the world to comply with reporting procedures and this does cause errors in the data that management uses to make decisions and on royalty statements. However, I do think that most of the record companies have reasonably reliable information regarding weekly sales figures.

I don’t agree with you regarding most lawsuits relating to smaller markets. As an auditor who provides expert witness testimony and litigation support, I focus on the big markets because otherwise I will waste my client’s money. Therefore, I know that most (if not all) of the lawsuits are for big money in major territorries.

ThoughtCancer says:

Fiduciary Malfeasance

Electronic accounting systems have been available for a very long time. They’ve been accurate since the early 80’s, and have been wildly successful in every industry they’ve been implemented. We’re supposed to believe that the labels, as big and well stocked with smart people as they are, haven’t had such systems available to them?

When even your local gas station has (and has had) better accounting and retail tracking systems than Warner and Sony, the only way to characterize such behavior is fraudulent, or at the very least criminally incompetent.

In a world where we’ve had ATM’s that can track the most minute transactions, and gas stations pumps that can count down to the last 1/100 of a gallon, we’re expected to believe that the RIAA can’t accurately account for its sales, or that the government can’t get a hold of accurate vote-counting machines?

None of this passes the smell test. It’s outright criminal.

Bettawrekonize says:

“Digital media technologies for distribution, asset management, security and monetization have matured to the point that an easy-to-use, scalable, fully featured digital media gateway and financial tracking system is now possible and should be demanded by all artists. “

I completely agree and have even stated an easy to implement one earlier. We have the technology and it’s being done for other things, so it should be done. Here is the idea I came up with.

http://www.techdirt.com/articles/20090612/0056115206.shtml

Lickity Split says:

If artist don’t get paid until the unit sells at the retail level, they are getting screwed. The label gets it money as soon as they sell it to the wholesaler or retailer. so if the retailer doesn’t sell the record, the label still got paid. I gauran-fuckin-tee you that they can account for every single penny owed to them by their customers.

Anonymous Coward says:

Re: Re:

In the “usual” arrangement everyone but the artists get their money up front, and that was part of why the artists needed someone with real money to get the album made.

Digital distribution and even the CD have changed all that and the established “music industry” is on it’s way out.
Good Riddance!

Auditrix (profile) says:

Re: Wholesale vs. Retail Sales

For physical sales of CDs, the record company recognizes a sale on the wholesale level, when it ships the CDs. However, CDs are returnable, so instead of reporting 100% of shipments to artists, record companies hold back some of the units as a “reserve” against returns and liquidate the reserve over time. (As a royalty auditor, sometimes I claim royalties for unreasonable reserves.)

For digital sales, the record company must receive a statement from the DSP (e.g., iTunes) before it knows how many units to report, so that is on a “retail” level. This is one of the reasons I disagree with the record companies’ contention that digital downloads are sales and not licensing. (If they were sales, the record company would know how many it sold.)

Anonymous Coward says:

So here’s this is inherently unfair. Artists get money out of the profit that their music makes. However, you have to take the marketing and advertising expenses out of this to get the profit. I would have no problem with this since I still believe that marketing and advertising are important in selling music. However, what I suspect happens is that the record company is not just charging them for what it spends, but rather, it treats its marketing and advertising arms as separate companies and charges itself whatever it wants. I don’t know if this is true or not, but I can’t see any other way they could do it without it being outright left.

Auditrix (profile) says:

Re: Marketing Costs

Hi Anonymous Coward:

You are correct to suspect charges by affiliates of a record company. As a royalty auditor, I have made many claims for such improper charges, particularly if the arrangement was not at “arm’s length.”

However, now that WMG is no longer part of Time Warner and UMG is not part of NBC Universal, etc., it turns out that many of the charges against artist royalty accounts are legitimate costs charged by third parties, not affiliates (…although I am always looking for evidence that the third parties give the record companies kickbacks or phony invoices, which does happen but can be hard to prove). The bigger problem with affiliates are the intercompany fees they take off the top of the revenue, not so much the marketing costs.

However, regarding marketing costs charged to artists, a trend that I have noted over the past five years is that recording contracts provide for the deduction of additional types of costs, including wardrobe and third party marketing, not just 50% of independent (radio) promotion charges, which was the standard for decades. If you are negotiating an agreement like this, at least require the artist’s approval, so that your auditor can claim any unapproved charges upon audit.

With respect to your statement that “Artists get money out of the profit that their music makes,” I just wanted to point out that major recording artists receive sizable royalty advances, and many such artists’ records never become profitable for the record company. So, even though I am a strong artist advocate, I still think there are many artists out there who have received more money than they have earned. Bottom line: Most artists who complain about never receiving any money did receive enormous advance payments and are simply unrecouped. Whether the record company is correctly calculating and applying the artist’s earnings to his unrecouped account(s) is a separate issue, but it is only relevant if the artist has the potential to recoup.

stevestephen (profile) says:

few reasons

The only reason for hiding facts and figures (that have been available for years) it to hide theft and skimming.

With the exception of the most popular legends who can demand upfront payment for going on tour…the record companies own artists and contractually demand they go on tour. The freebie they usually offer is revenue from those expensive T-shirts and goods sold, after they pay licensing to the record company.

Unfortunately, there are so few big venues that take non contracted artists (they were part of the game before the big sports venues got built) your only hope to get famous and obtain future financial security was to play the game – it’s about time that the game changed.

It is a form of prostitution: Keep them on a schedule that doesn’t give time to think or reason or know night from day; Provide drugs and alcohol to confuse them even more. Sounds like pimp tactics doesn’t it. Maybe times have changed. I had to get out years ago.

Sammie Houston (profile) says:

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acronym says:

“Buyer profiles, habits and usage patterns are not shared with artists, who are then forced to use other means (surveys, focus groups) to determine how their content is being received by the fan”

how should the distributor be able to provide such data when most of the (digital) retail does not collect it – and i’m not speaking of the big 5.

Hephaestus (profile) says:

I had to come back and comment on this....

The achilles heel/dirty little secret of the record industry, Creative accounting. Dave Steward made that one very good point. That having been said …Big Ole GRIN…

Another couple entries for the business plan…

186 entry/note) A standards body for Open Music Accounting

187 ) An open source accounting system for artists, suppliers, roadies, business managers, mixers, web sites, CD manufacturing shops, Tee Shirt manufacturers, etc to use that links all of the music industry together.

(Notice how record labels are missing from the above list)

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