Kirk’s recent post on AllofMP3.com lead to a few interesting comments. Okay, one interesting comment — one of our readers took Kirk to task for not discussing royalties and the payment thereof. Poor guy, he had no idea that this is one of my favorite topics. Calculating royalties from the perspective of a major entertainment company comprised a large portion of my professional career.
Or, that is to say, they never let me anywhere near math. My role in the whole game was far more sordid.
And instructive. Let us all begin with a basic fact of life: he who writes the contract wins. This generally means that in the entertainment industry, artists (especially, sigh, writers) get the short end of the payment stick. Sticking to music, for every unit (disk, download, whatever) sold, the artist receives a percentage of the list price. This is an old-fashioned concept, but, hey, there are a whole lot of contracts out there that must abide by this method of calculation. By way of example (and this is admittedly oversimplifying the concept and probably overstating the royalty rate):
List Price = $13.99
Royalty Rate = 6%
Payment to Artist = about 84 cents
Naturally, my example doesn’t take into account things like reserves for returns or other contractually permissible deductions, like, oh, the cost of making the record. One must recall that the music company isn’t receiving $13.99 either. List price is suggested retail price. What the labels earn might be half, might be three-quarters, might be almost nothing, depending on a wide range of factors that we don’t need to consider.
But let’s say it’s half. Let’s say that for every unit sold, the label gets seven dollars (I round; I’m a creative accountant). Using our handy dandy royalty calculation above, we see that the label actually gets $6.16. Except that the label has paid to manufacture the disk. Let’s say that costs two dollars. We’re down to $4.16. Then you have marketing and promotion and production and a slew of other costs. Let’s say that’s about three dollars. You see how this goes. I don’t defend the way artists are paid by entertainment companies, but I do know the reality. Accounting sleight-of-hand aside, real checks are being written for real costs. And that’s before considering the overhead…also known as the people who work for the label, the building, and free coffee.
Without free coffee, the world could not function.
Granted with digital media, a lot of the costs related to creating physical merchandise disappear. Goodbye, jewel boxes. So long, freight. Hasta la vista, returns. Of course, the royalty rate being paid to artists hasn’t changed. Nor has the cost to consumers. The price of digital music, despite the drawbacks to consumers, mirrors that of music you purchase on a CD. That’s a rant for another day.
The payment of royalties is a huge issue because labels generally take a highly aggressive position regarding the payment of royalties; Cheap Trick are not suing their label because they’re bored. They are suing because their label is paying them a lesser royalty than their contract states they are entitled to receive (note: I have not personally seen this contract, so this is based on media reports). Rest assured that the motion picture industry is due for similar lawsuits. You weigh the risks against the benefits, and they have.
I digress. The way the money flows is that the label sells the music to retailers. The retailers pay in a fairly timely manner (she says, laughing), though the label generally reports on sales rather than cash received. On a semi-annual basis, with either 90 or 60 days after December 31 or June 30 to issue statements and payments. Of course, the payments are less generous reserves for returns (liquidated in conjunction with total eclipses of the sun) and bad debt and whatnot. In the business, this is known as the time value of money — the labels hold on to artist money for far too long.
All of the above is also based upon old-fashioned accounting concepts. I wouldn’t be surprised if standard costs for manufacturing and shipping are being calculated on iTunes sales. Truly. I would not be surprised. I’ve seen worse. Much, much worse.
When we talk about fighting the good fight and collecting all the money due to artists for sales of their music, let’s talk about the way artists are paid. Semi-annual statements issued 90 days after the close of the period are verging on unconscionable. Let’s talk seriously about the fact that the system is not designed to make most musicians rich. And, yes, let’s talk about the fact that AllofMP3.com is paying into a collection society, the Russian Organization For Multimedia and Digital Systems (ROMS), but the labels refuse to recognize the organization’s legitimacy. And they refuse to accept the money (hopefully now) being held in escrow.
And let’s talk about the fact that there is no international copyright law. The United States is not the only country in the world with copyright laws, and until the entire world comes together to agree upon standards, we must accept that what happens elsewhere may not be something we like, but may very well be legal.
Piracy is a very real problem. Back in the day, I collected articles about piracy raids and collections and issues. I have emotional problems, but they illustrated the costs of piracy to the media companies and artists. You don’t get paid for pirated merchandise. But when a company is selling your product, and offering to pay, it sometimes behooves the industry to come off of its high horse and begin earnest negotiations. Maybe the prices are too low. Maybe there’s room for discussion. Maybe the DRM is too lenient, but maybe that’s why consumers are bypassing more restrictive protocols…and maybe there’s a lesson to be learned.
Artists get paid by the labels, and as I was researching this post, I encountered one site that complained about never hearing about musicians receiving payment for their work from AllofMP3.com — gee, who’s the roadblock there? All things considered, maybe a mechanism needs to be created to allow artists whose work is being sold on the site to collect their share of royalties directly. Then, if the labels want to object on moral grounds, it’s only their money at stake.