Creative Accounting: “We lose so much money….”
Here’s an oldie but a goodie.
The music industry loses money on 98% of the albums it releases in a year.
That, by the way does not take into account their favorite whipping boy since 1998, internet file sharing. According to most industry flacks who tout that number, that’s just the standard cost of doing business. Only 2% of their product will ever make a penny. The rest of it is money tossed down the drain.
If you like, you can blame it on the fact that only so much product can be consumed in a given year. You can also blame it on a fickle public that sometimes seems more obsessed with image than with quality. You could even blame it on a concentration on cookie cutter “product” that promotes general ennui from the public, although the record industry would prefer that you didn’t, as would many of the actually very good bands that are counted in the 98%.
But if you had an industry where 98% of your product lost money, would you stick with the same-ol’ same-ol’, or would you try to refine your production process and create a more consistent earner, even if it meant releasing fewer items?
Consider this There are between 4-6 major labels in the United States. Hal Vogel
You would think with numbers like that, at least a couple of the labels would consider ratcheting back the volume of releases and spending more of their budget on each individual product in the hopes of capturing a larger share of the market.
But the story goes that industry executives continue to invest millions of dollars a year without ever making it back. Not out of the goodness of their hearts, but because they don’t know what will become popular this year.
Which begs the question—really? They got to the top of their industry without understanding how it works? And they just can’t expect Eminem’s first post-rehab album
Come to think of it, it seems completely unreasonable that 220 albums would completely make up the deficit of 10,780 albums that can’t make their budgets back. So how do these labels continue with a business model that bleeds money at an alarming rate without retooling for a better product?
The answer, as you might expect, is creativeaccounting. Really, by now you should be familiar with the kind of accounting trick the record industry pulls on its artists—they’ve been published everywhere for over a decade now. But this particular trick was a new one on me.
Tim Quirk of Too Much Joy reveals that there’s a difference between not turning a profit and not recouping the expenses of an album. And the difference is that in the second, only the artist gets screwed.
See, the money that is paid out to the artist and on production expenses is considered “recoupable.” This means that the label gives it as a loan to the artist, and the artist pays it back out of their royalties.
The artist makes approximately $23.40 in royalties for every $1,000 in sales. That’s considered a good deal.
So, using round numbers to make the math as easy as possible to understand, let’s say Warner Bros. spent something like $450,000 total on TMJ. If Warner sold 15,000 copies of each of the three TMJ records they released at a wholesale price of $10 each, they would have earned back the $450,000. But if those records were retailing for $15, TMJ would have only paid back $67,500, and our statement would show an unrecouped balance of $382,500.
Does the record industry actually lose money on some releases? Of course.
The question is, do they actually lose money on 98% of their albums? Or are many of those albums simply albums that haven’t “recouped?”
Wednesday, July 14th, 2010
