Labels respond to their abuse of musical artists with this revisionist
Chorus: High Risk, Low Margin
Music: With stars questioning their deals, the big companies make their
case with numbers.
You're a 19-year-old dropout without a
nickel to your name.
No car, no job, no credit.
Who in their right mind would hand you
Welcome to the record business, where
giant corporations risk more than $1 billion each year on young,
untested musicians whose careers typically crash and burn.
The few who do succeed contribute
truckloads of cash to industry coffers. Profits from blockbuster
releases by such acts as 'N Sync and Hootie & the Blowfish help
companies offset losses from thousands of failures each year.
For every successful act such as the Spice
Girls, there are nine bands like the rock group Radish--signed for a ton
of money and touted as the next big thing--that never make it.
There are the millions in marketing and
promotion lost on pop acts such as Take Five, which disappeared in a
blink, and a seemingly endless list of promising hopefuls such as rock
band Gwen Mars, hip-hop act Major Figgas and R&B singer Sammy.
This is the record industry's defense in a
controversy now winding its way through the courts and in a debate with
activist artists who are challenging the economics of the record
Company practices have come under scrutiny
by lawmakers after some stars complained recently to Congress that the
industry uses unconscionable contracts and corrupt accounting tactics to
rob artists of their share of earnings.
But the record companies say that just
isn't so. According to the major labels, it's the artists who are making
out like bandits.
Major label executives decided to come
forward after articles in the Los Angeles Times detailed efforts by rock
star Courtney Love and others to break their contracts and organize an
artists trade group to fight the Big Five music conglomerates.
Pop music, executives say, is a high-risk,
low-margin business in which more than 90% of the CDs released each year
flop--at great expense to the companies, not the artists.
It's an industry, the executives say, in
which even unknown acts are treated like royalty, receiving millions of
dollars in advances per project as their labels struggle to transform
them into global stars.
To bolster their point, executives from
Vivendi Universal, AOL Time Warner, Sony, Bertelsmann and EMI Group
provided The Times access to internal budgets and cost-analysis data for
dozens of recording projects, from marquee stars to failed unknowns.
The information was disclosed on condition
that no specific artist would be named in this article.
Executives for the companies agreed to be
interviewed on the condition that they would not be identified.
The documents disclose the following:
* Only one of 10 acts ever turns a profit.
* It costs about $2 to manufacture and
distribute a CD, but marketing costs can run from $3 per hit CD to more
than $10 for failed projects.
* Successful acts thwart the existing
contract system by refusing to deliver follow-up albums until they
extract additional advances.
"You might want to ask yourself why
it is that most recording stars who have the opportunity to exit the
major label system typically re-sign with a major label," said
Hilary Rosen, president of the Recording Industry Assn. of America, the
Washington trade group that represents the nation's largest music
"There is a very simple reason:
Record companies know how to market and promote records to mass
audiences. And they take huge financial risks that help advance artists'
careers--risks that few artists are willing to take on their own."
But rock stars such as Love and Don Henley
say the execs can do a better job and treat artists more fairly in the
They and 100 other acts in the Recording
Artists Coalition have pledged to launch a trade group or a union to
challenge the industry tradition of long-term contracts that keep acts
tied up for years longer than is legal in other industries, including
film and sports.
Under the standard contract, artists are
prevented from owning their original music and, after attaining success,
must repay companies for financing their recordings, videos, retail
placement and tour support.
The standard contracts also allow
companies to deduct fees for a variety of promotional expenses and to
pay artists reduced royalty rates for albums sold overseas and through
"Record companies get away with their
sloppy and obsolete system of accounting," said Love. "They
are terrified of having their practices exposed.
"The state of California and the
stockholders need to know that they're missing out on billions in
revenues and thousands of jobs because of this unwillingness to stop the
excess and stupidity of the old-fashioned system," the singer said.
But to hear the corporations tell it,
contemporary artists have little to complain about. Even those whose
contracts are severed, executives contend, earn the opportunity to
pursue their creative dreams on the company's dime. Failed unknowns walk
away debt-free, no matter how many millions of dollars in losses they
And the artists who produce hits,
executives say, typically renegotiate for even larger advances and
frequently parlay their musical fame into other financial opportunities.
Superstars can earn millions of dollars from concerts, commercial
endorsements, merchandising, music publishing and acting deals--none of
which they share with their labels.
Nonetheless, record company executives are
reluctant to publicly challenge the artists. And for good reason, Rosen
"It's their job to promote artists,
not attack them," she said. "They see no upside in alienating
their own artists, even when they're feeling abused. No act wants to
work with a company that bad-mouths artists."
It's true, companies acknowledge, that
years ago artists were not always compensated fairly. The industry's
history is rife with tales of great musicians who signed away their
rights for a pittance and died broke.
It wasn't uncommon during the 1950s and
'60s for artists such as Motown singer Mary Wells and blues act Jimmy
Reed to suffer at the hands of unscrupulous managers, lawyers, concert
promoters and independent labels who once dominated pop music.
But these days, executives say, the
$40-billion industry, which throws off an estimated $3.5 billion in
annual operating profit, is run by public corporations that pay artists
fair royalties commensurate with the risk each party takes. Even the
most obscure acts, they say, now enter the business represented by
competent attorneys who negotiate fair deals. And artists who do not
want to sign a major label contract always have the option of putting
out their own recordings.
The five music conglomerates spend
billions of dollars each year to keep their global star-making machines
intact. The industry employs about 50,000 people, and the price of
signing talent, producing videos and promoting records continues to
skyrocket, squeezing margins in a business already threatened by
"If this was an industry showing
Microsoft-like profits, the artists might have an easier battle ahead of
them," said Michael Nathanson, a media analyst at investment firm
Sanford C. Bernstein & Co. "But music margins are under serious
pressure, growth is nearly negative and everybody's already scrambling
to cut jobs. The business is a mess."
Statistics tabulated by SoundScan, an
independent research firm that monitors U.S. record sales, confirm the
Of the 6,188 albums released last year,
only 50 sold more than a million copies. Sixty-five sold 500,000 units
and 356 sold 100,000 or more.
In other words, more than 90% of last
year's releases flopped.
Generally, a major-label album needs to
sell about 400,000 copies to reach profitability.
"People who don't understand the
business just look at what makes it to the top of the chart," said
SoundScan CEO Mike Shalett. "They fail to appreciate what it takes
cost-wise to get there.
"Companies invest enormous amounts of
capital trying to make hit records. It's like searching for a needle in
Few artists concern themselves with the
financial intricacies of record-making. Indeed, most musicians enter the
business with nothing more than a demo and a desire to become famous.
Once an act begins to exhibit commercial potential, however, it usually
doesn't take long to rustle up a deal.
The drill, executives say, goes like this:
After the artist solicits an offer from one label, his or her attorney
usually contacts competitors in an effort to drive up the signing price.
A bidding war can ensue and, by the time it's over, the act normally
walks away with a check for about $750,000 to cover recording costs and
living expenses. (That's for pop and urban acts. Rock and country acts
are often paid less.)
All five major labels provided The Times
with lists of their latest failed acts to support their contention that
artists are often the only ones making money on these projects.
In the case of one unknown act that
received a $750,000 advance, the money was allocated to cover the cost
of recording its first album and to provide the group with about
$250,000 to live on--after deducting legal and management fees.
The contract required the singers to repay
the $750,000 and all other advances from future sales, assuming the
album did well, before receiving any royalties.
After the artists turned in the finished
studio recording, the company invested an additional $2.8 million to
roll out a marketing campaign to reach retail stores, radio, musical
networks MTV and Black Entertainment Television, which play crucial
roles in stimulating music sales.
A big chunk of that money, approximately
$800,000, went to produce two videos, neither of which ended up getting
much airplay on cable music shows.
Another $800,000 was set aside for
independent promoters to pitch the first two singles to radio
programmers. Neither single got much play before being axed from
Over the course of a six-month campaign,
the company spent an additional $1.2 million for retail product
placement, tour support, photo shoots, advertising and radio and TV show
appearances to boost the CD.
Despite the effort, the album sold only
about 100,000 copies and the label decided to drop the act. The company
lost more than $2.7 million on the project. The artists walked away
If a company decides to risk a follow-up
on a failed act, the meter starts running again. Either way, the
corporation eats the loss.
But the music companies get no sympathy
from attorney Jay Cooper, whose clients include Recording Artist
Coalition co-founder Sheryl Crow.
"These companies are run by
intelligent, well-paid executives who have no one to blame but
themselves that the industry's failure rate is so high," Cooper
Cooper and other critics contend that the
record labels should be more discriminating when signing artists and
stop wasting so much money on videos, retail positioning and independent
If executives ran their labels more
efficiently, critics say, they could afford to pay better royalties to
the artists who succeed, instead of forcing them to offset the losses of
so many failures.
Why, critics ask, does Wall Street bother
with a business that doles out millions of dollars each year in salaries
and bonuses to executives who fail so frequently?
The record companies respond that music is
not a commodity and that public taste is not easy to discern. Executives
who deliver the hits, companies say, are entitled to the big bucks they
And to hear them tell it, artists aren't
always so altruistic either. Each of the major labels privately shared
horror stories involving a number of successful newcomers who dominated
the pop charts last year.
Two of those acts racked up more than $18
million each in marketing expenses on their first albums.
One singer charged the company $2 million
just to make a video. Another billed the label $250,000 to film a
15-second video sequence.
Several entertainers billed their labels
more than $20,000 each for hair and makeup "glam squad" fees
every time they appeared on TV.
Overnight sensations aren't shy either
about using their newfound leverage to strong-arm labels for additional
money not covered under their contracts.
"About six seconds before they go
back into the studio to record the follow-up, you get the gun to your
head," said one label chief. "We call it the second-album
hold-up. They want bigger advances. They want better royalties. The risk
One pop act, whose debut album sold 7
million copies, demanded a $13-million advance before returning to the
Another act, whose debut album sold 4
million units, refused to deliver a follow-up until it received a
$4-million advance and a beefed-up royalty. The band pocketed the money
and the album bombed.
Executives say the success rate for
follow-up albums by blockbuster bands is no better than for debut acts.
"The problem is almost nobody has
more than a three-album shelf life in this fickle market," said one
To make matters worse, superstars are
having a tough time delivering hits. Companies say they are still
smarting from a spate of expensive deals negotiated during the middle
and late 1990s.
The concept behind such deals is that
career acts create a body of work that will sell for a long time.
Indeed, the value of a record company
hinges primarily on the size and quality of its catalog. That's why
labels are so adamant about owning the master recordings of the acts
they sign to long-term deals.
But in a business threatened by
encroaching Internet piracy, companies have watched catalog sales slip
from about 50% to 38% over the last decade.
In one recent case, a label signed a
$25-million, three-album pact with a superstar act that broke up shortly
after delivering one CD. That CD sold fewer than 300,000 copies.
Another label signed a $30-million,
three-album deal with a star who took four years to deliver his first
recording, which ended up selling fewer than 500,000 copies.
Four of the five music conglomerates are
saddled with similar money-losing propositions.
"You know, sometimes running a record
company feels like working in the emergency room of a hospital or a
cancer ward," said one executive.
"The odds are so severely stacked
against you. No matter how hard you try, in the end you know from
experience that the vast majority won't make it.
"Every now and then you get lucky.
It's not as easy as it looks."