posted 05-29-2001 08:50 PM            

Assumptions:
The Record Company has been in business for some time and the next NEW CD is 'one more' for the company to deal with.

Logistics Of The Record Company
It has an office(s) and all the costs associated with maintaining it.

Fixed and Variable Costs
Land, Rent, Building, Utilities (Gas, Electricity, Water, Phones), Insurances (all of them), Taxes (all of them), Supplies, Postage, Paper, Equipment, Computers, Advertising and Marketing Costs associated with GETTING the business in the first place, and then the ongoing costs of maintaining the business, etc.

Personnel
Receptionists, Secretaries, Designers, Marketing and Sales, Account Reps, Computer Personnel, Order Fulfillment, Shipping and Receiving, Accounting, and other Administration, etc.

1. People NEED a place to work,
2. They NEED the equipment and supplies to do the work, and they
3. DON'T work for FREE!

These are the costs associated with DOING Business just like EVERY other Business has!

Process of a New Project Acquisition
When a company is considering doing a New Project, bear in mind the costs that are already in place and the money that is spent because the Business has its doors open.

The company has costs in FINDING the right Project. When they've advertised (cost) they're looking, they're going to get back a bunch of potential projects. Some might work. Most, as in almost all, won't. BUT, the company has to spend money on an EMPLOYEE(s) (cost) to sift through the potentials. They write letters (cost) or get on the phone (cost). No money is made yet on securing that NEW PROJECT! But already a lot of money has been spent!

OK - so the company finds the Right New Project. There is time spent (cost) with the Artist(s) preparing the paperwork (cost), getting the contracts (cost), explaining the process (cost), etc. and the Artist is going to take time (cost) to figure it out themselves. No money has been made yet and still, a lot of time money has already been spent.

In the background, hopefully money is flowing into the company by fulfilling orders and getting paid for them. Key here is 7 out of 8 don't work!

OK - so the ACT is signed and they are about the business of developing the product (and money is being spent) and finally finishes.

Hopefully the company has revenues coming in. But remember 7 out of 8 don't work.

Now that the project is complete, product is in the warehouse, and order fulfillment is taking orders, shipping and receiving is doing their job, etc. This new act from acquisition of the act to shipping of the product could be in motion for 2 years without the Record Company seeing ANY money yet!

Remember - 7 out of 8 don't work and money is being spent 8 out of 8 times.

Note: At this point in time, the company is probably living on the 1 out of 8 that did work to pay ALL the bills they must pay for the People that NEED a place to work, the equipment and supplies they need to do the work, and their Salaries because they DON'T work for FREE! That is a lot of money on the line and being spent!

The IDEAL Time Frame
Orders are taken and shipped to the distributors.
Distributors ship to the retailers.
There is a little waiting game -The Distributors have 90 Days to pay the bill and The Retailers have 30 Days to pay the bill.
The record company is paid accordingly and in full.
Artists are paid their royalties.
Everyone is happy!

Here's the REAL flow with the completed project
Orders are taken and shipped to the distributors.
Distributors ship to the retailers.
There is a waiting game.
When the retailers don't sell the product, they ship what they didn't sell back to the distributor with some money to pay the bill.
The distributor ships the product that didn't sell back to the Record Company with some money to pay the bill.
Money is owed and Artists and the Record Company aren't paid.
Everyone isn't happy.

But here is what ALSO happens in this REAL world of Business and WHY!

When the Retailers pay the bill, some things they sold and some things they didn't. For the things they didn't sell, they want to return them for Credit against the amount of money they owe. They CLAIMED (which may not be actual) a value for the return for that they think it is worth (A Problem).

But, the Distributor doesn't have the goods IN yet - meaning the goods are probably (and the distributor hopes that's the case) somewhere on a truck (Another Problem).

These are the beginning parts of the difficulty because of what they do to the Distributor's Accountants when it comes time to apply the payment to the Retailer's account and clear it up.

The Distributors Accountants take the check and have to wait until the return is processed by the Distributors Returns People to apply the payment and FINISH the job of clearing up the account - invoice by invoice. This is, almost all the time, done in two parts. And, that takes time and I don't mean by the minute.

Sometimes the Accountants will have to apply the check to the invoice(s) and leave a remaining balance on it. Sometimes they will create a chargeback invoice for the total of the returns and a credit memo. They do that to clear the invoices the Retailer intends to pay.

The Distributor Accountants do it this way when there are a lot of unpaid invoices and returns that the Distributors don't have processed yet. When the credit memos are generated, they apply those credit memos to that chargeback invoice and settle differences months and years down the road.

When the Return is finally processed, a credit memo is generated and mailed to the Retail Customer. MOST and ALMOST ALWAYS, there is a difference between what the Retailer CLAIMED and the ACTUAL VALUE of the Return! What this ALSO means is that another MONTH goes by before the bill is finally paid.

Here's another problem. The person who processes the RETURNS is generally flooded with so many returned products that they cannot process them instantly. There are times that it takes OVER a MONTH to do! Which adds more time before the bill is finally paid and cleared up.

Of course, the company COULD hire another employee to assist. But they DON'T want to do that because the RETURNS Proccessing means they are paying more for something that doesn't make them money!

And it still means is that the Retailer hasn't finished paying the bill to the Distributor.

It is the SAME process that the Distributor uses to pay the Record Company. EVERY time there is a difference, it almost always means another month before anyone is finally paid!

So you have the MONTH from the Retailer to the Distributor and the MONTH from the Distributor to the Retailer. But remember the Distributor had 3 MONTHS to START with!

When the returns are finally processed up the chain, the Administration MUST go back and apply the money and the return because it is hopefully resolved with all the differences figured.

People, they cannot do it like making Credit Card Payments or on Installment Payment Schedules. The reason is simple. They cannot figure out how much of the payment should go to which artists royalty account.

So what is the big deal? Here's how it affects Artists Royalties.

When the retailer hasn't paid the distributor, the distributor can't pay the Record Company. When the record company, who has MILLIONS on the line with the 7 out 8 that don't sell, ROYALTIES to the ARTIST CANNOT BE PAID but they are expending MILLIONS for the 7 out of 8 that DON'T WORK!

Here's an Impact Example
Consider the "Thriller" album by Michael Jackson. Everyone KNOWS that was a super seller right? I remember reports saying that there were 48 million copies sold all over the newspapers, magazines, television, etc.
http://www.findarticles.com/m1355/3_97/58459429/p1/article.jhtml
Says over 40 Million

When you look at the RECORDS that state the amounts in the almanacs, the total was 25 Million!
See the 2001 People Weekly Almanac page 227

WHAT HAPPENED TO THE OTHER 15-23 MILLION COPIES!?

From http://www.livedaily.citysearch.com/news/2137.html

quote:

---

The RIAA awards its gold (500,000 units shipped) and platinum (1,000,000 units shipped) certifications after an independent audit is conducted by the accounting firm Gelfand, Rennert & Feldman. Record companies typically must pay a fee to the RIAA before the audit is conducted, so an album's certification level doesn't necessarily track sales levels exactly.

---

Did you get that PEOPLE!? It says shipped, NOT PAID FOR!

The album certification is based on SHIPPED copies and they CAN'T do it on actual sales because of the problem above!!!

This IS the REAL WORLD of Record Companies and the process of Distribution!

So HOW do I know all this?
I am an accountant.
I was responsible for applying Chargebacks to accounts.
I was responsible for Explaining and Collecting the differences between the return claims and the amounts owed as I described above.

Here's a few things that you can think about.
What would YOU do if YOU were the Record Company and these are the types of COSTS that YOU would have to pay JUST to keep your doors open with 7 out 8 that won't work?
Did any of you make the connection that the 1 out 8 super-seller is paying the bills for the other 7?
What if it was YOUR 1 out 8 that was paying for the 7 that didn't work?
What if it was YOUR project that the 1 out 8 was paying YOUR bills on?

Now consider what M. Copeland said in his article at http://www.riaa.com/Guest_Column031500.cfm about the 19 out of the 20 that don't make their investment back.
The General has been telling us for years that the AVERAGE seller when something DOES sell is 50,000 copies.
Do the math people and see if you can figure a few things out for yourselves.

If you have any questions, ask them. This was a brief introduction about distribution. I did leave lots of things out of here that are in the REAL WORLD of Distribution and have an impact regarding payments up the chain. Can any of you thing of some of the other things that could slow the process down? I guarantee you that in Business this IS a must!

Ideas for future articles.
What happens with all those returns?
Why does VMG do it differently?
Radio and Distribution

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chylon@avmrnetwork.com
Ice Fire International

Signing Artists with proven product.