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First Blood is Spilled at Record Industry Hearings - The War is On!!!
By Moses Avalon
(more articles from this author)
2002-09-28
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September 26 - Los Angeles. Absent the penalty of perjury, Major Label lawyers testified to a panel of senators in Los Angles that most artists are happy with their recording contracts. The panel, held this past Tuesday, was assembled to entertain arguments as to whether legislation might be necessary to keep major record labels honest when reporting to their artists the amount of money earned on their exclusive record contracts. If enacted, this would be the beginning of government regulation of the music business; a concept that, ironically, artists are initiating.

Tuesday's panel was an informal Joint Hearing of the Senate Committee and Senate Select Committee on the Entertainment Industry. Lawyers and spokespersons from both sides were invited to air their points of view.

Major Labels emphasized that artists, by and large, are "happy with the current system," and based this on the fact that so few artists audit their labels or sue for breach of contract. Meanwhile, artists representatives indicated that this was only the case because many feel intimidated or, in the case of older, more powerful stars, believe that an audit would be useless. The following three points were the center piece of the day's comments:

1) By contract, artists are prohibited from showing royalty statements to third parties. Normally this would not include their managers, lawyers, consultants, or others who could aid them in getting paid, but apparently this is not necessarily the case. Senator Kevin Murray, leading the initiative for artists' rights, claimed the that Cary Sherman, Chief Counsel for the RIAA himself, said to him in an interview, that RIAA members (the major labels) would sue any artist that broke ranks and shared information with the Committee. This claim was rejected by Sherman but supported by others in the room. Don Henley, among them, outwardly dared his record company to sue him for bringing royalty statements to the hearing. He presented his most recent royalty statement for "Hell Freezes Over," which showed the panel that even though his contract called for a no more than a 10% "reserve" on sales of records shipped, Universal Music had held back more than that for eleven pay periods (roughly under three years) and that, even though his contract calls for no free goods in Europe, they had deducted $87,000 in free goods charges to Europe.

2) All boiler plate recording contracts stipulate that manufacturing records are exempt from an audit. Senator Battin took particular interest in this point, wondering how can an artist get an accurate account of sales if they don't know the number of units produced to start with.

3) Even after an artist has gone through the audit and has found recoverable money, they are expected to negotiate a settlement with the record company. Furthermore, their auditors are required to meet with label executives BEFORE they can release findings to their clients (Wow?!?). The net result is that, even after an audit, the artist can expect to get only a fraction of what they are owed. Most would rather not rock the boat.

Another interesting contractual speed-bump is that most contracts regulate who the artist can hire to do the audit. The proverbial "list" seems limited to a small cartel of accountants and financial managers who "understand the way the record business works." The auditor can not be simultaneously auditing the record company for any other artist or any other record company. This makes scheduling the few "qualified accounts" on par with booking Russell Crow for your next motion picture.

Record companies claim that this standard avoids conflicts of interest, makes the audit process cheaper for the artist - as the auditor's time will be minimized - and the company's royalty accounting process will not be held up. But a more likely strategy, as voiced by artist representatives, is that they are trying to deflect auditors from exaggerating their claims, in hopes that the settled-upon amount will be somewhere near what is believed to be owed.

The seasoned artists who testified, admitted that holding out for large advances on second and third albums acts as an enfilade against accounting rip-offs. But it is not always successful. This strategy, however, would exclude artists past their prime and deceased artists, whose money can be kept by the record companies with virtual impunity.

In addition, the common strategy of "renegotiation" after the record is a hit, has meet with opposition as consolidation has caused record companies to get "mean and lean" in the troubled economy. Artists' lawyers have reported that they are having "some tension" with the tradition of getting better terms for their clients after they have a proven hit. In a shocking statement made by Back Street Boy Kevin Richardson, he testified that they have NEVER received a royalty check, and that they only took a large advance after their third hit album in a row failed to earn them a penny in royalties. (Case in point, three albums on a major label is generally about 5 contract years into the term.)

Also, the wife of Lester Chambers, of The Chambers Brothers, claimed to have never received a royalty check, nor an advance, in upwards of 30 years. Ms. Chambers claimed that Columbia told her there were no overseas sales to report because The Chambers Brothers records were never licensed to an overseas distributor. She believed them until she started seeing her product on E-Bay and found 22 different foreign pressings of Chambers Brothers recordings, all by foreign affiliates of her label, Columbia Records, a subsidiary of Sony. Similarly, a member of The Olympics, of the hit "Hully Gully," was present and complained that he found his recording on 94 different compilations world-wide, yet has never received a royalty check.

To defend their actions, record companies hired Linda McLaughlin, an economist, to do a study of record industry profits. She testified that, on the whole, record companies get only 9% of profits while artists get 17%. Upon questioning by Senator Murray, she admitted that when calculating the profits artists earned she was including their publishing money earned from song writing, but when calculating the record company's earnings she broke apart the record sales profits and excluded publishing revenue, even when the artist's account was earning money for both the record and publishing divisions of the same company.

She was also asked to produce comparisons to other industries where royalties are accruable to vendors and furnishers of product. Sighting examples like the book publishing industry, where authors are only required to recoup the actual advance they receive for each book, and not money that is spent on their behalf (i.e.: promotion). She had not included such research in her study. Her study was also only limited to US record labels and not foreign affiliates.

In the afternoon session, representatives of artists steered the conversations towards establishing government regulated penalties for labels clearly trying to defraud their artists. A solution that makes everyone uneasy.

Senators on the panel made it clear that Big Brother peeking in their financial records was probably going to make everybody miserable. But the tone was clear: unless the majors labels come up with a system, whereby they agree to a penalty for under-reporting royalties, then the Senators are likely to introduce a bill making the collection of royalties, especially overseas royalties, a fiduciary duty. This would give the artists who are victimized by chronic under-reporting of royalties legal remedies beyond submitting to a 2-4 year auditing process, which normally costs them $30-$40 thousand dollars before the audit begins (Most contracts expressly prohibit artists from hiring auditors on contingency).

An insider present at the hearing commented, "It was kinda pathetic watching all the major suits try and defend the indefensible... it was clear that the Senators want no part of any legislation, but that they feel it's inevitable if the majors refuse to address any of the artists' concerns."

Research and commentary for this piece was provided by Pat Spear.

Moses Avalon Disclaimer:
This is not news... News is allegedly objective. This is anything but. This is about interpreting the news into information that you can use. The key to predicting the future is in interpreting the past. In real terms, this means understanding how the big players interpret their mistakes and their recent acquisitions.

MusicDish - Music Industry Events

The Moses Avalon Confessions of a Record Producer Workshop

Los Angeles, CA - On November 9th & 10th, 2002, multi-platinum record producer, music industry insider and artists' rights activist, Moses Avalon, will speak candidly at the American Federation of Musicians in a coveted two-day workshop.


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