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Nielsen Rating System At Odds With RIAA's Claim Of "Lost Sales"
RIAA says sales are down. Soundscan says "Wha..?" Who should you believe?
By Moses Avalon
(more articles from this author)
2004-04-24
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When speaking this month to a representative from Soundscan, the company that provides much of the data for the Billboard Top 200 Chart, I learned things that would contradict reported statements by the RIAA. Mainly that US labels have had a significant reduction in sales over the past three years. Cary Sherman, president of the RIAA, responded personally, put his rebuttals on the record and in the process exposed intriguing insight into the way the RIAA calculates "losses."

Soundscan is a service owned by Nielsen, the company that computes TV ratings. Soundscan uses the barcodes on CDs to register sales at record stores. The correlated data contributes to the Billboard chart listings, as well as much of the market research that record companies use to determine which artists are worth keeping under contract.

My original reason for speaking to Soundscan was to determine if the "free" barcode many CD Replicators provide with a substantial order is a real added value to the indie artist, or just a bogus premium that sounds more intriguing than it really is. Replicators claim that with the barcode they give one can track indie sales on Soundscan. I have my doubts.

The answer will be revealed in my Keyboard article over the next few months, so I'm not going to spoil the punch here. Through my interview with the Soundscan rep, however, I learned the following:

- For the first quarter of 2003 Soundscan registered 147,000,000 records sold.

- For the 1st quarter of 2004 Soundscan will report 160,000,000 records sold.

That's 13,000,000 more units, almost a 10% increase in sales since last year. He also confessed that 1st quarter "album sales" (as opposed to overall sales) had increased 9.4% since 2003.

What gives? Didn't Cary Sherman recently attest to the "fact" that there was a "7% decrease in revenue since last year." (This quote was taken from Mr. Sherman's speech to Financial Times Media at a Broadcasting Conference in London.) And didn't he name piracy/file-sharing as the main reason? Yes, according to more than one source. (http://musicdish.com/mag/index.php3?id=9338)

So, I asked the Soundscan rep, who would only speak to me if I didn't use his name, "Would you disagree with what the RIAA is implying?"

"I would NEVER disagree with the RIAA," he said.

Of course he wouldn't; the RIAA is, after all, arguably Soundscan's biggest sycophant. But he did do the most amazing thing; he proceeded to explain the rational that would allow both of these seemingly inconsistent realities to exist in the same universe, "The RIAA reports a sale as a unit SHIPPED to record stores. Whereas Soundscan reports units sold [to the consumer] at the point of purchase. So, you're talking about apples and oranges."

Really!?! I fact-checked this with Cary Sherman, who confirmed, "He is correct," and added, regarding RIAA and Soundscan data, that "The two sets of numbers tend to be similar, but because of timing differences, they're usually a little different at any point in time."

Similar?!?! How is a 10% increase for first quarter of 2004 similar to, or a premonition of, a 7% decrease for the entire year of 2004?

THE SECRET: "SHIPMENTS" = "SALES"

Now armed with the secret decoder formula, I went back and read the RIAA and International Federation of the Phonographic Industry (IFPI) Web sites more adroitly. Sure enough, every time the RIAA complains of large drops in "unit sales" it includes international sales, not strictly domestic. Every time it speaks to domestic "losses" it is speaking ONLY of "units shipped in the US" to record stores. It seemed obvious that if the RIAA confined their revenue statistics to the US market alone they may not be able to publish ANY losses in REVENUE at all.

But what about Sherman's statement of 7% "losses" at the London conference? He answered, "I was speaking to an international audience, [and] thought they'd want worldwide figures, rather than just US."

Sherman's statements hinged on a statistic published by the IFPI. "Surveys in all major markets prove [file-sharing] is a major factor in the fall in world music sales, down 7% in 2003, and down 14% in three years." (Their Web site, which claims to "represent the industry worldwide," but, oddly enough, doesn't readily explain what the anachronism, IFPI, means, has a "fact sheet" at (http://www.ifpi.org/site-content/press/20040330c.html) But the RIAA's website chart claims only a 7.1% drop in units SHIPPED. (http://www.riaa.com/news/newsletter/pdf/2003yearEnd.pdf)

There is only one logical integration of all these statistics with the recent Soundscan data: even though actual point-of-purchase sales are up by about 9% in the US--and the industry sold over 13,000,000 more units in 2004 (1st quarter) than in 2003 (1st quarter)--the Industry is still claiming a loss of 7% because RIAA members shipped 7% fewer records than in 2003.

Forget the confusing percentages, here's an oversimplified example: I shipped 1000 units last year and sold 700 of them. This year I sold 770 units but shipped only 930 units. I shipped 10% less units this year. And this is what the RIAA wants the public to accept as "a loss."

I'll go a step further. This fact, that Sherman seems to confirm, should logically mean a smaller percentage of returns. But, shouldn't fewer returns mean higher profit margins and faster turnaround; and shouldn't that be good for both the retail and wholesale side of the industry? "Sure," admits Sherman today, "but I have no idea what US shipments looked like in the first quarter." Then how can he claim world-wide "losses" in his March speech to Financial Times New Media?

Roger Goff, an Entertainment lawyer in Los Angeles confirms that, indeed, retail has reacted this way in the Post-Napster era. "Retail used to buy 10 weeks-worth [of records] and now they realize, in most cases, they don't have to carry more than two weeks-worth." In other words, retail has adapted to more of an "on demand" model (similar to the Internet) as opposed to the, accepting-tons-of-product-shoved-down-the-pipeline model record companies imposed on them in the past.

I misplaced my MBA this morning, but my mental math assures me that fewer returns and shorter reserves should mean an INCREASE in record company profits and artists' royalties. If this is true, and file-sharing is responsible, one could conclude that "on-line piracy" has been the single greatest factor in increasing profits, because it forces record companies to keep a tighter lid on mass-production and costs.

Sherman's response is pithy, "Managing shipment and returns better is obviously a good thing. But to credit file-sharing is silly. That's like saying if enough thieves were holding up delivery trucks and causing massive losses to the industry, the thieves should be thanked for forcing record companies to keep a tighter lid on mass production."

My pithy rebuttal: No, it's like acknowledging what most retail industries have been doing for the past ten centuries; theft (even by employees) needs to be built into the cost of doing business, and file-sharing has forced the record sales side of the industry to finally adjust to that dynamic. Should we thank the "thieves?" No, but we shouldn't let off the hook those who blame others for "losses," only to ask Congress to legislate fix-its due to their own mismanagement.

SO ARE THERE REAL LOSSES?

Maybe, but "we, the people" will never be able to figure them out due to this confusion, deliberate or not. Regardless, it's certainly been a great excuse for majors to clean house of over-paid executives. But as for a US major label's bottom line, the effect could never rise to the RIAA's/IFPI's claim that file-sharing is the "major factor" of revenue loss for labels, and certainly not for artists.

Nope. My analysis suggests that the number one reason for the loss of jobs in the industry is self-perpetuating major label PR, and that the number one cause of loss of unit sales revenue for artists is STILL record label accounting practices.

Take a bow, fellas; you finally beat the geeks.


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