PHYSICAL DISTRIBUTION

The music industry uses a centralised model of distribution that has been built up over many years. It is quite a simple model whereby the record label controls the recording, sales and marketing and very often distribution of CDs. Smaller labels will license independent distributors to get their product to wholesalers, and thus incur a higher distribution overhead.

Figure 2.4: The music value chain for off-line distribution (Durlacher 2001)

The business model of the recording label is dependent upon leveraging the intellectual property copyright of the artist’s recording. In the UK, the 1988 Copyright Act states that the copyright owner of a sound recording is the person ‘who made arrangements for the recording to be made’.12

This is taken to mean the person who pays for the recording. As a standard practice labels demand that musicians give up the copyright on the recording (Harrison 2001). This is contrary to the practice in the publishing industry, for instance, where authors own their books but license them to

publishers. Thus most CDs bear a stamp displaying the label’s ownership of the recorded music such as “copyright 2003 BMG”. The argument put forth by the record label is that the ownership of the copyright allows them to invest in the artist by providing the services illustrated in Figure 2.4: Artist Development, Recording and Production services, Sales and Marketing and Distribution.

However, even after an artist has recouped with profit the label’s outlay, the copyright still belongs to the label. Artists and their managers view the practice of insisting upon outright ownership of copyright as an abuse of record company power (MMF 2001). The artist’s cut from the sale of the CD is low – 18% of the dealer price would constitute a good deal. However, the royalty calculation invariably contains several ‘standard’ reductions for expenditure such as packaging and manufacturing (20–25%) and the producer’s royalty (3–4%) so the artist receives considerably less than suggested by this figure. On top of this, the cost of recording and any advances the artist receives while recording are recoupable from the artist’s royalty rate. Recording royalties are not paid by the record company until such costs have been recouped. Therefore, the artists recording royalties are dictated by how many units are sold. In many cases they make very little or nothing from recording royalties after the recording label’s costs have been recovered (Mann 2000). Instead, if they write their own songs they will make money from mechanical royalties, which are technically paid for every song on every CD. In the UK the Copyright Tribunal 1992 has set this rate at 8.5% per CD. This royalty is paid from the record company’s cut of the CD, irrespective of the number of sales that take place, and is generally the songwriter’s biggest source of income (Harrison 2001).

Figure 2.5 shows the price breakdown of a new CD (€21.45) in Ireland. The figures are based on a cost analysis from the MMF guide to professional music management (MMF 2001). The figures are based on the assumption that the record company is a major with its own distribution network, thus distribution costs are relatively low. It must also be kept in mind that the artist royalty rate (5%) is only paid once the record company has recouped recording costs and artist advances. Until the CD has reached this quota the artist will not receive recording royalties.

According to this analysis, the record company takes five times as much as the artist. However, after taking into account the marketing and promotional expenditure the profit ratio might typically be in the region of 2:1, or even nearer 3:1 in favour of the record company (MMF 2001). The recording industry argues that these ratios are necessary to cover the expense of the number of artists they lose money on – according to one report 90% of the roughly 20,000 albums released every year sell less than 10,000 copies.13 _{While the number of copies necessary to cover}

costs depends on the investment, one analysis suggests that the company needs to sell 86,957 CDs to cover costs on an average first album deal (Leach & Henslee 2001). In fact only 16% of all record releases reach that sales figure. According to the same analysis it is typical for 5–10% of the labels’ roster of artists to subsidise all the music released by the label (Leach & Henslee 2001).

Record labels argue that lowering profit margins will mean that they will be forced to take less risk, thus reducing the number and diversity of artists that they sign.14

This is a double-edged sword. Non-profitable artists do not receive recording royalties from a label because costs are recouped from the artists share until profitability is reached. Therefore the RIAA claim that piracy hurts artists, refers to the profitable 15% of artists who still only receive a small portion of the price per CD. Of course, piracy also means that songwriters do not earn from the mechanical copyright of the song. However, this area is not within the remit of the RIAA. In fact, the recording industry has regularly fought to reduce the artist’s mechanical copyright fees. The point of this analysis is that the smaller artist has much to gain if another mechanism for getting his/her music to the public outside the conventional means of production and distribution can be established. On the other hand, the music industry has a lot to lose if control of production and distribution is decentralised. As Frith (1993) has pointed out in his analysis of music copyright, music industry concern at the plight of the artist is usually an alibi for protecting its own interests.

A breakdown of where the money goes per CD. (Price = € 21.49) VAT: € 3.76 (17%) Dealer: € 6.83 (32%) Distributor: € 1.22 (6%) Publisher: € 0.92 (4%) Manufacturer: € 1.43 (7%) Artist: € 1.08 (5%) Producer: € 0.42 (2%) Record Company: € 5.84 (27%)

Figure 2.5: The breakdown of the price of a CD