If you know people who work at record labels, you know they are not without complaint. From Napster to YouTube, half of the new technologies in the world at any time seem specifically designed to subtract money from their bank accounts — oh, and everyone thinks they’re too rich, serve no purpose, and are quite probably evil to their very cores, all because they thought it was a good idea to get a job finding great music and selling it to people.
However, we heard a new one the other day that we haven’t read about anywhere else, so we figure it warrants a little attention. A record label friend whom we will call Cornelius relays the following.
After Napster, CD burners, MP3s, sneakernet, and other forces conspired to send physical (mainly CD) sales into a tailspin, his label became accustomed to receiving a monthly check from iTunes that never seemed to change much, regardless of whether the label had a hot release or not. People were discovering this label’s music at a fairly steady rate, probably in all the usual ways, and then some of them were buying some of it from iTunes.
For Cornelius, this digital sales revenue represented a bright spot in the otherwise bleak financial news that arrived each month. But it didn’t last forever. His distributor, ADA (Alternative Distribution Alliance), crossed the revenue streams coming from physical and digital sales [updated], so when his label’s music began losing more money on the physical side as digital revenue grew, due to inevitable returns, because the thing about physical products is that you have to make them before you sell them and people are buying less physical music these days, ADA began subtracting that from his digital sales. That monthly check grew far less reliable.
In one sense, this seems fair. His label owes the distributor for those returns of un-bought CDs, and they’re the same company that puts his music on iTunes, so they should be able to mix that up and simplify accounting, rather than sending money back and forth.
But in another sense, it’s the past holding the future for ransom. Distributors’ main job, back in the purely-physical-music days, was to store big stacks of CDs, cassettes, and records, and then drive them in actual trucks to record stores, where people would buy them. The market determined that all of this storing and driving was worth around 15 percent or more of revenue. (ADA’s take ranges from 14.2-24 percent.)
Distributing physical music takes drivers, insurance, gas, warehouses, warehouse workers, tires, oil, windshield wiper fluid, and possibly heat, cooling, and other expenses.
Delivering digital music to iTunes, while not free, is pretty close to it. Cornelius says he does get data, market intelligence, and other help from ADA’s digital distribution arm, but there’s no way all of that totals the cost of physical distribution.
Either way, distributors are claiming the same percentage of revenue. That would be fine, except that the market cannot respond appropriately, because distributors won’t handle a label’s physical objects unless they are also the exclusive distributor of the corresponding digital files. In other words, Cornelius can’t hire ADA to drive CDs to record stores unless he also gives it 15 percent of his iTunes revenue, too, for doing significantly less work.
In the late ’90s, the digital media optimists among us foresaw a media landscape that would increase choice while driving down costs — in part because music wouldn’t have to be driven around in trucks. As it turns out, it doesn’t matter — labels are paying the same percentage, with or without the trucks, unless they want to go digital-only.
Cornelius assures us that this practice is fairly standard across the industry, although he has heard of exactly one label that managed to divorce physical and digital distribution, and is trying to figure out how they did it.
Can distributors hire enough social media experts, digital strategists, and FTP uploaders to justify claiming the same cut they got for driving trucks? Maybe they can — or maybe it doesn’t matter, because the only way labels can ignore them is to stop distributing physical stuff, and it’s too early for that. It might always be too early for that, considering vinyl’s ongoing survival.
In other words: Oh well.
(Image courtesy of OverDrive)