December 11, 2012 at 11:14 am

Middlemen 2.0: How Music Distributors Make Labels Sad by Chaining the Future to the Past

This image depicts a truck designed to deliver digital goods... wasn't the internet supposed to be post-truck?

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)

  • MoveMusicMoney

    Insert “traditional” or “physical” between “how” and “music”. This is a relevant argument, however it does not really press upon the fact that Cornelius’ business is unique on many levels than that of his fellow label. That said his company has been faced with a business decision or series of decisions that he seems to have failed to make soon enough. There is little point in vilifying a business model when it is in the participants control to move into a alternate model that better suits his business needs.

  • NotHardToUnderstand

    Sounds like Cornelius’ label needs to do a better job of projecting demand and managing physical inventory if they don’t want returns to cut into their digital income. ADA doesn’t dictate how much product is ultimately shipped into the marketplace, the label does.

  • http://twitter.com/altavozdistroco Altavoz Distro Co

    Trying to paint all of distribution based upon the few details of this post seems a bit of a reach since we don’t have their contracts nore details about deals as they developed during the contract time line. As for pressing CD’s before sales people call on stores is old school; Since, today a FanHeatMap can be used to determine where and when distribution is worthy of being undertaken. Also maybe being on a distributor that doesn’t have hundreds of thousands of titles thereby ensuring that only the top sellers or labels with deep pockets are given attention as opposed to a bill for warehousing services. As well I know digitaltards love to say physical is dead. However, physical sales are still 50 percent of the money made and with some distributors it’s more like 70 percent. So leaving it out of the equation ensure that you have 50 percent less chance of making money.

    Here’s a crazy idea, use clicks to place in bricks and give the fans it any way they want it.