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Record Label Chorus: High Risk, Low Margin

Music: With stars questioning their deals, the big companies make their case with numbers.

May 31, 2001|CHUCK PHILIPS | TIMES STAFF WRITER

You're a 19-year-old dropout without a nickel to your name.

No car, no job, no credit.

Who in their right mind would hand you $750,000?

Welcome to the record business, where giant corporations risk more than $1 billion each year on young, untested musicians whose careers typically crash and burn.

The few who do succeed contribute truckloads of cash to industry coffers. Profits from blockbuster releases by such acts as 'N Sync and Hootie & the Blowfish help companies offset losses from thousands of failures each year.

For every successful act such as the Spice Girls, there are nine bands like the rock group Radish--signed for a ton of money and touted as the next big thing--that never make it.

There are the millions in marketing and promotion lost on pop acts such as Take Five, which disappeared in a blink, and a seemingly endless list of promising hopefuls such as rock band Gwen Mars, hip-hop act Major Figgas and R&B singer Sammy.

This is the record industry's defense in a controversy now winding its way through the courts and in a debate with activist artists who are challenging the economics of the record business.

Company practices have come under scrutiny by lawmakers after some stars complained recently to Congress that the industry uses unconscionable contracts and corrupt accounting tactics to rob artists of their share of earnings.

But the record companies say that just isn't so. According to the major labels, it's the artists who are making out like bandits.

Major label executives decided to come forward after articles in the Los Angeles Times detailed efforts by rock star Courtney Love and others to break their contracts and organize an artists trade group to fight the Big Five music conglomerates.

Pop music, executives say, is a high-risk, low-margin business in which more than 90% of the CDs released each year flop--at great expense to the companies, not the artists.

It's an industry, the executives say, in which even unknown acts are treated like royalty, receiving millions of dollars in advances per project as their labels struggle to transform them into global stars.

To bolster their point, executives from Vivendi Universal, AOL Time Warner, Sony, Bertelsmann and EMI Group provided The Times access to internal budgets and cost-analysis data for dozens of recording projects, from marquee stars to failed unknowns.

The information was disclosed on condition that no specific artist would be named in this article.

Executives for the companies agreed to be interviewed on the condition that they would not be identified.

The documents disclose the following:

* Only one of 10 acts ever turns a profit.

* It costs about $2 to manufacture and distribute a CD, but marketing costs can run from $3 per hit CD to more than $10 for failed projects.

* Successful acts thwart the existing contract system by refusing to deliver follow-up albums until they extract additional advances.

"You might want to ask yourself why it is that most recording stars who have the opportunity to exit the major label system typically re-sign with a major label," said Hilary Rosen, president of the Recording Industry Assn. of America, the Washington trade group that represents the nation's largest music companies.

"There is a very simple reason: Record companies know how to market and promote records to mass audiences. And they take huge financial risks that help advance artists' careers--risks that few artists are willing to take on their own."

But rock stars such as Love and Don Henley say the execs can do a better job and treat artists more fairly in the process.

They and 100 other acts in the Recording Artists Coalition have pledged to launch a trade group or a union to challenge the industry tradition of long-term contracts that keep acts tied up for years longer than is legal in other industries, including film and sports.

Under the standard contract, artists are prevented from owning their original music and, after attaining success, must repay companies for financing their recordings, videos, retail placement and tour support.

The standard contracts also allow companies to deduct fees for a variety of promotional expenses and to pay artists reduced royalty rates for albums sold overseas and through record clubs.

"Record companies get away with their sloppy and obsolete system of accounting," said Love. "They are terrified of having their practices exposed.

"The state of California and the stockholders need to know that they're missing out on billions in revenues and thousands of jobs because of this unwillingness to stop the excess and stupidity of the old-fashioned system," the singer said.

But to hear the corporations tell it, contemporary artists have little to complain about. Even those whose contracts are severed, executives contend, earn the opportunity to pursue their creative dreams on the company's dime. Failed unknowns walk away debt-free, no matter how many millions of dollars in losses they leave behind.

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