Jim McDermott spent nearly seventeen years at major labels like Polygram, Universal Music Group, and Sony Music Entertainment, starting with Warner/Elektra/Atlantic Distribution in 1987.
Here, McDermott describes a radically different approach to retailing, one that may completely surprise you. And, make you wonder whether the current approach towards digital retailers really makes sense.
This was originally commented in response to an earlier debate between Walden Venture Capital’s Larry Marcus, who called for lower licensing demands, and Universal Music Group executive David Ring, who defended them (that article is here).
“I worked with David Ring for a short time at Universal, and he’s a good guy. But he’s a lawyer, this is how lawyers think.”
“I did twelve years in distribution, at Warner and PolyGram. I was in artist development for the first part of my career. The biggest challenge we had then was convincing accounts (retailers) to take chances on unestablished new artists. Their “open to buy” budgets were largely alllocated to hit titles, and catalog that they knew would turn. So in order to get retailers to take a chance on anything new or risky, we gave them incentives.
What kind of incentives? Favorable credit terms, discounts, and subsidies. Often we gave dating on product so a retailer would be able to sell their stock before payment was due. We often sold product at a steep discount, and let the customer return the product months later, but keep a portion of the discount – so they made money on product they didn’t even sell.
As an industry, probably hundreds of millions of dollars were given to retailers for “co-op” and “point of purchase” advertising, meaning we paid the retailer to advertise our own products. The retailers of course built healthy margins into this advertising, and it became another profit center for them. We’d spend $25,000 on a Best Buy circular so a major artist’s new record would be stocked visibly in stores the day it came out.
The distribution company relationship with retailers was more than friendly, it was symbiotic. Small retailers did not have the volume to buy direct, so they went through wholesalers, and did not get many of the benefits the larger chains did, but we still sent them promotional product, called them, asked their opinions, and understood that especially on developing artists were a vital part of building success and credibility.
Of course, NONE of these retailers paid an “upfront” or licensing fee to carry our product; direct customers needed to show an ability to pay, and we gave them credit. We shipped them physical product, at considerable expense, and if they went out of business, we often took pennies on the dollar for monies owed.
At any time in the US, there were tens if not hundred of millions of dollars of record label product sitting on shelves purely on credit, with no real collateral.
Most of these companies are out of business now. The business no longer needs to produce huge amounts of product before they even know what demand will be, they don’t spend co-op or point of purchase advertising dollars with digital retailers, they no longer need to destroy millions of dollars worth of returned product annually, they have detailed product sales information from retailers and do not have to pay Soundscan millions of dollars, they have they ability (if they desire) to sell direct to any potential retailer, no matter how large or small, or direct to consumers. They no longer have to beg retailers to carry product on developing acts.
Let’s also remember that record labels never received a dime from radio stations playing their records and in fact spent billions of dollars over the past few decades to get airplay.
In the mid 90s, when I started working on digital deals, the upfront payment accomplished two things: it separated the jokers and wannabees from serious players, and it made labels feel good taking a risk, because that’s what big advance checks do. There was another side benefit to the labels – these demands stalled the progress of the digital business, and kept the physical retail business from collapsing overnight.
In 2012, especially given the decimation of the physical retail environment and the huge shifts in the landscape, a rational mind would deduce that ubiquity is the only way to offet the reduced commercial viability of the product. Make it easy to consume, get your product out there in as many places as is possible, be friendly with your retailers, help them sell.
Huge upfront payments mean the companies have less money to market their service. It means they have less cash to keep the lights on, make payroll and survive. Investors know this which makes it tough for innovators to get funded, let alone survive and be successful.
It’s an ugly word, but perhaps it fits: extortion. Remember that scene in Goodfellas, where the guy brings in Paulie Cicero as a partner into his restaurant? He gives him a piece and they end up burning down his place. If you want to be in music subscription service business today, expect a similar experience.
We never asked any retailer or radio station for a piece of their company if they wanted to sell or play our music. Back in the day we did everything we could to help retailers; we gave THEM money! There is no rational argument or justification for these huge upfront payments, however, it’s a great strategy if you want to keep 99-cent downloads alive, and control distribution in a world where that’s become nearly impossible.
I often wonder how dire things must become before labels are compelled to be reasonable, responsible to retailers, artists and consumers. The adversarial tone and predatory manner of doing business seemed rational in 1999, in 2012 it’s just stunningly dumb. Every friend I have still employed by a major splits time either rationalizing their existence, or shitting their pants as they watch colleagues get laid off weekly.
You cannot develop artists when digital retailers, streaming services and blogs hate your guts and think you’re an extortionist.
One day soon, a “label” is going to consist of one lawyer, sitting in a shabby cloth chair in a room with one 20-watt lightbulb, who picks up the phone, shouts “FUCK YOU, PAY ME” into the receiver, hangs up and goes back to checking his Facebook page.”