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« How to use iTunes to drive up your iTunes revenue | Main | Songwriters are taking it on the chin. What’s the solution? »
Tuesday
Apr072009

Crime and Corruption: Recognizing Unethical Practices in the Music Business

The music business has always been riddled with unspoken scandals and juicy secrets of corruption. We see topics of shortcuts, bribery, exploitation, scams, and fraud in the news frequently whether it is from the U.S. or international businesses. The music business is no different from any other business in this world; they are out to make a profit, which is the most important aspect that motivates those businesses. What drives those businesses to make profit is self-interest, which is also the factor behind all the corruption of the music business; sometimes the achievement of this profit is executed by any means possible. The following is an attempt to explain the different means of making that profit in the music business when ethical tactics are just not enough.

            The most common form of unethical practice in the music business is payola. According to Thall (2002), payola is the “unreported payment to, or acceptance by, employees of broadcast stations, program producers, or program suppliers of any money, service, or valuable consideration to achieve airplay (p. 132).” The record companies make these payments to the radio stations. Payola has had a long history in the music business and was only illegalized in 1960 (Dannen, 1990, p. 45). The first evidence of payola can be traced back to the late 1800’s when W.M. Hutchinson, a rising song publisher, could not get famous singers of the time to sing his songs since the singers were so busy with other publishing companies. W.M. decided he would pay them some money to sing his songs, plus the royalties (Segrave, 1994, p. 1). 

            The biggest scandal of payola occurred in the early 1970’s with CBS records’ president, Clive Davis (Dannen, 1990, p. 86). The story of Clive Davis and CBS records involves embellishment, fraud, payola, and ties to crime syndicates. Clive Davis hired a man named David Wynshaw as a sales representative in Los Angeles, CA. Wynshaw was a close associate of a man named Patsy Falcone, who had ties with West Coast crime syndicate, the Genovese Family, and Falcone managed acts like O.C. Smith, Ben Vereen, Lynn Anderson, and Tommy Cash. Under Clive’s supervision, Wynshaw and Falcone helped one another set up fake companies like Del-Tone Trucking and Limousine Service that CBS would pay more than $75,000 for. Wynshaw would concoct fake invoices as well in order for CBS to pay for parties, jewelry, apartments, and more (Dannen, 1990, p. 91).

            After Falcone was arrested on drug trafficking charges, some of his income was traced back to Wynshaw who was eventually arrested as well. Wynshaw and Falcone’s arrest brought Clive under suspicion, and eventually Clive’s embellishment invoices were found, totaling to more than $94,000.  Clive was fired from CBS records but Clive argued that, “why should I be fired for the couple grand I took when I brought tens of millions of dollars into the corporation (Dannen, 1990, p. 86-87)?” One could argue how much of that money could have gone to the artists under the record company, or countless others who were “screwed over” by the missing profits. Wynshaw began cooperating with the grand jury about CBS records’ hidden budget of $250,000 a year for the sole purpose of payola to black radio stations. Wynshaw’s suspects argued that Wynshaw was desperate to avoid prosecution, and from that point, CBS records became a “communist state under suspicion (Dannen, 1990, p. 99).” In the later months of 1973, IRS agents had audited the financial records of Philadelphia International, an affiliate of CBS records, and found a trail of payola in quarterly checks for promoting purposes from CBS. The checks showed to whom the money was paid, how much was paid, and when the money was paid. Clive was aware of these financial records. The executives of CBS were also found taking $343,000 in kickbacks from retailers by selling records to the stores well below listing price. CBS would then use those funds to payoff the radio stations (Dannen, 1990, p. 103-4).

            Dannen (1990) writes that Congress, in 1960, made payola a misdemeanor offense with a $10,000 fine and one year in jail. To the book’s date, not one person has ever served jail time for payola (p. 45). The law is not very strong, especially with the 1979 statute that says, “social exchanges between friends are not payola.” The author also presents some arguments in favor of payola, and that without payola certain records would not have made any time of day on radio stations, especially during the 1950’s emergence of rock and roll. One DJ stated that rock and roll may never have gotten on the air without payola (p. 46). On the morality of payola, Segrave (1994) gives an account of payola as a means of popularization; singer Jane Morgan stated that “payola helped popularize bad songs and the teenage influence has brought exposure to tunes that are illiterate and meaningless (p. 125).” Another industry observer stated that,“[payola] would be tougher for small, indie record labels to get hits since larger companies can afford bribery.”

            Of course, record companies have found loopholes around these laws. Thall (2002) states that, “[in order for record companies] to avoid ties with their payola foot soldiers, record companies, as a group, would fire their promotion department personnel to avoid a scandal being investigated into the company, and avoid losing their broadcast licenses. The company would then file a 1099 with the IRS to hire a new independent promoter that is not under the ‘supervision, guidance, or control’ of the company (p. 134).” Another way the record companies avoid scandal investigation is to “make a contract obligation for their artists to promote his or her own records independently after promoters began charging more and more money from the record companies. The managers of these artists lose money for the artist’s charged royalties and the manager will not commission earned royalties on every recoupable independent promotion, which forfeits the manager’s commission on every recoupable independent promotion dollar spent.

“The record company controls the budget and exploits the artist’s own money even when independent promotion is unaffordable, which avoids the company’s risk of being seen as advancing its own funds.  The new solution is to hire the manager to run the radio promotion campaign and have the manager hire the independent promoter designated by the record company, which will have the manager at the interest of any investigation (Thall, 2002, p. 135).”

Payola is still dominant in the present music business and takes place in the U.S. and other countries in different forms. Russell (2002) stated that “Korea is finally cracking down on payola scams, bribes to newspapers for positive critiques, embezzlement, buying videoclip packages, and record companies offering stock options in exchange for artist play, inaccurate music charts on album sales and votes, and connections to organized crime, all being committed by top managing and record companies in Korea (p. 71).” Tsui (2003) wrote that “23 leading executives of the Universal Music branch in Hong Kong were arrested for alleged bribes of advantages, including money, to Hong Kong’s largest TV station in order for their artists to receive awards run by the TV station’s award show (p 71).” The U.S. has yet to see any scandals this big in recent years, but it is not difficult to imagine that if these crimes can be committed in other countries, what is to stop the corruption here? A recent article by Smith (2006) notes that “Universal is accused of giving travel packages, computers, and concerts in exchange for airplay. Universal agreed to pay $12 million in fines, Sony paid $10 million, Warner paid $5 million, and a settlement with EMI is underway (pg. A. 17).” After 40 years of payola being illegalized, it is still a predominant practice by major record companies. Payola is just one of many forms of corruption practiced by record companies, while many other forms of corruption for profit can directly affect the artist at hand. 

Record companies have been renowned for “screwing over” their artists in order to advance their own funds. Some of this deception can be seen as a pure scandal for the artist, or it is seen as complete naivety on the artist’s part during the contract signing. Record companies have been able to hold the artist obligated to pay for certain aspects of their record deal, and also distort certain numbers to withhold some of the artist’s royalty money. Other ways of “screwing over” the artist include kickbacks, cleans and clears, scams, and fraud.

There are many ways in which the artist’s royalties can be distorted, held from the artist, or used to payoff a debt to the record company. Some would view these ways in which the artist’s royalties are going towards the record company are unethical, but most of these terms are laid out in the contract. For example, there is a process between distribution companies and record companies for artists to receive their royalties for albums sold in retail stores. The distribution companies send the master recordings to duplication warehouses, which are then shipped to each record store at request. The catch is that record stores can return their shipments of the recordings for a refund from the distributor, which is from the record label. The record label keeps a reserve against the artist royalties and does not pay the full amount until the distributor pays the record company from the refunds. This means that the distribution company withholds the money before sending the money to the record company before the money goes to the artist (Avalon, 2006, p. 46).  Unethically, the record company could distort the number of records returned or kept by the distribution company to withhold more portions of money.

Record companies can change the figures for how many records are sold from an artist for certain unethical purposes. This is where the terms, clears and cleans, come into play. A clear is a record that does not show up on an artist’s audit record due to bootleg international shipping. Some labels will state a number less than the actual amount sold; the labels bootleg a master copy without a barcode and send the copies to countries that do not use a barcode system or track any sales equipment. Record sales then fall through, and do not show up on the artist’s audit (Avalon, 2006, 199). A clean is made when a company produces excess records that are able to be returned to the record company for cash with no questions asked. The record will be given to private vendors that do not pass the records to the retail store but are returned to the record label for a refund. This could be a form of embellishment by whoever in the record company is having these private vendors buy and take back the money for the records (Avalon, 2006, 200). Every artist should know that a company may become antagonistic towards any artist that exposes some kind of wrongful accounting; the artist should begin to wonder why this correlation arises from the record company at this point.

The schedule of artist’s royalties also plays a large factor in how the record company interacts with the artist. Artists’ royalties are paid on pay periods, which depend on when the albums must be delivered to the record company. According to Avalon (2006), “record companies can hold artist royalties for four pay periods to make return and shipping deductions from the artist’s account, which is twenty to forty percent of gross sales on reserve clauses (p. 73). On the twenty percent reserve, the record company takes twenty percent of the royalties and places them in a bank to collect interest for two years, perhaps, never pay the artist while the artist waits for his or her last pay period royalties to come in, but the record company makes money on the royalties which never goes to the artist (p. 74).”

The artist can also be “screwed over” on the timing of the artist’s album delivery to the record company and the budget of each album. Avalon (2006) talks about “cross-collateralization,” which means “the debts the artist collects over the course of the record deal are to be repaid out of royalties from future records or publishing. This notion implies that future albums will always earn less and less royalty money to pay for the last over-budgets on previous albums (p. 75).” On the delivery of albums, artist have to record albums usually within 8 months of one another, even while touring, with the record company agreeing to pay more royalties for each new record, but if the artist does not deliver on time (which will most likely happen), then the record company will only pay the last royalty rate (Avalon, 2006, p. 76).

Meeting this deadline is nearly impossible (Avalon, 2006, p. 232). There are a number of factors that the record company can manipulate to delay the arrival of the album: the record company can disapprove of certain songs (Avalon, 2006, p. 234), the record company can reject the album within five months of its creation, which would require the artist to remake the album in sixty days (Avalon, 2006, p. 237), the record company can demand the delivery of the album any time before the end of an option period, and ask for two records in less than one year (Avalon, 2006, p. 235), and the record label can postpone the deadline of the album while offering little to no money between the time of one album and the next for the grace period to record the album (Avalon, 2006, 237).

Kickbacks are an important concept to understand in the music business. Kickbacks are ways for music industry people to get extra money that is not under their payroll. The most important thing to remember when it comes to money is that everything in any budget is supposed to go through the business affairs office of any major label (Avalon, 2006, p. 96). Not everything goes through that office, but everything should. For example, the artist’s manager may want a piece of the recording fund from the producer. The manager may say the money is for their client, but if the money were to reach the artist, the manager would commission the money. The manager can then convince the artist to let the manager keep some money to recover costs incurred from managing the artist for the past year or two before the record company signed them (a good indicator for why artists should not keep the same manager after three albums). The artist can agree to the payment out of guilt or loyalty, while the producer pays the manager out of recoupment of the artist’s royalties, so the manager is ultimately recouped twice (Avalon, 2006, p. 95).

A&R people, those who scout for new talent to record labels, can execute kickbacks. An A&R person can have a secret deal in which the producer can agree to give a kickback if the A&R had to convince the Vice President of the label to get the recording budget past a certain amount, say $300,000. The artist is ultimately paying for this kickback, which the record company will avert their attention if the record is a hit, but if the record flops, the producer may find him or herself in a lawsuit and not the A&R person(Avalon, 2006, p. 96).

Producers may take falls for kickbacks, but producers are one of the most dominant people in the field of kickbacks. Every artist should be careful with how his or her producer acts. For example, Avalon (2006) tells a story how one producer had a $300,000 budget for recording with a certain artist. The producer would always show up late to the recording sessions, which the artist would be paying $300 per hour. The producer would agree to pay the recording engineer about $60 per hour, but the engineer would have to pay $15 per hour in commission, but every vendor including the record studio was paying the commission, so the record company was charging more fees to the artist. The producer would secretly be making $100 an hour in addition to the fee. While the artist sued the producer for these kickbacks, the record company held the artist’s royalties, collecting interest, of course, and eventually the artist and the producer went separate ways. The album was a hit, but the artist’s next self-produced album flopped and the artist was dropped from the label. The producer continues to produce for that record label (Avalon, 2006, 97).

Producers can also use artist royalties for other purposes. Usually, big-time producers will block out a studio for one major artist. Producers will also work with smaller artists that the producer plans on selling to the label later. The producer uses the budget to buy late-night studio time with these smaller artists for the studio in which these major artists are supposed to be filling (Avalon, 2006, 99). Artists can be completely unaware of this happening for their whole careers, even before they are signed to a major record label. Not only are people willing to scam artists on major record labels, but some are willing to scam those who desire to be a major record label artist.

Scam companies often take advantage of unknown musicians who just want to make it in the big leagues. Recording companies usually find unsuspecting musicians by offering them a chance to record on a compilation CD. These unknown artists are sometimes willing to pay thousands of dollars for these recording sessions, while the distribution company would agree to distribute 500 to 1,000 copies to record companies and anywhere else (Avalon, 2006, p. 200-1). For example, a recording company does not expect a large number of responses, at most it would be 11 out of 100, which would cost $5,000 for each production fee to the artist. So $55,000 minus the mastering costs ($2,000), minus the duplication costs ($1,500), minus the shipping costs ($2/CD) comes to a net profit of $49,500 for the company. Artists usually have to pay for their own copies. Some of these companies are legitimate, while some are scams. The unsigned artist should be wary of other unethical scams.

Other corrupt companies work as CD replicator companies or those that guarantee music on numerous e-tailers for free or low prices. Avalon (2006) explains that “aggregators will entice artists to put up music for free on iTunes, yet the aggregator gives no up-front money, incurs no risk, and does not ensure any promotion or guarantee of distribution, and only takes 15% of money earned from downloads (p. 208). No legitimate label will sign an artist that has given away their exclusive rights to distribute music on a massive scale. Artists should limit their aggregation deals to just retail sales on the Internet or only one retailer. When the artist signs away his or her exclusive rights, the artist is saying ‘yes’ to a legal binding record deal, so he or she should limit the aggregator’s rights and deal (p. 209). The artist can vie for a non-exclusive deal, where the artist only has the right to the master recording and not to the downloadable copies. The artist should keep the ISRC codes after the termination of the deal. Some have payment thresholds, which means the artist must sell a certain amount to be paid after the 15% is deducted (p. 210). When ending the deal with the aggregator, it is sometimes impossible to opt out within the 30-day notice because the aggregator must retract the songs for months, while the artist cannot be compensated because the aggregators do not know who should get paid (211).” The artist should be careful when dealing with e-tailer deals and should know how much money the artist will make when putting up the songs for downloading. Artists should also be careful with those handling their master recordings.

Those in charge of CD replicators of master recordings can also dupe artists. Those who come off as CD replicating companies will come off as just that, but will use a CD duplicator, which does not guarantee the CD to work properly, but it is cheaper (Avalon, 2006, p. 205). Replication companies that guarantee distribution is an exaggeration since some replicators will only send the recordings to e-tailers with no significant promotion or marketing, and may not even have any relations with iTunes. These companies usually have a subcontract with an aggregating company to submit the songs to iTunes, but these songs need to be approved and some require exclusive copyrights, which is not free.

Barcodes for these songs through these scamming companies are usually not real and are against the GS1 US policy that states that each product that gets a UPC needs a form filed at SoundScan to keep track of the sales. Some companies will neglect to inform the artist of this necessity. Replicating companies will also offer replicating qualities of 1x or 4x (1x being more expensive but higher quality). The replicating quality does not matter if the songs “suck” though. The CD replicator may be bootlegging the artist’s material if the company does not use a fingerprinting system to make certain that only one machine is making copies of the master. The company may be bootlegging if the company does not encourage its clients to check intellectual property rights submitted with each order, or do not encourage clients to pay for any cover tunes to avoid any infringement. Sony or Philips must authorize the replicating machine by the company paying license fees, which is not cheap at all (Avalon, 2006, p. 205-207). Any legitimate replicating company will abide by the laws and pay for any necessary fees to replicate the artist’s masters.

Surprisingly, artists have the capability of committing corrupt acts as well. Not only can artists get “screwed over,” but producers can, too. When artists have completed their recordings with a producer, and are ready to exploit the master recording, the artists must sign off with the producer in order to exploit the master. Without the producer signing off the master recording is committing fraud (Avalon, 2006, p. 160-1). This rule is actually a law, and is included in the copyright protection law (artists, record companies, and producers are protected). Another way that artists can “screw over” producers is by re-recording the masters the artist worked on with the producer. By re-recording, the artist can remove the producer from being able to control the master. A standard contract with a producer would say that if the producer’s tapes are used on the recording, then the producer must be paid. All the artist or production company has to do is re-record the songs with the exact arrangement since musical arrangements are not copyrightable (Avalon, 2006, p. 162-3). The producer could sue the artist, but this move is quite expensive and difficult to prove.

Every artist (or producer) should supervise where the artist’s masters are going to, what for, for how much, and where the artist’s money is going.  Many of these unethical practices of “screwing over” the artist is laid out in the artist’s contract in a convoluted legal language that most artists do not bother to read or even try to understand. An artist’s lawyer is just as liable to making a mistake as the artist would, and some lawyers are not always trustworthy and can “screw over” the artist just as well. The artist should be aware of their sales records and have the ability to know where and how much royalty money is coming in and out of their contract. It is solely up to how much confrontational power the artist is willing to emit, and what the artist is willing to lose by uncovering any unethical practice done by a record company. Ultimately, the artist cannot be an A&R person, a producer, a distributor, a recording engineer, a manager, a record label owner, or a lawyer, all while being an artist; artists can learn from their own mistakes in being swindled, or choose whom they do business with wisely.

References

 

Avalon, M. (2006). Confessions of a record producer : how to survive the scams and

shams of the music business. 3rd ed. New York: Backbeat Books.

 

Dannen, F. (1990). Hit men. New York: Random House Inc.

 

Russell, M. (2002, September 14). Corruption crackdown hits Korean biz. BILLBOARD,

The international authority on music, video and digital entertainment, 114, 71.

Retrieved February 23, 2009, from The Music Index Online database.

 

Segrave, K. (1994). Payola in the music industry : a history, 1880-1991. Boston:

McFarland & Company, Incorporated.

 

Smith, E.  (2006, May 12). Universal Music Settles Claims Over Radio Play. Wall street

journal  (Eastern Edition),  p. A.17.  Retrieved February 23, 2009, from

ABI/INFORM Global database. (Document ID: 1035573151).

 

Thall, P. M. (2002). What they’ll never tell you about the music business : the myths, the

secrets, the lies (and a few truths). Minneapolis: Watson-Guptill Publications,

Incorporated.

 

Tsui, C. (2003, August 9). Hong Kong biz hit by corruption scandal. BILLBOARD, The

international authority on music, video and digital entertainment, 115, 71.

Retrieved February 23, 2009 from The Music Index Online.

Bio of Author: Josh from Loyola University of New Orleans, Expecting Bachelor of Science in Music Industry. Websites include

MySpace, PureVolume, Imeem, ReverbNation, Facebook, YouTube, Twitter, Wordpress 

 

 

Reader Comments (8)

WOW, man, thank you for that education. Especially the story of Clive Davis cold thugging on that RICO tip...that was an eye-opener. I knew the Bronfman fam was mafia money, but I'm always surprised by how deep these rabbit holes tend to go.

This was really excellent work, you should flesh it out with some pics and start a damn website of your own, man.

April 7 | Unregistered CommenterJustin Boland

Fantastic post - I really appreciate that this blog tries to pull in very thorough education and historical information, and not just Lefsetz-style ramblings.

April 7 | Unregistered CommenterTaylor

Hey, since we can stretch out and discuss here -- am I alone in taking it for granted that illegal activities are totally normal in the music business, and these cases don't represent anomalies or "bad apples" but Standard Operating Procedure?

April 8 | Unregistered CommenterJustin Boland

Who are the "Aggregators" he is referring to? I have considered signing up with Tunecore... they say that the distribution with them is Non-exclusive. So would that exempt them from such criticism?

Anyone used Tunecore?

April 8 | Unregistered CommenterJustin

Tunecore is legitimate.. Go for it..

-Bruce

April 8 | Registered CommenterBruce Warila

Tunecore is one of the most awesome things to happen to musicians and I generally hate on everything. It works, it's cheap, it's dope.

April 8 | Unregistered CommenterJustin Boland

yes.

December 16 | Unregistered CommenterBill

you wrote very important article for artists and upcoming artists.
I took over at myspace blog to forward them your informations.
In name of these upcoming artists...Thank You!!!

May 16 | Unregistered CommenterLindy

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