Moses Avalon's email newsletter of music industry news today has a
fascinating insight into the "fact" that record industry sales are in
decline.
What Avalon found is that the RIAA tracks sales as units shipped to
stores, whereas Soundscan tracks sales as scanned bar-codes sold at a cash
register.
The RIAA's numbers show that albums shipped to stores has been descreasing
but Soundscan's numbers show about a 9% *increase* in sales over last year.
Yes, that's right, tracking actual sales at stores shows record sales as increasing.
The cause, Avalon supposes, is that record stores are managing inventory
better, moving to an "on demand" system where only a few weeks of
inventory is held, resulting in fewer CDs ordered but not sold. Simply
put, stores are better at ordering what they're going to sell, so that
overall, they order less. In fact, this efficiency increase should be a
great boon to record companies, as it means fewer returns, less shipping
costs, and fewer units manufactured that end up not being sold.
Another interesting point Avalon makes is that International vs USA
domestic numbers are used at different times, when a different effect is
needed upon the audience, and that it appears that the USA domestic market
is growing overall, and that International numbers are used to find declining statistics.
Avalon's web archive of his newsletter doesn't have his excellent article, so I'm including it below.
-john
NIELSEN RATING SYSTEM AT ODDS WITH RIAA'S CLAIM OF "LOST SALES"
RIAA says sales are down. Soundscan says "Wha..?" Who should you believe?
=====================================================
April 21st - Los Angeles
When speaking this month to a representative from Soundscan, the company
that provides much of the data for the Billboard Top 200 Chart, I learned
things that would contradict reported statements by the RIAA. Mainly that
US labels have had a significant reduction in sales over the past three
years. Cary Sherman, president of the RIAA, responded personally, put his
rebuttals on the record and in the process exposed intriguing insight into
the way the RIAA calculates "losses."
Soundscan is a service owned by Nielsen, the company that computes TV
ratings. Soundscan uses the barcodes on CDs to register sales at record
stores. The correlated data contributes to the Billboard chart listings,
as well as much of the market research that record companies use to
determine which artists are worth keeping under contract.
My original reason for speaking to Soundscan was to determine if the "free"
barcode many CD Replicators provide with a substantial order is a real
added value to the indie artist, or just a bogus premium that sounds more
intriguing than it really is. Replicators claim that with the barcode they
give one can track indie sales on Soundscan. I have my doubts.
The answer will be revealed in my Keyboard article over the next few
months, so I'm not going to spoil the punch here. Through my interview with
the Soundscan rep, however, I learned the following:
--For the first quarter of 2003 Soundscan registered 147,000,000 records sold.
--For the 1st quarter of 2004 Soundscan will report 160,000,000 records sold.
That's 13,000,000 more units, almost a 10% increase in sales since last
year. He also confessed that 1st quarter "album sales" (as opposed to
overall sales) had increased 9.4% since 2003.
What gives? Didn't Cary Sherman recently attest to the "fact" that there
was a "7% decrease in revenue since last year." (This quote was taken from
Mr. Sherman's speech to Financial Times Media at a Broadcasting Conference
in London.) And didn't he name piracy/file-sharing as the main
reason? Yes, according to more than one source.
(http://musicdish.com/mag/index.php3?id=9338)
So, I asked the Soundscan rep, who would only speak to me if I didn't use
his name, "Would you disagree with what the RIAA is implying?"
"I would NEVER disagree with the RIAA," he said.
Of course he wouldn't; the RIAA is, after all, arguably Soundscan's biggest
sycophant. But he did do the most amazing thing; he proceeded to explain
the rational that would allow both of these seemingly inconsistent
realities to exist in the same universe, "The RIAA reports a sale as a unit
SHIPPED to record stores. Whereas Soundscan reports units sold [to the
consumer] at the point of purchase. So, you're talking about apples and
oranges."
Really!?! I fact-checked this with Cary Sherman, who confirmed, "He is
correct," and added, regarding RIAA and Soundscan data, that "The two sets
of numbers tend to be similar, but because of timing differences, they're
usually a little different at any point in time."
Similar?!?! How is a 10% increase for first quarter of 2004 similar to, or
a premonition of, a 7% decrease for the entire year of 2004?
THE SECRET: "SHIPMENTS" = "SALES"
Now armed with the secret decoder formula, I went back and read the RIAA
and International Federation of the Phonographic Industry (IFPI) Web sites
more adroitly. Sure enough, every time the RIAA complains of large drops
in "unit sales" it includes international sales, not strictly
domestic. Every time it speaks to domestic "losses" it is speaking ONLY of
"units shipped in the US" to record stores. It seemed obvious that if the
RIAA confined their revenue statistics to the US market alone they may not
be able to publish ANY losses in REVENUE at all.
But what about Sherman's statement of 7% "losses" at the London conference?
He answered, "I was speaking to an international audience, [and] thought
they'd want worldwide figures, rather than just US."
Sherman's statements hinged on a statistic published by the IFPI. "Surveys
in all major markets prove [file-sharing] is a major factor in the fall in
world music sales, down 7% in 2003, and down 14% in three years." (Their
Web site, which claims to "represent the industry worldwide," but, oddly
enough, doesn't readily explain what the anachronism, IFPI, means, has a
"fact sheet" at http://www.ifpi.org/site-content/press/20040330c.html.) But
the RIAA's website chart claims only a 7.1% drop in units
SHIPPED. http://www.riaa.com/news/newsletter/pdf/2003yearEnd.pdf)
There is only one logical integration of all these statistics with the
recent Soundscan data: even though actual point-of-purchase sales are up by
about 9% in the US--and the industry sold over 13,000,000 more units in
2004 (1st quarter) than in 2003 (1st quarter)--the Industry is still
claiming a loss of 7% because RIAA members shipped 7% fewer records than in
2003.
Forget the confusing percentages, here's an oversimplified example: I
shipped 1000 units last year and sold 700 of them. This year I sold 770
units but shipped only 930 units. I shipped 10% less units this year. And
this is what the RIAA wants the public to accept as "a loss."
I'll go a step further. This fact, that Sherman seems to confirm, should
logically mean a smaller percentage of returns. But, shouldn't fewer
returns mean higher profit margins and faster turnaround; and shouldn't
that be good for both the retail and wholesale side of the
industry? "Sure," admits Sherman today, "but I have no idea what US
shipments looked like in the first quarter." Then how can he claim
world-wide "losses" in his March speech to Financial Times New Media?
Roger Goff, an Entertainment lawyer in Los Angeles confirms that, indeed,
retail has reacted this way in the Post-Napster era. "Retail used to buy 10
weeks-worth [of records] and now they realize, in most cases, they don't
have to carry more than two weeks-worth." In other words, retail has
adapted to more of an "on demand" model (similar to the Internet) as
opposed to the, accepting-tons-of-product-shoved-down-the-pipeline model
record companies imposed on them in the past.
I misplaced my MBA this morning, but my mental math assures me that fewer
returns and shorter reserves should mean an INCREASE in record company
profits and artists' royalties. If this is true, and file-sharing is
responsible, one could conclude that "on-line piracy" has been the single
greatest factor in increasing profits, because it forces record companies
to keep a tighter lid on mass-production and costs.
Sherman's response is pithy, "Managing shipment and returns better is
obviously a good thing. But to credit file-sharing is silly. That's like
saying if enough thieves were holding up delivery trucks and causing
massive losses to the industry, the thieves should be thanked for forcing
record companies to keep a tighter lid on mass production."
My pithy rebuttal: No, it's like acknowledging what most retail industries
have been doing for the past ten centuries; theft (even by employees) needs
to be built into the cost of doing business, and file-sharing has forced
the record sales side of the industry to finally adjust to that
dynamic. Should we thank the "thieves?" No, but we shouldn't let off the
hook those who blame others for "losses," only to ask Congress to legislate
fix-its due to their own mismanagement.
SO ARE THERE REAL LOSSES?
Maybe, but "we, the people" will never be able to figure them out due to
this confusion, deliberate or not. Regardless, it's certainly been a great
excuse for majors to clean house of over-paid executives. But as for a US
major label's bottom line, the effect could never rise to the RIAA's/IFPI's
claim that file-sharing is the "major factor" of revenue loss for labels,
and certainly not for artists.
Nope. My analysis suggests that the number one reason for the loss of jobs
in the industry is self-perpetuating major label PR, and that the number
one cause of loss of unit sales revenue for artists is STILL record label
accounting practices.