August 11, 2002
How the RIAA is like MLB

Michael Croft has submitted an excellent list of questions for Cary Sherman, President of the RIAA, who has agreed to be gang-interviewed by participants in Eric Olsen's BlogCritics project. I highly recommend you read Michael's list and ask yourself what you think the RIAA's answers will be.

The question that drew my attention was this one, #13 on the list:

How does the RIAA respond to allegations on foxnews and elsewhere that their member labels must be using deceptive accounting practices when they claim that records that sell 2 million copies have not ever broken even or turned a profit?

Any time I hear the phrase "deceptive accounting practices", I think of Major League Baseball, where it has been raised to somewhat of an art form. Regular Readers know how loudly I've beaten this particular drum, but especially with the specter of a strike looming, I can't say often enough how vital it is to understand what's really going on.

The best source of information I've seen on MLB's books has been a series of articles by Doug Pappas in the Baseball Prospectus. You can find an index of these articles here, in the last article of the series. Take a close look at article number 5, which talks about some of the ways that baseball teams have been known to inflate their expenses. Article number 2, which talks about national and local media revenues, contains this illuminating quote:

Four major-league clubs are owned by large national-media companies: the Angels (Disney), Braves (AOL Time Warner), Cubs (Tribune Company), and Dodgers (News Corporation/Fox). This is a red flag for analysts, because the common ownership of a baseball franchise and a related enterprise can allow the parent company arbitrarily to apportion revenues and expenses between the companies.

In particular, an entity that owns both a baseball team and its local television outlet may well charge the TV station less than fair market value for the club's media rights. This strategy not only allows the club to cry poverty during baseball labor talks, but artificially inflates the station's profits, a figure closely watched by stock analysts. All four of these clubs report suspiciously low media contracts, but in only two of these cases do the suspicions appear justified.

I also recommend Forbes Magazine's annual survey of MLB's finances (registraton required), an article that Commissioner Beelzebud Selig has termed "pure fiction" and "the type of journalism one expects from a supermarket tabloid."

So, my somewhat longwinded point here is that there's any number of ways that the RIAA and the labels can cook the books. Paul Beeston, formerly of the Commissioner's office and now with the Toronto Blue Jays, once famously said that he could, using GAAP, turn a $2 million profit into a $4 million loss. You can be sure that if MLB knows how to do that, the RIAA does, too.

Posted by Charles Kuffner on August 11, 2002 to Music

The problem isn't just limited to MLB and the RIAA. Hollywood is infamous for this kind of accounting, and anyone who's anyone (and many who aren't) know to ask for a percentage of the gross rather than the net, because the studios cook the books to such an extent that serious blockbusters sometimes "don't turn a profit."

Posted by: Jeff Cooper on August 11, 2002 9:52 PM

Yep, both good examples. Deceptive accounting practices to hide money from the tax man or the "independant contractor" who should get a cut of profits aren't new.

This kind of deceptive shell game with dollars has a lot to do with the reasons that Texas has a law against, for instance, manufacturing and distibuting and selling beer (except, of course, if you are selling beer at a theme park based around marine mammals).

Cary's interview is slated for 8/13, so I expect to update tomorrow with answers. And I keep meaning to update that one with a link to the foxnews article in question.

Posted by: Michael Croft on August 12, 2002 2:48 PM