The Numbers Game -- Promotional/Specialty Shipments

By George Ziemann In 1997, the RIAA began to break out the total of units (all formats combined) that were shipped to retailers, leaving us to wonder what the hell happened to the rest of them. After asking this question publicly, James K. Willcox over at Sound and Vision Magazine determined that the balance is attributed to "promotional and specialty" outlets, such as record clubs. I'm sure this total probably includes promotional copies sent to radio stations, given away by djs and other promotional adventures, at least when they were allowed to do that. All data in millions Source:RIAA 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total Units Shipped 1063.4 1123.9 1160.6 1079.2 968.5 859.7 798.4 814 748.8 Shipped to Retail 817.5 850 869.7 788.6 733.1 675.7 658.2 687 634.8 Promos 245.9 273.9 290.9 290.6 235.4 184 140.2 127 114 Of course, we all know that sales and overall shipments have declined, so it stands to reason that the number of promotional units would drop, too. So to see if there really has been any kind of change in the promotional shipments, you have to look at what percentage of the total shipments they comprise. Conclusion One -- Either the record clubs are seriously sucking wind, or the industry has drastically cut back on promotional goods. Which is it? It's really hard to tell from simply the number of "units" shipped, as these could be anything. More telling is how much these promotional copies are worth. To be more accurate, it would be more telling if it were possible to determine. The RIAA's 2005 statistics include the notation: "Retail value is value of shipments at recommended or estimated list price." The word "estimated" is new for 2005, as is the definition's limitation to the retail shipments. Those promotional copies are valued by a completely different standard. While this may not mean much to the average music fan, if you're an artist whose income relies on the RIAA's math or a DOJ investigator cross-checking against tax records or something, this may be meaningful because the value of this merchandise varies greatly depending on how you arrive at it. If you take the RIAA's total value of physical shipments and subtract the reported value of the retail shipments, this should leave the value of the promotional shipments. Easy enough. Promotional Shipments Value -- Method A Data Source: RIAA - Data in millions, US$ 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total Value 12,236.8 13,711.2 14,584.7 14,323.7 13,740.9 12,614.2 11,854.4 12,154.7 11,195.0 Retail Value 10,785.8 12,165.4 13,048.0 12,705.0 12,388.8 11,549.0 11,063.4 11,423.0 10,477.5 Promo Value 1,451.0 1,545.8 1,536.7 1,618.7 1,352.1 1,065.2 791.0 731.7 717.5 By using Method A, it would appear that the industry has cut its promotional expense (in terms of physical goods) to less than half of what it was before Napster and file-sharing were an issue. Compared to 2000, they have reduced this expense by $900 million. The problem with this is that the average price (value) of each promotional copy hovers in the $6 range, while the same thing is valued at $16-17 if it goes to a retail outlet.

The second method for arriving at the value of these promotional goods involves taking the number of copies times the average retail price. Yeah, I know, it's just a recommended/estimated price, but still... Promotional Shipments Value -- Method B Data   1997 1998 1999 2000 2001 2002 2003 2004 2005 Promotional Units (Millions) 245.9 273.9 290.9 290.6 235.4 184 140.2 127 114 Avg Retail Price 13.19 14.31 15.00 16.11 16.90 17.09 16.81 16.63 16.51 Value of Promos (Millions US$) 3244.3 3920.1 4364.3 4681.8 3978.1 3144.9 2356.6 2111.7 1881.6 Method A showed a 56 percent reduction in this expense between 2000 and 2005 with a difference of $900 million. With Method B, the percentage of promotional reduction is slightly higher (60 percent), but the dollar amount grows to $2.8 billion. Parting Thoughts... The RIAA currently claims that the Internet file-sharing activity costs them $400 million a year in lost sales. No matter how you add it up, though, it looks like they're actually saving twice that, if not the entire $2.8 billion boatload o' bucks. That's what it looks like, but that may not be what's actually happening. It is possible that the number of promotional copies simply reflects how far the artist rosters have been cut back. A more useful "value" would have been the average wholesale price actually charged each year. That's how much the record labels charge the retailer. That's the starting point for determining artist royalties. That's a real number, based on invoices. Instead we get an "estimated, suggested" price. No matter which above method you use to determine the value of these promotional copies, it's based on bullshit data from the RIAA. The truth is somewhere in between. ...and a Few Questions Promotional copies are advertising. Advertising is a legitimate expense in any business. Artists are charged a chunk of their royalties to pay for promotional goods. Most industries would be bragging their asses off about saving between $1-3 billion in promotion. Should be a boon for the stockholders. What do they tell the stockholders? What do they tell the IRS? What do they tell the artists? Originally Posted May 8, 2006