Music Data Being Altered, Some Say (Chuck Philips, LA Times, July 13, 2001)

That big hit record rocketing up the Billboard magazine music charts may turn out to be a dud that's getting some behind-the-scenes help.

Top record industry officials told The Times they are aware of instances in which major labels have attempted to manipulate sales figures.

These music executives say there is a coterie of independent consultants and merchants from Los Angeles to New York who have developed a system to distort sales numbers that are reported to SoundScan, the research firm that was supposed to clean up the once-shadowy world of music sales. There's nothing complicated about the scheme: It involves retail clerks swiping a CD numerous times across a scanning machine to falsely boost sales figures.

"What you have here is an industry basically lying to itself," said George Zamora, president of WEA Latina, the U.S. sector of AOL Time Warner Inc.'s Latin music division. "It's a real problem. It's happened a number of times. In Los Angeles. In New York. In Puerto Rico."

Billboard magazine chart chief Geoff Mayfield said he also is aware of efforts to distort sales figures. "I am very disappointed . . . to know that record companies may be attempting these kinds of shenanigans."

SoundScan Chief Executive Mike Shalett acknowledged that the company has found troubling anomalies in record sales data. And Shalett said he is hearing reports among industry insiders that the major record labels are hiring outside consultants to manipulate the numbers.

Representatives of the five major record companies all denied knowledge of any label in their organizations participating in any schemes to enhance sales figures.

It is unclear how often manipulation occurs or how many record companies participate in efforts to distort sales figures.

Shalett declined to name which labels or retailers may have participated in schemes to falsely drive new releases up the charts featured in Billboard magazine.

But Shalett said, "We've seen anomalies in the sales figures. We have security measures in place, though. We catch them. . . . Let me put it like this: Some stores that used to report to SoundScan no longer do."

Shalett refused to say how many stores have been eliminated from the company's tracking system.

SoundScan is the record industry equivalent of the Nielsen ratings for television programs.

Placement on the Billboard record charts affects the amount of play a song receives on the radio, orders from retail outlets and the reputations of artists and label executives. And the fraudulent maneuvers affect the quality of data that companies pay millions of dollars to obtain.

Several executives familiar with the process say it works like this:

A label hires an independent consultant to ship boxes of free CDs of a new release to a select group of small, independent record stores across the U.S. The retailers, in return for the free merchandise, agree to swipe each CD numerous times over bar-code scanning devices at cash registers to make it appear as if more copies of the album are sold. The trumped-up sales figures are then fed into SoundScan's computerized accounting system.

"Some stores are scanning a single CD numerous times to falsely distort the sales numbers," said Sony Discos Chairman Oscar Llord. "It's got to stop."

Through these techniques, a record can be pushed up as many as 10 positions on the charts, which could be enough to get a CD into the coveted top 10.

Although there are no laws that specifically prohibit the manipulation of sales data, the practice could have broad ramifications for the music business. SoundScan is widely regarded as the most trustworthy gauge of consumer tastes, helping determine which acts should get radio airplay and which CDs retailers ought to stock. Record companies, artist managers and radio stations pay handsomely--$10 million annually--for the data because it is believed to be precise and tamper-proof.

"If ever there was an industry that needed accurate sales information, it's us," said Jheryl Busby, former head of urban music at DreamWorks. "One thing we can't afford to do is waste money hyping stuff that's not real."

The marketing scheme is a throwback to an era before SoundScan existed. Before the research firm's arrival 10 years ago, the hype-driven industry's charts were based entirely on verbal reports made by retailers, which executives say were easily corrupted with gifts and money from record labels.

SoundScan introduced a computerized system to register sales. The company tracks sales in 18,000 music stores, extrapolates the data using weighted samples and delivers a final tally to subscribers every Wednesday morning.

SoundScan's computer system revolutionized the business by rearranging the pecking order of pop music, allowing virtually unknown acts to elbow out established superstars in the weekly sales race. The data revealed, for the first time, that consumers were spending most of their money on non-mainstream music such as hip-hop, metal, alternative rock and country--genres that immediately began to dominate the charts. And because tweaking the system appeared to be an extremely complicated and expensive proposition, SoundScan seemed invulnerable.

But with so much riding on the perception of first-week sales, nervous executives eventually started exploring new ways to mask the failure of costly over-hyped projects, executives say. Because labels sometimes invest more than $2 million to produce a CD, video and corresponding promotional campaign, the importance of a blockbuster SoundScan showing is considered essential.

Indeed, pop stars blame label executives if their new release fails to crack the top 10. Radio programmers and concert bookers take notice when a CD bombs, as does the chief financial officer of the label's parent corporation. One failed project can undermine a label's quarterly financial projections.

"The big reason why label executives distort sales data is because they want to try to look good for the corporate bosses upstairs," WEA Latina's Zamora said. "It's ludicrous."

The major record labels acknowledge employing independent marketing firms, but said the consultants were required to sign contracts stating they did nothing illegal while operating on behalf of the companies. Labels said they hire outside marketing consultants on a per-project basis primarily to deliver CDs, posters and displays to independent stores that their distribution arms would not otherwise service.

But several retailers say labels often employ outside consultants simply to target a specific group of small, independent stores that are weighted heavily in the SoundScan formula. It is unclear how they discovered which stores are weighted. The consultants target small stores because they are more easily lured into the scheme and have less to lose than the larger chains owned by publicly held companies, record executives say.

Because SoundScan monitors transactions at only 650 of the thousands of independent music stores, those stores are weighted to count more in its weekly tally.

"I feel strongly about the security measures we have in place," Shalett said. "I'm not willing to discuss them with you for the obvious reasons, but they work very well. We catch the anomalies."

Stores participating in the scheme earn about three times their normal profit by selling the free CDs at the suggested retail price, according to people familiar with the practice. Marketing consultants can earn $12,000 a month.

Artists and songwriters, however, don't earn a penny on the transactions. Nor do the public corporations that own labels caught up in the marketing ploy. In fact, they lose money. By giving away so many free goods, corporations forfeit tens of thousands of dollars in potential sales.

Shalett said he is losing patience with those perpetrating the latest scheme.

"The labels pay us to run a system that delivers an accurate sales count," Shalett said. "What's the point of them paying somebody else to mess with it? It's insane."

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