UMG ADDRESSES ROYALTY ACCOUNTING ISSUES

According to an internal memo dated Nov. 25 obtained by HITS, UMG acknowledges it has a "perception problem" with the artist community, as pointed out by hearing sponsor Sen. Kevin Murray, and will immediately implement several initiatives meant to foster greater confidence among artists and their representatives. The changes will help build "stronger ties and relationships" with artists signed to its labels, the memo says.

UMG Sr. VP Global Royalties Marjorie Fieldman, from whose office the memo originates, lays out the following changes, based on conferences with audit firms and hearing testimony:

● UMG will double the size of its audit support staff in order to reduce the time required to complete an audit and make UMG more responsive to issues raised by audits.

● The royalty unit will hold "royalty workshops" for interested artists and their reps to help them understand UMG royalty statements. (Incomprehensible royalty reports were a major complaint at September’s hearing.)

● UMG will, for the first time, allow auditors access to manufacturing records.

● Directly addressing additional complaints heard at the hearings, UMG will waive previous restrictions on the audit process, including the hiring of auditors on a contingency basis, permitting simultaneous audits by the same auditing firm, permitting royalty documents to be copied and used outside UMG offices, and giving all artists the right to audit royalty records, even if there is no audit provision in certain contracts.

UMG is also "in the process of converting to an upgraded royalty system for all of the labels," the memo says. Last week, BMG announced it would simplify its royalty system, eliminating deductions for packaging, free goods and new technology across the board and moving to a wholesale-based model rather than one based on the suggested retail price. Last month, UMG itself announced it would eliminate such deductions for royalties on downloaded music, while opting to pay the higher album rate instead of the single rate as an incentive for artists to become more involved in online sales.

Noting the difficulty inherent in processing some 80,000 royalty statements each year, including issues of interpretation on contracts that are as much as 70 years old, Fieldman’s memo acknowledges that "inadvertent errors" are a reality of the system, but stresses that, "in the overwhelming number of cases," artists are paid accurately and in a timely fashion. Nevertheless, "after listening to outside auditors and testimony at the legislative hearings, we have decided to initiate a number of changes in our royalty reporting process to make it more efficient, responsive and easier to understand," the memo says.

Allowing manufacturing records to be scrutinized by auditors, in particular, will address an especially sore point with artists: "It became clear to us at the hearings that not making manufacturing records available is causing unnecessary suspicion and adding to a negative perception," Fieldman notes. "While providing these records will cause us some additional administrative burdens, we think it is appropriate to do so. It appears this will give some auditors (and hence our artists) a greater "comfot zone" and confidence in the process."