Re-engineering Music Companies

Marketing ace Jim Guerinot, who is credited with helping mastermind commercial breakthroughs for Offspring, Rancid, Sheryl Crow and Soundgarden, has launchedhis own label, Time Bomb Recordings. Based in Laguna Beach and financed by German conglomerate Bertelsmann, Time Bomb plans to employ a new financial architecture for music deals pioneered by independent labels, including paying unknown artists twice the going royalty rate and charging retailers 20% less for albums than competitors. Time Bomb will release debut albums in January from San Diego-based No Knife and the Boston-based Elevator Drops.

Standard music company financial model

* Royalty: Newly discovered acts are typically paid no more than a 12% royalty rate on every record they sell.

* Wholesale Cost: Record companies charge retailers about $10.30 for new releases in the compact disc format.

* Overhead: Most major record labels spend millions of dollars on overhead expenses such as salaries, promotion and marketing, and release hundreds of albums per year.

* Cash Advances: Bidding wars have driven up the cost of doing business, causing record companies to pay young, coveted acts more than $400,000 in cash advances per album to cover recording costs and living expenses. A cash advance is like an interest-free loan that the company deducts from the artist’s royalty payment every time an album sells.

Time Bomb formula

* Royalty: Time Bomb pays unknown acts a 24% royalty rate per record--comparable to the rate paid to such superstars as Madonna, Janet Jackson and the Rolling Stones.

* Wholesale Cost: Time Bomb charges retailers about $8.50 for new releases in the compact disc format. The lower wholesale price could benefit profit-squeezed retailers as well as young consumers.

* Overhead: Time Bomb is spending less than $250,000 on salaries for its seven employees and plans to tightly limit spending on promotion and marketing. The company expects to release no more than six albums per year. By releasing fewer albums, Time Bomb could focus more attention on each project.

* Cash Advances: Guerinot--who helped keep marketing costs be low $225,000 for Offspring’s 8-million-selling “Smash” album--plans to advance Time Bomb acts about $150,000 per album to cover recording costs, touring budgets and living expenses. By keeping overhead costs down, the band and the company should be able to recoup profits more quickly.