Keith Bernstein of Royalty Review Council is in the Glenn Peoples news scoop in Billboard about Keith’s Crunch Digital company and PDX service. Here’s Keith Bernstein’s interview with Chris from the February 2011 issue of our sister publication MTP Monthly (you can sign up for the MTP Monthly newsletter here–it’s free).
This issue’s featured interview is with Keith Bernstein of Royalty Review Council and Crunch Digital. Keith is a royalty auditor who specializes in auditing digital service providers, webcasters, and mobile carriers. Keith is interviewed by MTP’s Chris Castle.
Keith Bernstein: I go back to being in the major record labels about almost twenty years ago now in the “trenches” of royalties. While at the record labels I was the one that was receiving the audits from third parties, and I watched their processes. I knew that if I ever was to leave a major record label, I wanted to perform audits because I believed that the auditors out there weren’t
doing them right.
I made my move when digital was first coming in around 2000, really at the dawn of the digital era I knew there was going to be a need, as compared to the physical world, to bring specialized skills to conduct audits of digital services unlike the skill sets of the physical goods world. So when we started Royalty Review Council in 2000, the primary plan was to be in a position by 2003 or 2004, to be available to various clients to perform digital audits.
Our Crunch Digital service provides clients with a set of tools that allows them to more proactively monitor their digital sales to look for contract compliance. They can analyze prices and price changes, review the accuracy of incoming digital sales reports, and minimize their future audit costs.
MTP: What size of a client would typically use the Crunch Digital technology?
Keith Bernstein: Major studios, major record labels, major publishers, good size video gamers, eBook publishers. Folks that deal with lots of sales files coming from lots of places need the ability to consolidate those files, and make interpretations of what’s really deep in the data. You don’t want to wait for three or five years to go by and then perhaps engage us to perform an audit. We can do that, but we believe from our experience that you need to be more proactive and literally be reviewing your data for every statement.
While we serve the larger customers of that type, the service certainly can be provided to smaller companies and we can just scale it down so they too could gain from the insights.
MTP: Why do you feel that you need to go after your data frequently?
Keith Bernstein: It’s a lot of data. With some major labels, major publishers and studios, there are so many products, price changes, promotions, and different restrictions on the data that it’s a lot to track. It can be terabytes and petabytes of data. As the main source of revenue moves to digital we will be in the zettabyte and yottabyte world where it’s just piles and piles and piles and piles of data coming in. You are going to need tools to be able to process all of that incoming data, and analyze it as it comes in. For example, if you sell a title at $7 or $8 wholesale price and a DSP has the title miscoded at $5, that three or four dollar price difference is $300,000 or $400,000 on each 100,000 units that you might not catch unless you scrutinize your data. So why wait
four or five years down the road for an audit, and then try to negotiate to get your money that you should have been paid years ago.
MTP: It sounds like this isn’t something that an independent artist or label really needs to undertake.
Keith Bernstein: No, An audit might be cost prohibitive for maybe a smaller record label or an independent artist. If they were using the tools such as a Crunch Digital, they are literally performing a “desktop audit” every week or month, and staying on top of the accuracy of the files being sent to them in lieu of doing an audit. As they look at their data in real time, they may also determine that an audit is necessary and cost-effective if there is something material to correct.
MTP: Audits typically are not conducted under generally accepted accounting principles or any other standards of accounting. It is something that really concerns itself specifically with terms of a particular contract, right?
Keith Bernstein: That’s correct because when you conduct this audit you’re certainly not rendering a financial opinion as to the solvency of a company when you go in there, which is what a general CPA or accountant is going to do. We are going in there and confirming if all the sales were reported through for physical or digital, and did they pay them through at the contracted rates?
MTP: You are also examining the business rules that are coded into the digital service providers accounting system?
Keith Bernstein: Either coded or as interpreted. For example, in the performance of a webcasting audit, sound recording performances are paid on performance, in whole or in part and you pay on every performance. When we were conducting an audit we noticed that for some reason the number of stream counts weren’t lining up in total to what our client was paid, and when we asked a number of questions about it and began to look deeper into it, we found that this service was excluding all stream counts of under thirty seconds. When we inquired as to why they would do that, they said it was industry practice that anything under
thirty seconds is promotional and is not payable. Of course we questioned them a lot about this, and at the end of the day they were completely wrong. It is a business rule they set up because they felt they could, but it completely was against what the regulations provided for counting sound recording performances.
MTP: For webcaster audits, are you looking at what the Federal regulations require?
Keith Bernstein: That’s correct, it’s not as if you can look at the webcaster’s statements for total stream counts, or even if they give you the activity, that you would have the knowledge that streams of 30 seconds or under are being excluded unless you
MTP: So just because you audit somebody doesn’t necessarily mean that they are evil people, or that they’re staying up late night with whiskey and cigars trying to figure out how to take advantage of people. It’s just that mistakes are made and sometimes no one knows about it.
Keith Bernstein: It’s inadvertent. It’s contract interpretation. Its manual errors, but you could also run across folks who are devious.
MTP: A lot of independent artists and independent labels go through a content aggregator and do not have a direct relationship with the digital service providers. How would the artist or label be able to audit the DSP if they are signed to an aggregator?
Keith Bernstein: They probably don’t have the right to audit the DSP. I would presume that the onus would be on the aggregator to examine DSPs to confirm their compliance, so that they can assure the labels that they represent all money is being collected and distributed. I have seen where independent record labels do have direct audit rights of the aggregator though.
MTP: If you have an independent artist who doesn’t make very much money will they ever be in a position where it makes much sense for them to audit anybody?
Keith Bernstein: I would hate to say that it never makes sense because sometimes the reason you are not earning as much as you would like to earn because you are being underreported due to an error or otherwise. I would hate to see independent artists not be able to audit. I think in the market place there needs to be thought given to perhaps where a bunch of independent artists could engage a firm such as ours, let’s say 50 of them, and then as a group not have to go the legal route, without having to be certified as a class, we simply say to an aggregator, we have got these 50 artists, they all have licenses with you, and to be efficient we want to do one audit of your books and records at one time for all 50 artists. Let them all be beneficiaries. I think something like that has to happen. Otherwise it seems unfair that the independent artist has obstacles to them conducting an exam.
MTP: How far back can you usually go in time on an audit, and what is the typical error or problem you see at the DSP?
Keith Bernstein In general whether it is digital or physical, we go back two to three years, and depending upon who you are and your leverage, you could see four to five years. As I mentioned when we talked about Crunch Digital, we have folks going back
five or six years on digital audits, and with the volume of data it is quite a task to deal with that many years of data–let alone presume that the digital service kept the details going that far back. So we are big advocates of this Crunch Digital to proactively review your data as it is coming in. Then shorten the timeline of your audits, perhaps every 2-3 years do a digital audit because I think it would be much more efficient.
MTP: If you think back on the timeline of the evolution of the digital music business, the earliest aggregators started showing up around 2003. So what that would say to me is that if you’re an artist who has been with an aggregator for that period of time, then there are certain years that you will never be able to touch because they will probably have contracted you out of being able to audit back that far.
Keith Bernstein: Well let’s just say that you could audit back that far. There is nothing to say that the service has the data even going back that far so then it becomes problematic.
MTP: That is an interesting point. What do you see when you are out there auditing? Are people maintaining these records?
Keith Bernstein: Not really. They are not necessarily keeping the minutia detail. In their mind when they summarized data and totaled it up, what you see on a royalty statement is supposed to reflect the history. Some services didn’t keep the backup to it all [so cannot recreate the statements based on usage].
MTP: That is interesting. So sometimes when you go back to audit they just don’t have the backup data for you to audit.
Keith Bernstein: That is correct, especially if you are going to go back three or four years. I don’t think that the services ever thought there was a need, or they had other reasons, but our experience is when you start to go back more than four years the odds go down with every year you want to go back that they are going to have complete data.
MTP: So the answer is, audit early and audit often.
Keith Bernstein: Correct. I think that you could do two back to back two-year audits, covering a four-year period, and get much better results in terms of any findings or settlement than you would if you did one four year audit.
MTP: That would make sense because the data is going to be fresher.
Keith Bernstein: That is probably going to be more cost effective. It’s more economical to do two back-to-back two-year audits than one four-year audit because as data gets older and data formats change. It makes our work that much harder.
MTP also has a podcast with Keith Bernstein available on iTunes and Stitcher Radio.