• Records: Industry execs say major labels are involved in scheme to manipulate SoundScan sales numbers.
• Two of the most vociferous opponents of the Napster file swapping service, Metallica and Dr Dre, have come to an agreement with the troubled dot com firm.
• Napster Acts to Relaunch Song Service

Records: Industry execs say major labels are involved in scheme to manipulate SoundScan sales numbers.

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."

Two of the most vociferous opponents of the Napster file swapping service, Metallica and Dr Dre, have come to an agreement with the troubled dot com firm.

The heavy metal band and 'gangsta' rapper had both filed copyright suits against Napster. But just as Napster is fading away, the two settled, with Metallica now allowing some of the band's songs to be traded on Napster's song-swap system.

Those tracks can only be traded once a legal business model has been launched for Napster, which is expected to happen later this summer. The detail of the 'nu-Napster' are not known, although some form of subscription model for music fans is expected.

Regardless of whether Napster will ever be the powerhouse of online content that it once was, Metallica's outspoken drummer Lars Ullrich was happy at the deal. "I think we've resolved this in a way that works for fans, recording artists and songwriters alike."

The lawsuits were filed last year at the height of Napster's popularity when millions of users where downloading MP3 files every week, many of which were in breach of copyright. The company has since been dogged by lawsuits, artists and the recording industry, which won an injunction against the company ordering it to block access to all copyright music.

Napster's efforts have produced mild results. The service has been off-line since July 2 as the company tries to retool its software technology to comply with the court order. And the troubles for the company are continuing as it announced it would appeal against a federal judge's decision that the company remain off-line until it can perfect its song-swapping system

Napster Acts to Relaunch Song Service

La times

After 19 months of lawsuits, motions and appeals, the major record labels and music publishers finally have the Napster Inc. online song-sharing network where they want it: out of service.

Napster raced to appeals court Thursday to try to relaunch its service, whose new anti-piracy filters were deemed too weak by a federal judge. Under an order issued Wednesday, Napster can't reactivate its downloading service until U.S. District Judge Marilyn Hall Patel in San Francisco is satisfied with its efforts to halt piracy.

The order, which came 10 days after Napster voluntarily suspended its service, keeps the company in painful limbo while its customers flee to other services. "This is a crushing blow to this business," Steven M. Cohen, a lawyer for Napster, told Patel at the hearing.

The Redwood City, Calif.-based company filed an emergency request with the U.S. 9th Circuit Court of Appeals on Thursday, arguing that an indefinite shutdown would cost Napster its competitiveness and its customer base. The court is expected to rule within a few days.

The void left by Napster may exacerbate the labels' problem with online piracy, some analysts said. Several other unauthorized sources of free music on the Web have boomed in recent months, and the shutdown will only accelerate that trend, said analyst Phil Leigh of the Raymond James & Associates investment firm.

That's because the labels and publishers have been slow to provide legitimate alternatives to Napster. Although a number of would-be online subscription services exist, none have won all the licenses they need from the music industry.

One alternative--Microsoft Corp.'s MSN Music--got a significant boost Thursday when it announced a deal with Pressplay, the online music distribution service for Universal Music Group and Sony Music. But Pressplay won't be ready to supply music to the MSN Music site until late this summer at the earliest.

Even some advocates for the labels want to see Napster back up and running--but only as a service that protects copyrights. A transformed Napster could serve as the labels' Exhibit A in legal battles with other file-sharing services, said Russell J. Frackman, an attorney for the labels.

If the appeals court doesn't intervene, it's not clear how long it will take Napster to satisfy Patel. Frackman said the most foolproof approach would be to allow users to share only the songs authorized by the labels and publishers, an approach that Napster flatly rejects.

The company still hopes to launch a membership-based service this summer backed by labels and publishers, who would collect a share of the membership fees as royalties. Napster's interim chief executive, Hank Barry, said the shutdown shouldn't make it harder for Napster to attract paying customers for its new version.

"I think there's a lot of goodwill for Napster even in the circumstances we're in right now," Barry said.

The company's song-swapping system helps users find and copy songs from each other's computers. The service was slapped with a copyright-infringement lawsuit in December 1999, and Patel ordered Napster in March to block users from making unauthorized copies of any works identified by the major labels and music publishers.

After Napster and its opponents quibbled over how to carry out the order, Patel appointed a consultant, A.J. Nichols of Woodside, to determine what was technically possible. Meanwhile, Napster gradually built up filters to stop users from searching for and downloading copyrighted songs.

The filters slashed the amount of songs available for sharing, and that lack of content sent users packing, said analyst Lee Black of research firm Webnoize. The exodus picked up speed July 1 when Napster cut off all downloads after detecting a problem with its latest filtering software.

Nichols told Patel at a closed hearing Wednesday that Napster hadn't yet perfected the filtering, particularly when it came to matching song files in users' collections to the 950,000 songs that the labels and publishers have identified for blocking. Although Cohen contended that Napster's filters were missing fewer than 1% of those songs, Patel said, "I expect you to get down to zero, as close thereto as . . . humanly possible."

She instructed Napster to take the additional steps recommended by Nichols. "He will tell me when he thinks you have gotten to that [acceptable] point," Patel said.

Patel also instructed warring sides to resume settlement talks, aided by a federal mediator. Coincidentally, Napster announced Thursday that it had settled the lawsuits brought against it by the rock band Metallica and rapper-producer Dr. Dre.

Terms of the settlements were not disclosed, but Howard King, a lawyer for the artists, said Napster will be paying his clients. The settlements also call for certain tracks by Metallica and Dre to be available through Napster once it can track usage and pay royalties, King said.

A major factor in Napster's appeal, at least before it started filtering out songs, was the breadth of music available on the service. A handful of online companies have won licenses from several labels and publishers for on-demand music services, but none has the licenses needed to match what Napster once offered--or what the other unauthorized services on the Web still do.

A case in point is MSN Music, whose new deal with Pressplay gives it access only to about half of the most popular songs. That's because at this point, Pressplay's only deals with major labels are with Sony and Universal.

MSN's deal with Pressplay is not exclusive and Jeremy Hinman, director of MSN Music, said the company "will work to broaden the catalog in the way that makes the most sense." But Andy Schuon, president and chief executive of Pressplay, said his company won't allow its service to be commingled with any other music-distribution service.

Major labels have divided into two major camps, with EMI, Warner Music Group and BMG joining forces with RealNetworks to form Pressplay's main rival, MusicNet.