Moses Avalon is one of the nation’s leading music-business consultants and artists’-rights advocates and is the author of a top-selling music business reference, Confessions of a Record Producer. More of his articles can be found at www.mosesavalon.com.
In part I of our three-part series, “Why You Should Think Twice Before Joining ASCAP or BMI, or SESAC,” we covered the basics of why you might be better off waiting to join one of the PROs. In part II, we are going to examine the widely held belief that these performing-rights organizations are “nonprofit” entities, and how this fallacy affects the way that they both operate. And while we’re un-spinning that, we’ll learn a thing or two about actual nonprofits that might surprise you.
On any music-business panel where the PROs have a presence, this question always comes up: “Why should I join ASCAP/BMI instead of SESAC?” Reps from both ASCAP and BMI will robotically respond, “Because unlike SESAC, we’re a nonprofit organization.”
Is that true? If so, does being a nonprofit mean that you, as member, will get more cash? What if it was all a lie? All of it. Would that lie make you leery of other claims that ASCAP and BMI make about your benefits?
It’s not too hard to figure out why someone would claim to be a nonprofit; when people think of nonprofits, the word “charity” is usually not far behind. It also fosters the image of employees flying coach, eating bag lunches, and working tirelessly at a thankless job.
But, in truth, ASCAP and BMI are among the richest entities in the music business.
What exactly is a “nonprofit”?
From the IRS’ point of view, “nonprofit status” means one main thing: after you pay all of your expenses, any remaining money must be paid out to your members or your cause, thus leaving no “profit” left to distribute to stock holders — or anyone, really. This is true, even if you have 99 cents worth of expenses on every dollar that you make and give only a penny to your cause. The caveat being that it must be 99 cents worth of “legitimate and necessary expenses.”
ASCAP claims to have the highest cost/payout ratio (called a “cost/benefit ratio”) of any PRO in the world — 13.5 percent — meaning that 86.5 cents of every dollar that it collects goes to its members. BMI claims on its website that its overhead is only 15 percent, meaning that 85 percent goes towards its members. These are acceptable percentages, comparable to any legitimate, tax-exempt nonprofit charity. Save the Children, which pipelines donations to underdeveloped nations, has a similar cost/payout ratio, so it’s no surprise that the PROs would emulate that type of organization.
ASCAP and BMI both claim that after covering their necessary expenses, they pay out all remaining money to their members, leaving no “profit” at the end of each year. But what do the PROs consider “necessary” to spend your money on? A few facts:
– The CEOs of both ASCAP and BMI receive annual compensation well into the low seven-figures. Executives are paid quite well too.
– Both have offices in prime real estate in Manhattan and Los Angeles, where cumulative rent approaches millions of dollars per year.
– Both throw lavish and expensive parties designed to rally new members and give away huge cash awards.
– Everything listed above costs each PRO about $100,000,000 per year in “expenses.”
Big parties? Huge salaries? Fancy offices? A hundred million bucks a year in overhead? Does this sound like a charity or any nonprofit that you are familiar with? Are any of these expenses truly “necessary” to collect performance fees that are due them by law?
Tax fraud and the PROs
Now, since many nonprofits are exempt from paying income tax, the IRS has the authority to investigate nonprofits that are potentially co-mingling personal expenses with corporate ones. For example: if the CEO lives in a two-million-dollar condo that is owned by the “nonprofit” company.
When it catches one, that company can lose its nonprofit status and be subject to hefty fines and penalties. Yet, would you believe that neither ASCAP nor BMI has ever been stripped of its nonprofit status or paid any fines related to fraud of this nature? Nor are they even remotely threatened by this “outing” that you are reading now. How do they get away with it? I’ll explain.
BMI and ASCAP reps have told me repeatedly in green rooms that they are a “nonprofit organization,” but their websites and press releases say something a bit different. They state that they are a “non-profit-making” corporation that operates on a “nonprofit basis.” BMI’s beautiful online brochure uses this term in super bold headliner, and ASCAP has its version of “nonprofit basis” as well. It almost sounds identical, right? But this is the same kind of semantic distinction the FDA requires food companies to make on packaging, with phrases like “cheese-food” and “orange juice-drink,” when most of its ingredients are artificial. I’m sure readers of this blog are familiar with is the use of the words “digital quality” to help bolster the credibility of a standard piece of audio gear.
Truth: The ASCAP or BMI that you join as a writer/publisher is a standard, typical, run-of-the-mill, garden-variety “domestic business corporation.” They are not classified with a 501c3 status (the IRS code for a tax-exempt nonprofit), nor do either ASCAP or BMI file an annual form 990 (the tax-exempt nonprofit IRS documents).
So the answer to the question of how ASCAP and BMI avoid jeopardizing their nonprofit statuses while spending a fortune of their members’ money is quite simple:
Neither of them has ever been a nonprofit corporation, nor have they ever asked the IRS to recognize them as such.
Therefore, they are not misrepresenting anything to the government — only to their members, who often do not know the difference between “tax-exempt nonprofit,” regular nonprofit, and “not-for-profit,” the last of which is not even actual IRS tax nomenclature.
But even if they were classified as legitimate 501c corporations, operating on a “nonprofit basis” is no guarantee that a member will receive more money than with a “for-profit” company. In fact, it could easily mean the opposite. It all depends on how they spend your money.
Okay, so we’re not really a “nonprofit.” Big whoop. We still act like one, right?
Maybe. In a real tax-exempt nonprofit, there are regulations that must be followed about how much the company can filter for expenses. Also, the balance sheet of the company is often a public record, so you can see what the CEO and the Senior VPs pay themselves.
But in a nonprofit-like scenario, corporate conscience is their only guide. Since both PROs are, in effect, privately held membership associations, exempt from the public’s prying eyes, we can never know for sure if, when each spends about $100,000,000 a year, it’s all on truly necessary expenses.
One would hope that long before they give away members’ money to their needy executives, they would take care of their own struggling writers first, right? Unfortunately, the vast majority of their writer members never see annual payments that peak into the four-figure range. Meanwhile, executives have salary bases and annual bonuses that are well into six figures. (This information is rarely known by the PRO recruiter earning $25 K a year for shoving membership forms in your face at music conferences.)
Since how much they spend bears a direct relationship to how much is left for their members, for your consideration, here is a spending-comparison analysis between ASCAP and BMI.
– BMI has more offices than ASCAP and more employees. If you’ve ever been to a BMI office in a major city, you know that they are pretty fancy as well. If you like a lean, fiscally unadventurous administration, you may prefer ASCAP.
– BMI gives advances as an inducement to join with far more regularity than ASCAP. Both call these “expenses.” If you think that giving speculative money to emerging talent is too big a risk to take with your money, you may prefer ASCAP’s purist “if you got a hit, you get a split” philosophy. If you think it’s way cool that BMI gives more up front, like a label, to secure rights, then go with BMI, assuming that it’s are offering you an advance. See part I for more on that.
– BMI has tie-in marketing campaigns with industry trades and equipment makers to give its members “free” subscriptions and “discounts.” As you know, there is no free lunch. BMI sponsors these and justifies it as an “expense.” If you think giving up money so that you can get a discount on a fancy new Korg keyboard is dumb-ass backward, you may prefer ASCAP’s more conservative “we’re not Groupon” policy.
– BMI throws (on average) more lavish showcases than ASCAP. It also sponsors songwriting workshops, grants, and scholarships galore for emerging writers. This may sound awesome when you’re just off the bus, but if you think exposing the industry to new talent (other than ones you’re connected to), thus creating more competition, is not something that you wish to involuntarily subsidize, you may prefer ASCAP.
ASCAP sponsored a “matching donations” campaign for victims of Katrina, 9/11, and others. It also spends millions each year in “outreach programs” to bring music to poor school districts. BMI’s nonprofit sister company (the “BMI Foundation”) gives away millions each year to other nonprofit organizations for music programs in underdeveloped areas. If you feel that giving your money to disaster charities is a decision that you would like to save for yourself and not subsidize involuntarily, or you believe that charity begins at home, or that teaching a kid in Mozambique how to play the marimba is not what a PRO should be doing with your money, you may prefer SESAC.
More or less, this boils down to what role you see the PROs playing in the music industry. If you believe that they should be philanthropists as well as collection agents, then the items above may not matter to you. But remember that it’s your money that they are giving away before they give you anything.
So what? We’re still better than a confessed “for profit” PRO, right?
Who knows. As we can see, a very viable argument can be made for the reverse; if you were going to hire a collection agency to get the money that you are due, a for-profit model has a far larger incentive to keep its overhead down than a “nonprofit-like” one.
Law requires that all US PROs have to operate very similarly to each other. That being the case, wouldn’t it make sense to have your collection muscle remain thrifty?
But by now, I hope you would be far too sophisticated to consider claims of “nonprofit-ness” — or covert attempts to portray ASCAP or BMI as charities — as influencing factors when deciding whom to give your most valuable rights.
In part III of “Why You Should Think Twice Before Joining ASCAP or BMI,” we will explore the payment formulas of each PRO in detail, and finally answer the burning question: Who pays more?