How a CEO runs a traditional distribution company like a Ponzi scheme
Imagine someone who is out of work and wants to create an easy job for himself (and perhaps his wife or business partner) by forming and running an unprofitable media distribution company.
Hypothetical balance sheet:
$200,000 in total gross annual income from media sales
$150,000 of which is contractually owed to vendors (75%)
Contractually this only leaves $50,000 for the owner to allocate towards company expenses and salaries, however the owner instead chooses to allocate (or rather “steal”) another $50,000 from the $150,000 that is owed to his vendors (filmmakers).
$50,000 owner's salary
$30,000 wife/secretary salary
$20,000 other overhead expenses
The owner may prioritize paying larger vendors who have more product in the pipeline for release because he doesn’t want to lose those vendors. Consequently the smaller vendors get really hung out to dry, but at least the owner's house of cards will collapse later than sooner and he can continue to pay himself a full salary.
Understand also that there is a long lag time from the time that media product is shipped to the distributor, to the time it sells through in stores, to the time stores pay for sold product, and finally to the time the media distributor actually mails a check to the vendor. Billboard once reported that this lag time was on average 18 months for CD's! With this much lag time a distributor can stretch out running his Ponzi scheme for years while continually paying himself a salary, all supported by sales of your media products!
How do they get away with this? The owner knows that it is very expensive and difficult to prove fraud in court. In the absence of a written contract with "teeth" that specifically lays down the rules of the agreement, the law seems to allow an owner to prioritize paying for overhead and salaries before his vendors get paid. All the owner has to do is claim that he just made some "bad business decisions". Everyone makes innocent mistakes, right? Usually in the eyes of the law it’s only regarded as the lesser “breach of contract” rather than "fraud". And with "breach of contract", an owner is never held personally liable and the vendor never gets to collect for their attorney’s fees unless the written contract says otherwise (which typically it never does). A plaintiff might spend $100,000 in legal fees to win $25,000 in unpaid sales, then try to collect, but by that time the owner files for bankruptcy, there’s nothing left to collect and the whole ordeal is over and done with. Bankruptcy releases defendants from breaches of contract.
When it’s all said and done, the media vendor thought that signing with a traditional media distributor would lead to wider distribution and greater profits. Instead they only got paid perhaps 10 cents on the dollar for mainly Internet sales, which the vendor could have handled on their own through Amazon.com's Advantage program, through their own website and Ccnow.com, through Create Space, and / or through non-traditional distributors such as Tunecore or FilmBaby, all without the help of a traditional distributor.
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