US record companies could be about to lose out on millions of dollars because US electronics retailer Circuit City might be about to go under. The US's second biggest electronics seller applied for Chapter 11 bankruptcy protection on Monday following announcements earlier this month of planned store closures and staff cuts.
Although its biggest creditors are the major electronics firms, including Sony Corp's Computer Entertainment division which is reportedly owed $60 million, Circuit City also sold CDs and DVDs and reportedly owes music distributor Alliance Entertainment not far off $16 million. While Circuit City has Chapter 11 protection creditors can't take action to reclaim the money they are owed. It remains to be seen if Circuit City can be rescued through either restructure or new ownership, and if not how much of its considerable debts could be covered by selling off its assets. It's thought if the firm does go under the Alliance may have to write off a large portion of that debt.
It's not clear who that would hit the hardest. While such bad debt will be shared between the record companies and the Alliance, Digital Music News quote US label insiders as saying the distributor will be much harder hit. It's not clear if that's because the deals between the labels and the Alliance put more liability for bad debt on the distribution firm, or simply because while each label will only lose out on their share of a portion of that bad debt, the Alliance would lose their share of all of it, if that makes sense.
Either way, given that most companies in the distribution sector are already struggling because of the decline in physical product sales, presumably the Alliance could do without having to write off such a big debt at this time, should it come to that.