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Hands full with EMI

New EMI owner Guy Hands might just provide the biggest shake-up the industry has ever seen.

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One EMI executive was reported as saying that the “game is up”. Philipson continued: “The game is indeed up, though many in the music industry don't realise it. Years of price gouging, market manipulation and the artificial creation of "hits" and "artists" have finally caught up with them. Digital technology and the internet have brought them undone … the music industry's problem is that its monopoly on both trade and manufacture has disappeared.”

Philpson’s diagnosis is correct, but his evidence is suspect. The story was probably fictional. Who refuses free stuff? At the very least some of the teenagers would have shown enough entrepreneurialism to try to sell the CDs on the high street. What was probably more significant is that EMI released the story, in what is surely a signal to its own staff, artists and business partners that a radical change is needed to their business practices.

So what is Hands up to? We get a glimpse in a recent interview for The Diplomat magazine, where he comments that private equity makes its money in three different ways: “straight overcharge of margin; cost of debt versus return and asset expansion of multiple; and, finally, business transformation.” The first two are techniques of financial manipulation that are on the nose in the light of the credit crisis in the United States. The third is doing the hard yards of making a business better, the place where Hands clearly see himself (he boasted that he had found the worst company in the worst industry when he acquired EMI).

Hands confirms this. “Pretty well every private equity firm out there has made money on margin overcharge. Probably about 30 per cent are good at getting multiple expansion right. But those who actually do transformation of businesses are very few – you could probably count them on the fingers of two hands worldwide – and there are over a thousand private equity firms. This means you’ve got a vastly over-staffed, over-capitalised industry that is going to take some time to adjust.”

Hands thinks the recording industry is pretty over-staffed, too. He has sacked about a third of EMI’s employees. He has also identified himself as one of the most interesting people the music industry has ever seen -- a private equiteer who laments the waste of having too many people in the finance industry. “The world has gone crazy over the last 30 years. We have put such a high premium on financial skills that we have sucked all the bright people out of other businesses, all other activities.”

So what does this mean for the music industry? One is a decline in the thuggery that has been its stock in trade. No point stitching up young performers to deals that would make Dracula blush when the product being produced, CDs, is in apparently terminal decline. For the last three years there has been double digit declines of sales. US album sales are down another 12 per cent in the first two months of this year. Record executives are apparently “depressed”.

Distribution and marketing are also fundamentally changing, with the rise of internet sites like Myspace and Facebook, and the waning importance of radio outlets. No point engaging in payola when the customer is tuning out. File sharing companies now feed data into Billboard charts even though their users are not paying for it.

A few consequences are likely. One is that record companies will try to tie up musicians even tighter. They are increasingly striking “360 deals”, where they can take a share of live performances and merchandising. But they are starting to lose negotiating power, because they increasingly cannot promise musicians earnings, or even fame, from CD sales.

Live performing is likely to make a big comeback, because it is the one thing that cannot be digitised and pirated. The “working musician” might start to make a comeback.

Record companies may eventually learn to add value to CDs. In most businesses (and the music industry is more an organised racket than a normal business) market challenges are met with innovation, new ways to give customers value. The CD is just a digital form of the record, and as a customer offering, the record has not changed in over half a century. The industry has innovated in fashion, and in ways to use the law to exploit musicians, but precious little else. Hands may soon turn his thinking to how to give customers something more than just recorded music.

Another potential option is that internet sites will start to become smarter, and in theory record companies should know how to do this. At the moment, sites like Facebook just offer exposure (and you can die of exposure). A disintermediation site like Zoom2unes may be the approach of the future. Musicians are connected more directly with their market. Users vote on the music, which gives instant market feedback, and then there are various ways made available for them to develop a market for their music, many of the ways automated. The market can be developed in different on-line and physical distribution channels.

These seem to be some of the directions of the future. At least it might stop the egregious spectacle of record companies complaining about the immorality of piracy when they have usually gone to great lengths to ensure they get nearly everything and the creators of the music very little.

See the full text of Hands' October 07 letter to EMI staff regarding Radiohead's decision to release directly on the internet.

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Ring, ring, why did the income just fall?

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Ring tones have been touted in recent years as one of the new markets emerging to fill the gap created by the drop in physical CD sales. Recent reports question this. US performing rights licenser BMI says it expects ringtone sales to fall by 7% this year to US$510 million. Optimistically BMI identifies “ringback tones” as the new growth area, you hear these when calling someone. Don’t know if their new predictions can be relied on given the failure of their old ones!

Sony download downside?

Sony is the latest to announce their own download service using the extensive Sony/BMG roster. Looks like they are intending to use a flat fee for unlimited downloads. Users will retain ownership of tracks even after their subscription ends. This looks like a half way point between recently suggested models.
Sony also claims that their tracks will be playable on all MP3 players and that they are “in talks” with other music distributors to get more content. They also see mobile phones as a major download destination. Interestingly, we've heard nothing about what the artists will get out of this. We can imagine the deal likely to be offered to new artists is pretty poor if “industry standards” are any indication.

360 leaves you back where you started

Latest from the SXSW fest is more mention of the “360 deal” where labels take a hefty slice of ALL artist income, not just track sales. Quoted reasons are: track sales are down, live income is up so we want that too. C’mon record companies! You used to at least pretend that your behaviour could, with a great deal of imagination, be interpreted as not quite completely disgusting!!

Zapple(TM)

ZapMedia are chasing Apple’s iTunes over alleged patent infringement. Zappers claim the “core” is using their IP to make the download system work. If the suit succeeds it could potentially affect any digital distribution.

'Shroom prints

Mushroom publishing have done a deal with AMPD (formerly Allans Publishing) to provide print versions of the Mushroom catalogue. Both sides are expressing joy about the deal. Intelligence suggests someone should count their fingers.

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