Music GroupsEMI, the last holdout of the four major music groups, is now on board Nokia's Comes With Music service (press release). The news comes on the same day the new Nokia Tube touchscreen phone was unveiled and more details about Comes With Music have surfaced.
More on Comes With Music and Nokia's approach to music and media can be found on the virtual page for today's Nokia Remix event in London.
A few weeks ago I was thinking to myself, When is a major going to get rid of its physical distribution and outsource most functions or partner with another company? An indication came sooner than I expected. Today it was announced that Warner Music Group will distribution and market physical product for EMI in Southeast Asia. The companies have had a similar arrangement for India, the Middle East and North Africa since 2005. I was wondering about North America, not smaller and developing markets, but I think such partnerships here are inevitable. A permanent reduction in distribution workforce would have considerable cost savings. Since the number of labels and the number of titles released are not growing, physical distribution needs to be rightsized.
It makes perfect sense. First the majors got out of the manufacturing business. There has been some consolidation of sales and marketing for indies and majors (as in the case with EMM and Caroline). As both physical sales and the number of music retail sites drop, the logical step is to partner with another company to reduce the cost of physical distribution. Even the New York Times is doing it.
Pali Research, says this lengthy and worth-reading blog post at the Wall Street Journal's Deal Journal, suggested that EMI purchase Warner Chappel Music Publishing from Warner Music Group. The odds of that happening are slim to none, as Deal Journal explained.
The sale would allow for WMG to pay down its debt, but that's important only if servicing its debt is a problem. Right now, and especially after WMG suspended its dividend, this isn't a burning issue. The Goldman Sachs analyst who downgraded WMG the other day admitted the company appears able to meet its debt obligations.
For EMI to try to integrate Warner Chappel before the smoke clears on Terra Firma's reorganization would bring unnecessary stress to an already stressful turnaround attempt. Why bother?
Financing such a deal would be difficult in today's climate. Pali estimates Warner Chappel could sell for $1.95 billion. Publishing sits in a more favorable light than does recorded music, but if I was a bank I'd sit this one out and let Terra Firma get EMI on the right path.
Would regulators deny such a purchase? EMI has the largest music publishing market share, but publishing is more fragmented than recorded music (read about 2007 market shares here). If regulators could permit Sony BMG to exist, they could live with an EMI purchase of Warner Chappel.
But I don't see it happening. WMG doesn't need to sell right now, and EMI should focus on its own transformation.
Wow. The Times Online posted an article today that says the Rolling Stones will leave EMI and sign with Universal Music Group. No indication was given that EMI's new ownership or organizational structure was a reason for the departure. Instead, the article mentioned a "bidding war" and the Stones' desire to "court rivals in pursuit of a higher price."
This is a huge blow to EMI. It will miss out on both new releases and catalog since the Stones will take their post-ABKCO recordings to Universal.
• EMI announced it will shed its UK CD and DVD distribution and will outsource it to European logistics company CEVA, with which EMI works in a handful of countries on the continent. (Music Week)
• Muzu, an ad-supported video site that allows artists and fans to create their own TV channels, has launched in the UK and Ireland. Sony BMG and a number of indies (Ministry of Sound, Eagle Rock, Ninja Tune) are on board. (Irish Times)
• I hadn't heard much about Shockhound until recently. The upcoming -- launching next month -- online store was crated by Hot Topic (the retail chain that caters to emo and metal fans). The store will sell MP3s and merchandise (T-shirts and other items). (Boston Herald)
• People are chipping in to help out Philly's Siren Records and allow it to open in a different location. (Philly.com)
• DRM gets a vote of no confidence from the Library of Congress. (Ars Technica)
There is finally some financial news on the great EMI overhaul. Music Week just put up a report that Terra Firma chief Guy Hands sent out an email to employees that described a "dramatic improvement" in EMI's first quarter financials. The recorded music division had an EBITA of £59.2 million and total revenues amounted to £288.1 million. That is an improvement on the loss of £45.1 million recorded music had last year, and a 61% increase in total revenues. (These numbers do not include the costs related to recent layoffs.) There was certainly a good deal of low-hanging fruit for Terra Firma, but those numbers are encouraging.
Hands credited the revamped organizational structure and reduced waste for the improvement. Returns of physical product was singled out as an improvement. Returns in Q1 2008 were less than 16% of gross sales, said Hands, compared to 42% in Q1 2007. He downplayed the impact the recent Coldplay release had on the quarter's results.
We have come a long way this year but, of course, there is still much to do. The problems facing the music industry cannot be solved in a few months.However, it is already clear to me that what is emerging at EMI is not only a far leaner organisation, but a more focussed and effective one as well, and better aligned with the interests of our artists. An organisation that is becoming much better placed to serve artists and customers alike, and to give our talented people the opportunity and the tools to produce their best work.
Q1 2007 revenues were 5.1% lower than in 2006. EMI Music revenues dropped 13.4% and were blamed in part on a light release schedule.
• In an effort to improve margins, Universal Music Group will bring back deluxe editions of CD releases for the fourth quarter (at least in the UK). Standard versions will also be available. (Music Week)
• EMI has appointed Elio Leoni-Sceti as its new music unit chief executive. On Leoni-Sceti's resume are stints at consumer product companies Reckitt Benckiser and Proctor & Gamble. (AP)
• More executive changes at EMI. Billy Mann, EMI Music’s Chief Creative Officer is in for departing President, A&R Labels - International and President - EMEA, JF Cecillon. (Alley Insider)
• The Orchard "substantially completes" its acquisition of TVT Records' assets (which includes masters, artist contract and office lease but not publishing). (Press release)
• A campaign by McCann-Erickson for Universal Music Group will give MasterCard users free downloads at www.priceless.com. After giving away the first 100,000, each track will cost $0.80. Being a Mastercard user I went to the site to test it out. After jumping through too many hoops, I ended up an an Amplified.com page and just gave up after being asked to register again. The prize packages are cool, but the free download aspect is pretty weak. (Billboard.biz)
• In Australia, brick-and-mortar sales of #1 albums dropped 30% and #1 singles dropped 40% in the first half of 2008. Those figures are not for all albums or singles, just the #1 singles. (Herald Sun)
• I haven't posted an article about vinyl's popularity in a few weeks, so here's another one. The article says vinyl sales in Ireland were up 20% in the first half of 2008. That's puny compared to the 77% increase in the U.S. in the first half of the year. (Times Online)
• Live Nation has purchased a controlling interest in France's Main Square Festival. (AP)
• A profile of Soundtrax, which makes music download cards. (Duluth News Tribune)
The Financial Times has reported that Terra Firma is considering Elio Leoni Sceti, whose tenure with consumer products company Reckitt Benckiser was preceded by a stint at Proctor & Gamble, to run EMI's recorded music division. Mr. Sceti's appointment would mean Terra Firma would place chiefs at both the recorded music and publishing divisions. One could interpret that move as a facilitator to merging EMI's recorded music division with that of Warner Music Group.
If there was any doubt Terra Firma has little faith in the culture of the music industry to lead EMI to profitable territory, look no further than the executive ranks that are filling up with industry outsiders. The implication is Terra Firma believes music executives as well as larger shifts in technology and listening habits are responsible for EMI's position. The company's org structure has been radically overhauled and a third of its employees are being dismissed this year. This strategy of large shocks to the system contrasts with that of EMI's competitors, who are this far hoping to ride out this period of uncertainty with smaller layoffs, fewer organizational changes, slight changes in licensing of product and the occasional acquisition that adds diversification.
As I mentioned yesterday, Terra Firma's plan to change EMI's organizational structure, what Guy Hands has called a "global functional matrix organization," strikes me as an oddly timed experiment. And yes, it really is an experiment.
The Wall Street Journal's Ethan Smith confirmed an earlier report by Fox News' Roger Friedman that Capitol Music Group chairman and CEO, Jason Flom, would not be replaced.
Traditionally, the corporations that own the major labels have organized their operations geographically, with label heads for the U.S., the U.K., Europe and other regions operating with a fair degree of autonomy, overseeing A&R, marketing, promotion and other functions in their territories.Since taking over last year, Mr. Hands has stated his desire to centralize such functions within the company. For instance, A&R executives in North America will now report to (head of A&R for the US and UK Nick) Gatfield, while marketing executives would report to a marketing czar, which EMI is currently looking to hire. Previously, both sets of executives reported to Mr. Flom, whose position wouldn't be filled.
Trink, who announced his resignation, told the WSJ's Smith he was leaving because of differences over Terra Firma's org chart.
In a telephone interview, Mr. Trink said the decision to step down was his, based on a "philosophical difference" with changes EMI's new owners were making."Their view is that there is no local management," Mr. Trink said. "There is no such thing as a president of Capitol Records going forward. I believe that's a mistake -- and not just because I happen to be the president of Capitol."
Some EMI hires have made sense. Former Google exec Douglas Merrill and Second Life co-founder Cory Ondrejka are no doubt tasked with finding new markets and new manners of music consumption and experience. They represent the future music business.
A shift toward technology and away from A&R fits with earlier statements by Terra Firma chief Guy Hands. "What we are doing is taking the power away from the A&R guys and putting it with the suits - the guys who have to work out how to sell music," he said in February '08.
How does the market feel about the strategy? If there is such thing as a score card on EMI's A&R outlook, it is EMI's loss of Radiohead and the Rolling Stones, public bickering of artist managers and Coldplay's sit-on-the-sidelines-and-wait delay in putting out its new album.
But getting rid of label presidents is a far riskier move. It implies one of two things: EMI's struggles are due to organization structure, not specific leadership, or label presidents' value to the company do not justify their salaries. With its new structure, EMI is betting that its "global functional matrix organization" is the best way to greet the future.
The thing about multi-national music companies -- just like other large, diverse corporate entities -- is within the larger company reside many unique company cultures. Each unique business unit may need its own unique leadership. Furthermore, different territories have different music markets -- especially the US and UK -- and managing two large and geographically separated divisions will be a challenge. At the very least, the new structure can run afoul of music industry executives' historical reluctance to work with people they did not hire themselves.
This is not to say the new organizational structure will not work. Hands may very well have on board the people who will buy into his vision -- there cannot be dissent if EMI is to meet its goals. But the timing of the changes adds greater risk to an already risky venture.
A report this morning by Fox News' Roger Friedman claims Capitol Music Group head Jason Flom and Capitol Records president Lee Trink will exit their roles at EMI and will not be replaced. The folks at Terra Firma, Friedman wrote, do not believe in label presidents...which means Coldplay will soon release the most important album of the Terra Firma/EMI era without anybody helming the ship. (Friedman is told all EMI labels will have "president of A&R" roles and heads of marketing, but no label presidents.)
Terra Firma has made some bold moves -- hiring Second Life co-founder Cory Ondrejka to its digital strategy team was an unconventional decision -- but this one is flat out suspect. The desired executive structure is not really the problem, it's the handling and timing of it. Not only is Hands & Co. toying with EMI's ability to sign and retain artists, it is revamping its organization chart at a precarious time. The company needs leadership at every level. This hardly seems like a time to experiment. But such is life on a private equity firm's accelerated timetable.
• SpiralFrog, provider of free, ad-supported P2P, has inked a deal to offer EMI Music's recorded music. The company has deals in place with a number of music publishers and Universal Music Group on the recorded music side. With EMI and UMG in place, SpiralFrog has about half of the major label market share for recorded music. Chairman and founder Joe Mohen told the AP that SpiralFrog is about a year away from turning a profit. (AP)
• Sony BMG's International's president of continental Europe, Maarten Steinkamp, will step down. (Music Week)
• Live Nation is increasing its advertising spending (a precursor to selling its own concert tickets?) in the UK. The concert promoter is looking for an agency to handle £10 million of media planning and buying, a figure that is up from its current £4 million annual account. (Brand Republic)
• EMI Music Publishing has signed a worldwide deal with Ben Harper. (Press release)
• imeem is now inserting short audio advertisements between some songs. (Ad-Supported Music Central)
• New York record store Jammyland closed last weekend. (Crimes Against Music)
• Universal Music Group spent $180,000 on lobbying the federal government in Q1 2008. It spent $700,000 in all of 2007. Q1 money went for anti-piracy efforts as well as for appropriations relating to intellectual property theft enforcement, Internet and satellite radio issues and performance rights. (AP)
• A resolution that calls for the protection of terrestrial radio from royalties for the public performance of sound recordings has picked up the support of an eighth senator. The House version has the support of some 200 representatives. (Press release)
On Wednesday, Terra Firma chief Guy Hands released his quarterly letter to investors. He wrote about EMI's difficulties and the current credit climate.
EMI is certainly not highly correlated to the economy. The issues and challenges facing the recorded new music side of the company are not due to the economic cycle, but to more fundamental shifts in consumer behaviour that are affecting the whole music industry. We are addressing these challenges, and working to develop a robust business model for the future. Meanwhile, and importantly, our investment has strong downside protection in the publishing and catalogue assets of the business, where revenues are on an upward trend. ...From a financing perspective, unfortunately, the crisis has been so deep that the debt package has had to remain on the balance sheet of the bank which provided it. Clearly, this is a time when all banks are under tremendous pressure, but this is not ideal for EMI. In all leveraged buyouts, your bank is your partner, and we have worked hard, and continue to work hard, to see if there are ways to help Citigroup syndicate or sell down this loan.
The New York Post hopped on the story. "EMI's debt has been viewed inside Citi as largely unsellable, sources said," wrote Brian Garrity.
The Daily Swarm has the text of an article at The Evening Standard that says "the private-equity magnate is open to offers to split the business, and is considering selling off the recorded music arm." EMI would retain the publishing arm of the company ("where revenues are on an upward trend" Hands wrote in the letter). In addition, Hands mentioned considering moving EMI's U.S. headquarters to Los Angeles, according to the article.
Such a sale would result in three major music companies that would account for about 80% of all recorded music sales in the U.S. Economic efficiencies, yes, but this has got to be close to the point at which regulators become too uncomfortable with the concentration of market share. It would be bad for sales, too. Labels merge, bands dropped from contracts, fewer acts developed, fewer titles released, fewer units sold. Good for catalog sales, but at that rate the majors would be in jeopardy of becoming archivists rather than creators.
There may be whispers and musings about a company like Apple or Nokia buying EMI's recorded music division. Nothing seems like a good fit right now. Apple doesn't need to buy EMI Music just to make another $0.30 per track, and Nokia needs to prove its sales model and technology before considering an investment in music assets. Besides, history is filled with examples of parent companies failing to realize synergies with a media subsidiary. It looks good on paper, but it doesn't always work in reality.
The Telegraph reported today that Terra Firma has bought itself a bit of time with Citigroup. EMI reportedly now has an extra three months to reach certain financial targets. (To what degree these goals are tied to Citigroup financing is a bit unclear. A December 2007 article at the Telegraph said the recorded music earnings goal was not tied to loan covenants.) The recorded music division has a goal of £180 million in EBITDA by September. About £100 million is expected to be saved from a restructuring that reduced the staff by over 2,000 employees.
The report said internal sources claim the original June goal of £150 million EBITDA will be missed. The recorded music division is on pace for £133 million, which means label bosses will not receive bonuses. Instead, the entire workforce is being offered a back-end bonus. When Terra Firma realizes the value of its investment (through sale of refinancing) the entire recorded music workforce will receive 15% of the division's equity. Publishing employees get a similar deal.
The article ends with a tidbit about an EMI strategy to merge its recorded music division with that of Warner Music Group.
Terra Firma is also understood to be sitting on a secret long-term plan, code-named Project Poker, to tie-up with listed US major Warner Music Group, merging their struggling recorded music divisions. No approach has been made to Warner, but the strategy would be to sell on some music publishing assets in order to avoid regulatory constraints.
The two companies have danced around one another for a number of years and have not been able to either merge or acquire the other. The two planned on merging in 2000, when Warner Music was still a part of Time Warner, but pulled out later in the year due to regulatory concerns. More recently the two companies made offers and counteroffers before EMI was eventually acquired by private equity group Terra Firma in May of 2007.
Update: EMI has denied The Telegraph's report that it will cut an additional 1,000 jobs. The company said it plans to have 2,700 employees by the end of 2008 and that "the new EMI" will be up and running by the end of June.
The Telegraph just reported that EMI will cut another 1,000 jobs. Those cuts are on top of previously announced plans to cut between 1,500 and 2,000 jobs. About 2,000 jobs -- down from 4,5000 when EMI was purchased -- will remain after the next round of cuts are made.
People familiar with the situation said Mr Hands was looking to cut more jobs at the company because, even after the round of redundancies announced in January, the business will still have more employees generating less revenues than its competitors at Warner Music and Universal.Insiders speculated that the next job cuts will come in waves throughout the year.
From where I sit, it appears Terra Firma head Guy Hands is content to starve the beast rather than gain strength. For all its talk of improving A&R, which would impact its top line in the coming years, EMI seems to want the same bottom line simply through lower spending. It would have to be a far more efficient operation than currently exists. Cut just enough and EMI should be able to properly develop its artists. Cut too much and it will be undermanned and unable to realize its artists' potential. The wild card is EMI's future organizational structure and creative vision for monetizing its recordings. Just how the company will do more with less is quite a big question mark.
Terra Firma is finally making substantive changes to EMI's organization. FMBQ has some information on changes to Capitol Music Group's organizational structure. In addition to the promo group changes mentioned below, some staffers were laid off.
What transpired today is the assemblage of one central promotion team by which (EVP of Promotion Greg) Thompson will continue to oversee. Again, the composition of this central group, which includes a national executive team for every radio format and a field staff, has yet to be officially unveiled by the company. The function of this central promo team will be to service the following labels: the Capitol Music Group including Capitol and Virgin; all the imprints in the Bluenote Label Group including Bluenote, Angel, Manhattan, MetroBlue and Back Porch; the Caroline Music Group and Astralwerks. The team will also work in conjunction with the Nashville office for country crossovers and the EMI Christian Music Group for crossover artists as well. The U.S. Latin label is not part of this initiative.Greg Thompson will continue to report to President Lee Trink, and he and his team will support and service all of the promotion efforts for the aforementioned label groups.
Among those let go were Virgin Records VP of promotion Dave Reynolds, Virgin director of promotion operations Jordan Rosenblatt, Virgin Boston regional James MacDonald, Capitol Chicago regional Amy Kaplan and Capitol Florida regional Ric Austin. Additionally, several assistants have been let go from the Los Angeles office, including Jen Kelly.
Three high-level industry sources familiar with the situation claim EMI needs more money to cover the restructuring costs, which are running higher than anticipated.Once source said Terra Firma is looking to possibly raise another $60 million for EMI to help pay for the cuts. Multiple sources said raising the money was not going to be a problem for the firm. ...
Terra Firma insiders are attributing the holdup to European labor laws, which require a lengthy review process before pink slips can be handed out.
The cuts are now expected by June, a source said.
Darn red tape.
Citigroup has canceled plans to sell its EMI debt. The bank had lent about $4.9 billion to finance Terra Firma's acquisition of EMI and was planning to sell the debt to third parties. Risky debt is hardly popular these days. Citigroup will keep EMI's debt and sell off $12 billion of loans to the buyout firms.
From the Wall Street Journal: "Citigroup worried that such uncertainty would add to the squeamishness of the already-jittery debt investors it is trying to lure."
EMI incoming head of digital Douglas Merrill did a Q&A with Billboard.
There's actually academic data that suggests file sharing is good for some artists. That's very much against the common prevailing wisdom, but the minute you look at the data on it you find some fascinating things. I think part of what I'm excited about doing at EMI is doing a bunch of experimenting to see what works and what doesn't. How do we add value to artists? How do we help fans find and experience artists? How do we find the right value to add? I'm really looking forward to see what happens in the next 12 months.
If you sum all the papers on P2P, the overall opinion is that it neither helps nor hurts recorded music sales. Merrill is right to say file sharing helps some artists. Unfortunately for EMI, file sharing tends to hurts the big earners (this is supported by some research) and helps the most the sort of albums that don't recoup. If Merrill's presence can help turn mid-hits into profitable albums, EMI will have won half the battle. I don't doubt Hands believes a restructured, re-imagined EMI can be sustained with lower expenses. The other half of the battle is continuing to create big hits (which, again, are exposed to file sharing).
Hits also have the greatest exposure to format substitution. Hits are usually driven my singles, and customers are free to cherry pick the single and forgo the purchase of an album. I think one of Merrill's top goals should be to figure out ways to maximize the percentage of all purchases that are albums or bundles. When consumers embrace digital music, they tend to get more into a singles mindset. This is ruinous for record labels that can't recoup on sales of single tracks. You can argue that labels need to change so projects are less dependent on album sales and are more likely to break even, but most of that is out of Merrill's control.
Merrill also spoke with the Los Angeles Times and brought up the P2P topic.
As a sign of his willingness to consider bold moves, Merrill held open the possibility that people sharing music online -- an illegal practice that the music industry has fought to stop through lawsuits -- might help some artists during certain parts of their career. "Maybe a lot of the things we assume are not actually correct," he said.
I'm not sure where he's going with this. Can one harness file sharing at one point in an artist's career and minimize its damages at another point in the artist's career?
The fact that this news arrived on April Fool's Day gave me pause, but it appears to be legit. (Although All Things D confirmed this news twice, VentureBeat confirmed through a source Merrill's departure from Google, and News.com's Elinor Mills confirmed the Google and EMI angles, I hereby reserve the right to update this post with conflicting or correcting information.)
The news: EMI has hired away Google VP Engineering Douglas Merrill to be its new head of digital.
This is the kind of culture clash that will be written about for years to come. I hope somebody is going to do a Harvard Business School case study on Merrill's attempt to overhaul EMI's digital department and help transform the company into the next-generation media company imagined by Guy Hands.
Reading on Merrill:
• February 14, 2008 interview with InformationWeek. "The CIO of tomorrow is not a business service person; the CIO of tomorrow is a technologist who understands business in a different way. The job I get to have, and I think is increasing prevalent in industry, is I get to find new ways to enable people to be more effective. I get a job which says, 'What are the business problems we have to solve and how can we transform them?' and that's a fundamentally different skill set."
• March 18, 2008 interview with the Wall Street Journal.
• Merrill's bio at the Google website
Side note: Someone at TechCrunch left the comment, "Roger federer is now the president of EMI? That has to be an april fools joke." Yeah, he does look like Federer!
Coincidentally, EMI came out in favor of Nokia's Comes With Music plan on the same day news broke about Apple's early-stages talks about a similar device-plus-subscription bundle for its iPod and iPhone devices. Reuters has a very brief article. Nokia is set to roll out the service in the second half of the year.
"We want to be part of it. I believe strongly that when it launches we will be there, with a full offering," Wemppa Koivumaki, head of EMI Finland, said at a press conference.
How could Guy Hands, with a vision for a new kind of entertainment company, not be part of Comes With Music?
Both bits of news comes as worries mount that iPod sales are slowing and Nokia's stock took a hit over fears about the U.S. credit crunch and a slowing U.S. economy.
Billboard.biz reported today that EMI will remain a member of the IFPI (press release here). The company's new ownership had threatened to drop out. On January 8, Billboard.biz reported that EMI had sent a conditional resignation letter which said EMI would drop out at the end of this month unless "discussions with the other major labels over the future structure and funding of the IFPI and the national industry bodies...lead to a solution that we are able to support."
EMI was said to have wanted a more cost-efficient, global trade group rather than pay dues to separate groups such as the RIAA and IFPI. The company's stance has resulted in some changes at the IFPI, though nothing but cost savings were mentioned. Said EMI Music international labels president Jean-Francois Cecillon,
We undertook to work with our colleagues in the other major labels and with [IFPI chairman/chief executive] John Kennedy on a cost saving plan for the IFPI and together we have been able to find solutions which we believe are achievable whilst maintaining what the IFPI does best in representing our industry.
Update: The Financial Times article has information from a source that said the IFPI receives half its funding from national trade groups "but EMI had been able to make a substantial cut to its direct contribution."
There are a couple of ways to look at EMI's deal with the Daily News that will offer free downloads from the News' website to purchasers of the print version.
This deal marks the beginning of a new EMI and a fresh approach to generating revenue from its catalog. This one deal isn't going to change the company's fortunes, but it is important for symbolic reasons.
On the other hand, one has to wonder why this type of partnership had to be born from a private equity acquisition and management overhaul. What is preventing companies from marketing their catalogs in radically different ways that generate adequate returns? That's what this deal points to: A lack of creativity by the other three majors and a good portion of the indies. Different ideas aren't going to be enough. Radically different ideas are needed. Everybody's throwing things against the wall to see what sticks...but most often they're all aiming for the same part of the wall.
There have been few new ideas that represent this sort of shift in thinking. Here are the ones that stand out.:
One is Nokia's Comes With Music, a great combination of hardware and service. Sony BMG's MP3 cards, although universally scoffed at, shows a new way of thinking about non-traditional formats at non-traditional retail. Matador's "Buy Early Get Now" is a jump forward in approaching the timing and packaging of music. Selling downloads of original songs for use in video games (such as Guitar Hero) allows users to enjoy music in a totally new setting. And, of course, Radiohead's tip jar album release that preceded the standard CD and digital launch, which showed how simple distribution can be.
As a follow up to my post on silos (and how EMI can't and shouldn't do too much to bring some of the down), here's a quote from New Improved Plan Resonate Blog that comments on a Wall Street Journal article on EMI's restructuring. I couldn't agree more with this post:
Jim Fusili at WSJ makes a pivotal error by assuming that EMI’s stated commitment to A&R will benefit "music lovers." Fusili asserts that EMI’s "silo mentality" leads to the unnecessary segmentation of consumers.This would be true if EMI were in the business of directly interacting with consumers. They’re not. The music industry relies heavily on distribution partners and, most importantly, retailers. ...
Retailers use segmentation and classification to help customers find what they’re looking for. Distributors, ad agencies, publicists, booking agents, old media outlets, and new ones alike use segmentation to deliver an attractive product. Segmentation is useful and desirable in a world where so many different dialects are spoken.
Many hip hop fans love classical music, and vice versa, yet they don’t want to have to dig through the Lil Mama to find their Liszt.
Label execs generally won’t pretend to have the same talents of a successful local record shop manager. Similarly, financiers shouldn’t pretend to have the same talents of an A&R rep."
If you're following Terra Firma's transformation of EMI, this Telegraph article on Guy Hands makes for good reading. The Telegraph actually spoke with Hands for the article. While it's not a tell-all in the vein of a Barbara Walters interview, it is a nice break from the usual ways we hear about EMI: prepared statements and anonymous sources.
• There are rumors that EMI has made an offer for Chrysalis, one of the few remaining independent music publishers in the UK. (BBC News)
• Reuters just reported that Warner Music Group has also bid on Chrysalis. (Reuters)
• FCC commissioner Michael Copps cautions against media companies being taken over by private equity groups and has urged the FCC to launch an investigation. His main complaint is the structure of these companies, which he argues may render the FCC unable to take action in the event something goes wrong. (Dow Jones)
• Alltell Wireless and mSpot have announced a new service called Music powered by Celltop, which allows users to access the DRM-free music collection on their PCs over the Alltell network. The service costs $3.99 per month of $9.99 for three months. (Press release)
• Spotted in a post about how MySpace is still killing Facebook in terms of traffic: "I spent some time on MySpace last night, exploring the profile pages of family and friends and was shocked to see that all the music players on the site are now sponsored by Zune. It was news to me but I'm told it's been that way for weeks. I haven't been able to find a single shred of coverage of that deal on any of the top tech blogs - but I would assume it's helping sell more Zunes than ever." I've looked at a dozen or so mainstream pop artists' MySpace pages and haven't seen anything sponsored by Zune. (ReadWriteWeb, via Techmeme)
• Physical music sales in France fell 17.1% in 2007. (Billboard.biz)
• An article about Indiedrive, an online music store that offers music only on 1GB USB flash drives. The flash drives, which cost on average $20 apiece, contain MP3 files, videos, pictures, artwork and anything else the artist wants to include. (Shakopee Valley News)
"EMI, bought by Guy Hands' Terra Firma group last year, confirmed today that worldwide headcount will be cut by between 1,500 and 2,000 as it slashes costs.Confirming EMI insiders' fears, the company said ahead of staff briefings this morning that it was launching 'a series of wide-ranging initiatives within its recorded music division to enable the group to become the world's most innovative, artist friendly and consumer-focused music company."
More reports about the coming changes at EMI, which will be announced to its staff tomorrow.
Wall Street Journal: "The private equity firm, which bought EMI last year for £3.2 billion, plans to strip EMI's individual record labels such as Capitol, Virgin and Parlophone of many of their responsibilities. Most or all of the labels' sales and marketing staff will become part of a new global structure reporting to EMI's headquarters in London, according to the person. That should leave the labels to focus on signing up musicians and helping them create music, known in the industry as artists and repertoire or A&R."
Times Online: "The cutbacks will focus on recorded music, which is less profitable than publishing. Mr Hands wants to exploit further the back catalogue at EMI, the label behind Kylie, Norah Jones and the Beatles, by digitising more recordings."
The Times Online has an article today on the restructuring plan EMI will announce tomorrow. About 2,000 jobs are expected to be cut in an effort to reduce marketing expenses. Other highlights from the article: the company will be split into two groups (creative and back office) and a new incentive scheme will be based on profits. Take a look at the article for the details.
I'm practically in awe that EMI is taking the step to base incentives on sales and profits rather than shipments. It makes so much sense and would have been standard in any other industry in the world, but somehow music companies put the focus on shipments. In the digital era, shipments equal sales, so there's no issue. But on the physical side, basing goals on shipments too often puts the focus on the wrong part of the supply chain. Sometimes sell-through takes a back seat to loading up retailers and distributors. From my years in sales, I learned that goals based on shipments too often lead to excess product sent to accounts only to be returned after it gathered dust. The only winner is UPS.
Guy Hands, who is leading the transformation of EMI, is finding out how difficult change can be in the music industry. The head of EMI owner Terra Firma, a private equity firm, is faced with an artist-manager revolt over his plans to remake the troubled music group. Even though the status quo will be their downfall, artists and their managers are obviously far more comfortable with the status quo than the uncertainty that goes with the pending changes.
Today the Financial Times looks at Hands' artist manager problem. Tim Clark, Robbie Williams' manager, told the Times that in two meetings with EMI he saw none of the "fresh thinking" he believes the company needs, and he has urged other mangers of EMI artists to "demand answers to hard questions."
One EMI senior adviser said EMI's changes would make the company more effective. "There will be more people focused on A&R [artist and repertoire] than there are today" and that "A&R and artist support will be a bigger share of the business than it is today." That statement conflicts with earlier reports that EMI will cut its A&R staff and depend more on new technologies to discover and develop new artists. Here's a quote from a November 2007 article at the NY Post:
"The firm also wants to reduce costs in artist-and-repertoire and marketing by $58 million by using social networks and user-generated Web sites like MySpace to discover and promote talent."
Here's the thing: criticism of the old model are far easier to come by than specific examples of badly needed "fresh thinking." Whatever changes EMI eventually makes will alienate some artists and their managers. There is simply no way to make everybody happy. EMI will be faced with a slate of potential models that will result in few to many estranged artists. If Hands shows his mettle, he will do what is best for the company in the long term and ignore the impulse to make a few superstars happy in the short term. With no activist shareholders looking over his shoulder, Hands should be able to make the proper decisions.
The Telegraph reported that Terra Firma is planning to broadcast live music events of EMI artists at movie theaters. An EMI spokesperson confirmed the report. The company owns Odeon and UCI, the largest theater outside of North America, and is looking to use this new format as a part of its transformation.
"Coldplay, the Spice Girls and other performers signed to the EMI label will be given the option of broadcasting a live concert to screens in dozens of cities. The format would be used to launch new albums, with fans, media and music executives invited to the screenings and given the option of picking up the CD or film of the concert on their way out of the cinema."
With most expectations for new revenue coming from mobile, this is an interesting development. And it's a good idea, though whether or not consumers will buy into the final product is far from known. I assume the price of admission will be similar to a movie. That's good, because concert ticket prices are getting ridiculous. And fans in markets not on a tour's route can still experience a live show. Incremental CD sales will be there, in small numbers, but the focus should be on revenue from the screenings.
• Ad-supported download site SpiralFrog has received a much-needed $2 million in additional funding in the form of convertible notes. The notes' interest is a tidy 12% annually, interest is to be paid quarterly and the principle is due on April 19, 2008. Between the company's IPO and these convertible notes, SpiralFrog has taken two of the more costly routes to raising money. (Press release, via paidContent)
• Digital track sales rose 47.7% in Britain in 2007. CD sales dropped 10%, according to the BPI. (Times Online)
• eMusic closed out 2007 with more than 400,000 subscribers (it was at 350,000 in November). The download site doubled its forecast for Christmas Day new customer trials. (Press release)
• An article for California residents or retailers doing business in California: A new California law, which went into effect yesterday, allows gift card holders to redeem for cash a balance of less than $10. (Modesto Bee)
• Antony Bruno has a list of artists that could possibly follow in Radiohead's footsteps. (Billboard)
• EMI artists are worried upcoming marketing budget cuts will hurt their sales. Gee, you think? EMI's problem is the same that William Hesketh Lever had a century ago: Half the money it spends on advertising and marketing is wasted, and the trouble is it doesn't know which half. If Terra Firma can figure out which half is wasted, EMI artists have nothing to worry about. But you know what? EMI artists should be worried. (Financial Times)
• MeeMix, which streams music matched to users' tastes, went live yesterday. (VentureBeat)
• With so much attention being put on Terra Firma's cost-cutting plans for EMI, things are getting a little absurd. Check this quote from an article at The Telegraph: "EMI's new owner, Terra Firma, has told managers at the music company to only ship CDs they expect to sell after discovering millions of pounds were being lost annually because of returns." Maybe Guy Hands is really that green, but somebody should tell him that offering retailers a returns guarantee allows EMI to get titles stocked. Take away that returns allowance and add more risk than a retailer is willing to carry alone. If Hands & Company has a better idea, especially on how one could convince a retailer to • stock a developing artist, please share. (The Telegraph)
• The promo departments of Roadrunner and Atlantic will be merged. Current Lava VP or promo Mike Easterlin will replace Dave Loncao as Roadrunner's SVP or promo. (Billboard.biz)
• More layoffs: Island Def Jam laid off a dozen workers last Friday. (Silicon Alley Insider)
• West Babylon, New York indie store Looney Toons reopened after the owner decided to rebuild and improve the store after a devastating fire. Inventory grew by 30% and an in-store stage was added for performances. (Newsday)
• This article is a good overview of the proposed legislation in France that will punish its citizens who engage in illegal file sharing. One tidbit I did not know: French music legend Johnny Hallyday endorsed Nicolas Sarkozy. (International Herald Tribune)
• The Digital Pricing Conundrum Part IV: The Loss of Resale. "On average, you'd pay $10.19 for one of the top-10 titles in iTunes, as opposed $11.49 for the equivalent CD. But you could, on average, net $6.23 for subsequently selling your CD. So the mean potential 'loss of resale' premium for these iTunes albums was $4.93." Read this Coolfer post about the value in the choice to resell a CD. (Digital Audio Insider)
• Greg Kot interviews Paul McCartney. Kot asks the (sadly) predictable question, Are record labels done? McCartney responds, "No. It's not final. I feel like I made the right decision, because right after I left, EMI got sold, so obviously something was wrong. They are now in new hands and are applying themselves and they're going to bring themselves into the modern world." (Chicago Tribune)
• Coolfer has a Facebook page. Sure, why not? So many people use Facebook these days, it's the best place to keep in contact. Feel free to befriend me. (Coolfer on Facebook)
• Arguments for dropping DRM: Getting rid DRM is bad only for the most risk-averse and pessimistic in the industry. Without DRM, entrepreneurship will flourish and labels can enter a new era of marketing. Whatever increases in piracy result will be overshadowed by the gains from a growing digital market. The bottom line is the bottom line: A net gain. Not a silver bullet, but a net gain. (Big Red Horseshoe)