Will the Music Industry Ever Learn From Its Mistakes?

The music industry has endured more than its fair share of trouble over the past decade, through Napsterization, the collapse of CD sales, the rise of iTunes (s aapl) and more. But few labels have been more affected than EMI, one of the “big four” labels which was taken over by U.S. finance titan Citigroup yesterday.

The deal wasn’t even worth much in cash terms — Citigroup (s c) simply called in the debt EMI owed it, wrote it down by $3.5 billion and took control.

EMI’s sad story shows that it’s suffering the same problems as the wider music business: It went into the networked era as a huge and well-known brand with a roster of big name artists and ownership of incredible catalogue of recordings. It was home to acts like the Beatles and Coldplay, and was the owner of iconic brands like Parlophone and Virgin. Yet despite its natural advantages it had built up over the years, it fell to pieces in the face of changing consumer behavior and aggressive new distribution models enabled by the Internet. Outpaced, outgunned and outmaneuvered, it has now handed its success over to the likes of Apple (s aapl) and its future to a bank that’s trying to hawk it to the highest bidder.

It was all supposed to be very different when private equity group Terra Firma bought the company for $6.8 billion in 2007. Boss Guy Hands, a successful London banker who had already overseen a succession of huge property, pubs and transport deals, hoped he could turn things around through canny business moves.

He made some progress by slashing overgrown budgets and cutting expenses — chopping the London office’s insane £700,000 annual taxi bill and, more notoriously, getting rid of the vast “fruit and flowers” budget, which most insiders understood as a byword for some altogether more rock and roll substances.

But while he was good at cutting back on excess, all his work really did was prove that the problems for the music industry aren’t fixed through frugality.

His impersonal approach meant that lucrative relationships went on the slide; major names such as the Rolling Stones and Radiohead quit the label in protest. Change was something to be endured, not encouraged. And by the time EMI did try to be progressive— the first major label to drop DRM, and one of the few that still uses artist-friendly deals — it had already handed the keys over to technology companies that didn’t really care about its business model or long-term future.

So instead of building a 21st century record label, Hands turned his investment into a huge loss: On top of the debt Citigroup has chosen to ignore, Terra Firma also lost the $2.7 billion it invested.

Perhaps most likely is a tie-up with rival Warner Music Group (s wmg), which has been sniffing around a merger for years (interestingly Dick Parsons, who pushed for a similar deal while chairman of Time Warner (s twx), is now Citigroup’s chairman).

That might shore up the balance sheet temporarily and cut a few more costs, but it doesn’t seem like it would be much of an avenue to progress. After all, it would put EMI in the hands of former booze magnate Edgar Bronfman, who has pulled Warner out of deals with popular music services like Spotify while watching the losses mount year on year.

If that merger goes ahead, it will prove that the music industry is as clueless as it ever was. Traditional business heads suggest consolidation is good because it can eliminate waste and share costs. But in reality, that doesn’t work when the problem is not financial but structural – as it is in music.

The truth is that recorded music is unlikely to ever be the business it once was. The world is different now, and EMI is among those who shoulder some of the blame for letting it overtake them.

And this is not exceptional. The problems endured by EMI are the same ones seen across nearly all creative industries. The businesses built to profit from the work of artists have been laid to waste by technology companies who have no legacies to worry about and systems that drive costs down to almost nothing. Faced with the choice between taking charge of the future and trying to hold onto the past, record labels, TV companies, news organizations and book publishers have all been pushed in directions they don’t want to go and scrabbling to keep themselves alive.

When they do finally realize that they can not only embrace change but create it, the effort always looks too late: you only have to look to Rupert Murdoch’s Daily for an example of that.

In the end, it means that big companies are left with two options: more consolidation (which merely puts off decline for a few more years) or radical transformation (into fewer, smaller, nimbler businesses).

Will the next owners of EMI understand that it’s better to move forward than stand still?

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