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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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4 Responses to “Will the Music Industry Ever Learn From Its Mistakes?”

  1. Bobbie. Good piece. The reality of Mr Hands success was always on flipping or stripping not changing. In a rising market and with cash its possible. His arrogance meant he entered into 2 markets he did not understand, music and the internet.

    I remain bemused why so many people only to be able to look at the future, by referring to the past. We all hang onto clothes we wont wear, but because we have invested in them we struggle to deal with reality as it is. So it is with the concept of the music industry. It mutated a while ago. It will mutate again. The ability to spot or grab the oportunity of the future mutation is severely constrained when music is seen just in the very simple evelotion from vinyl to tape to disc to download to streaming. Everyone loved Spotify 6 months ago – bizarre given that its business model loses more revenue as it grows due to streaming costs. There is plenty of money in a mutated music business – just not if you see it in a linear way. Madonna is signed to Live Nation not a record label. There is more money in concerts and merchandise that record sales. Festivals are booming. Hundreds of thousands of people paying £150 to wade in the mud. Music is the 3rd biggest category in computer games. MR Cowell is taking X Factor to the USA. Isn’t that music too. Stand up comedy has become the new rock & roll and there is cash there – but EMI missed that too. The issue is very simple. Once you start defining any business and its future and think within a category – you not only close your eyes to the reality youhave to deal with – but how you get out of it. I bet Apple are glad that they didn’t say “we are a computer business” or Amazon “we are an online book retailer”.

  2. “it fell to pieces in the face of changing consumer behavior” is the primary dynamic all media is trying to come to terms with. Fundamentally we’ve always believed in fair market ideology as in buyers determine what they are willing to pay for a product or service. What’s never really been looked at even now is that consumers can decide that your entire product is no longer needed. Period. Newspapers can tweak everything they can with their model, but if the sad reality in the country is that far few of us are readers of anything, your buying base has clearly shrunken.

    The papers probably benefited from a lot of social engineering when you think about it. 50s thru 70s tv programs were rife with dads reading papers in the morning. Media titans were big deals in their respective cities as well. Today cable and satellite repeatedly raise prices trying to make up the gap but how much longer can they really expect everyone to pay increasingly higher prices only for “500 channels and there’s nothing on”. That statement is buyer sentiment that they can’t get away from. The continued purchase probably mirrors the vast numbers of us that continued to subscribe to papers because it was good neighbor relations to have one on your lawn, even though technically we stopped reading the paper long time ago.

    The elephant in the room is big media refuses to accept that the lifestyle is based on the profit model based on consumer use. Not the other way around. It’s understandable that there was a time when there was a lot of glamour and wealth associated with newspapers and magazines and the real estate tied to them but those days are in the rear view. The technology we use to consume seems to take up more of the conversation than the media being consumed. That’s a clear indicator that in the social discourse value of the content is not necessarily tied to the content itself.

    The studios, music and otherwise had a chance to take the lead in shaping their new identities in the new delivery system, but much like the cats with the Pony Express when faced with the telegraph: they didn’t buy in and buy stock, they just kept cutting wires. LiveNation for instance, do you think they get that they’re days are numbered. Probably not, but Near Field Communications and Square “like” systems will probably be the death of the ticket as we know it. The hilarity is the system is probably going to get open sourced and bands will throw up ticket sales mechanisms as easily as we throw up WordPress and they’ll role it out on EC2/Route53/”Child of BigTable” and the moment the sales are over and the concert done with, they can kill the instance, only to roll it out again the next time they need it. That’s the future.

  3. While I won’t argue that the music industry doesn’t have problems, wasn’t the real reason for EMI’s collapse was that they were over-leveraged? Sure, they can cut their ridiculous budgets for taxis and drugs, but they were both dwarfed by their debt service. The owners (TerraFirma), like so many other private equity types who relied on an abundance of cheap short term debt financing, were screwed when the supply of cheap short term debt disappeared in 2008.