The decline of the record label EMI is usually put down to the problems in the music industry. But really it is the City that is to blame, as I explained in my Money Week column last week. Here's a taster....
It is hard to know how much longer the record label EMI can stagger on under its current management. Every week seems to bring more bad news: selling the legendary Abbey Road studios to raise cash: replacing the chief executive: and losing a legal battle with Pink Floyd over whether it can sell single tracks as downloads.
Ever since the private equity mogul Guy Hands bough the business for £2.4 billion in 2007, the business has staggered from one disaster to another. The stars are already jumping from the ship: The Rolling Stones and Radiohead, have already left, Pink Floyd and Queen are rumoured to be on the way out. The private equity investors look like being wiped out, and there are doubts about whether the company itself can survive. It may well end up being auctioned off by its bankers. Even against some stiff competition, it must unquestionably rank as one of the worst takeover deals of all time.
The slow, tragic demise of one of this country’s finest companies is regularly portrayed as an inevitable result of technological change. Faced with a generation that swaps music for free on the internet, the old record labels are doomed, runs the argument. In fact, that isn’t true. Sure, the music industry faces challenges, some of them severe. But it is the money men that are killing EMI, not the web pirates. And that is a terrible indictment of the City, and the way it operates. After all, EMI is precisely the kind of company that we should be nurturing, not destroying it. And if the City isn’t able to do that, people are rightly going to wonder what exactly is the point of our over-mighty financial sector?
Historically, EMI is one of the few British companies that has always been brilliant at riding technological change. It’s been around since the start of recorded sound (it was formed as The Gramophone Company in 1897). It virtually invented the modern pop business. Long before any of its rivals, it recognised it was a global industry, built around artists of stature. It pioneered album-orientated music, from The Beatles onwards, and was the first label to sell more albums than singles. For the best part of a century, there was very little it didn’t know about getting ahead of the curve. When something new came along, it grabbed it, and figured out how to make money from it.
Much the same was true of the internet. EMI was experimenting with digital music when most of us were still wondering how to plug in our modem. It was the first label to make a whole album available for digital download. It turned Lily Allen into one of the first MySpace stars.
Fast-forward to today, and EMI’s core business is still in pretty good shape. It knows as much as it ever did about finding artists and selling songs. Coldplay’s Viva La Vida was the biggest selling album in the world of the last two years. It has just taken the country act Lady Antebellum to the top of the American charts. When it comes to its core business, EMI is still pretty good at doing what it’s always done.
Nor is the record business in the crisis that is sometimes portrayed. Last year single sales – that is, paid for downloads – soared 33%, to an all-time high of 152 million units in the UK. Ringtones are a whole new vast business. Album sales are down a bit, but only from 133 million in 2008, to 129 million in 2009, hardly a catastrophic fall. The overall value of the music industry actually rose by 4.7% in the latest annual figures from the Performing Rights Society. It’s an industry facing change, true. But it’s hardly terminal.
Its rivals prove that. Warner Music, like EMI, has seen a hit. But it is still a profitable company. Its shares have tripled in the past year. Universal Music Group, the world’s largest label, owned by France’s Vivendi, made 580 million euros last year, and pushed up profits by 11% in the latest quarter. If they can do it, why can’t EMI.
Because, instead of focussing on its main business, the company has been wheeler-dealing. As early as 2000 it planned a merger with Warner. It had another go with Warner in 2002, and when that failed again, tried to merge with Bertelsmann in 2004, before finally giving up the attempt to stay independent and selling itself to Hands’s Terra Firma in 2007.
The City kept pressing it for deals. It wanted a merger to boost the share price, and to allow it to strip out costs, and keep the profits steadily ticking upwards. But mergers are an irrelevance when your whole industry is being re-invented. It doesn’t make any difference how big you are, and cutting costs it’s rarely the way to keep the artists happy. All it does is keep you from concentrating on what the company should be doing to survive and prosper.
Private equity ownership has been even worse. In theory, it could have taken EMI out of the spotlight of the quoted market, and carefully nurtured it through a period of change. Instead, it loaded it up with a ton of debt, and put a group of people who nothing about the industry in charge.
In reality, the money men of the City have taken one of the UK’s most successful companies, a key player in one of our most promising industries, and turned it into a complete dog’s breakfast.
A financial market is meant to provide the capital to allow companies to grow, and to share ownership among a wide group of people. It should be a mechanism that helps encourage a healthy, balanced, creative economy. The lesson of EMI is that the City, for the last decade, has been completely failing to do that. Not only does the City consume vast public subsidies, and pay itself vast bonuses, it can’t even keep alive British companies. If that carries on, it is going to be very hard for people to see the point of it.