WHEN Chris Martin wrote Fix You for the last Coldplay album, X&Y, he almost certainly was not thinking of Eric Nicoli, the boss of the group’s record company, EMI.
However, shareholders in EMI could be forgiven for believing otherwise:
When you try your best but you don’t succeed
When you get what you want but not what you need
When you feel so tired but you can’t sleep
Stuck in reverse ... Could it be worse?
On Friday, Nicoli’s problems at EMI became considerably worse, or at least more apparent. Disappointing Christmas sales of the latest Robbie Williams CD — and of a remix album by an up-and-coming young act called The Beatles — forced a profits warning out of the group.
The collapse in sales is set to continue because of a far-reaching restructuring that EMI announced. About 900 of the group’s 6,600 staff are expected to lose their jobs as EMI seeks to save £110m in overheads. The weak Virgin North America arm is likely to be hit, along with the Capitol label.
The company admitted that the “significant disruption” this would cause would limit its ability to promote new records in the last two-and-a-half months of its financial year. As a consequence, sales at EMI Music might fall by as much as 10% in the year to March, the group believes.
The restructuring, which will cost £150m, will involve EMI combining the back offices of its labels, and making its recording and music publishing divisions rely more heavily on shared services. It will scale back its operations in 50 countries, possibly pulling back from parts of Latin America and Asia.
Most dramatically, the board has sacked — or in its phrase, “de-layered” — Alain Levy as chairman and chief executive of the troubled EMI Music, along with his vice-chairman David Munns, who ran the business in North America. Levy and Munns are two of the industry’s most experienced executives.
Nicoli is standing down as the group’s executive chairman and taking over as chief executive. John Gildersleeve, the former Tesco commercial director who is chairman at Carphone Warehouse, will now chair the board. Shares in EMI slid to 245Äp.
Industry sources said the falling out between Nicoli, Levy and Munns was all the more surprising because they had planned to work with Permira, the private-equity firm that was attempting to buy the group last year. It is said the trio were to receive a 10%-15% stake in Permira’s buyout vehicle.
EMI said it had been thinking about a shake-up for a long time. “What the board has realised,” said a spokesman, “is that they need a different sort of management running the music business — people with more general management skills, more consumer marketing skills.
“We have created a very good team of very strong country managers, and it is these country heads who really hold the artist relationships and who really discover the talent. Having Alain and David there has become a fairly bureaucratic exercise.”
Nonetheless, it was Nicoli who spent much of Friday calling to reassure top artists and their managers. EMI’s biggest-selling acts, besides Coldplay and Robbie Williams, include Gorillaz, KT Tunstall and the Rolling Stones.
Shareholders have little enthusiasm for Nicoli — a music fan who has been chairman of EMI since July 1999, and a director since 1993. The former United Biscuits boss has presided over a long period of share-price underperformance, admittedly through a very tough few years coping with online piracy and falling CD sales.
One leading shareholder said: “We’ve made it clear that one more slip-up and Nicoli has to go. Really, if it weren’t so expensive, it would be funny.”
Another institutional holder said: “Nicoli might have been saved but he shouldn’t get too comfortable — he’s the only constant in this sorry mess. It’s extraordinary but he’s been given another life. I suppose we are waiting for Warner and it’s better to have someone running the company when that deal comes along rather than nobody.”
Many investors and analysts regard a merger with Edgar Bronfman’s Warner Music Group as inevitable. Both companies were keen to pursue a deal last year but those plans had to be put on hold after European Union competition regulators objected to the merger that created Sony BMG. EMI and Warner would face similar objections.
()While an EMI/Warner deal remains in regulatory purdah, there is little enthusiasm for renewed talks with Permira, or any other private-equity firm.
“The reality is that the deal with Warner must get done,” said one shareholder. “This is why we turned down the last offer (from Permira), this is why we will turn down another if it comes along — and this is why it must get done somehow. Investors believe there is huge value in the deal and we don’t want to give it to private-equity firms.”
Some believe EMI’s latest stumble has changed the dynamics of the Warner deal, and will deny Nicoli the upper hand.
Claire Enders, head of the media research firm, Enders Analysis, said: “Our feeling is that this is a very strong signal that Nicoli is saying to Warner: ‘Please take us over. Give me a nice plum job or a big payout. I’ve not got a management team, I’ve not got a creative strategy, I’ve had enough’.”
She added: “EMI has been consistently over-optimistic about everything. It’s a nightmare. We estimate that global music sales will be down 4%-5% in 2006. It’s very clear that the decline in the industry is permanent.
“Nicoli has repeatedly said, ‘this year is the bottom of the market, this year is the bottom of the market’. They are never going to get there.”
It is this entrenched decline that is much more important than disappointing sales of a new album from the re-formed All Saints, Williams’s Rudebox or Love by The Beatles.
Mark Mulligan, an analyst at Jupiter Research, said: “CD sales are going to continue to decline by about 5% a year indefinitely. The music industry has had its high-water mark. It’s not going to go back to where it was at the end of the 1990s. This is all about the music industry finding its new level (and) realigning itself to the realities of the 21st century.”
Tim Grimsditch, strategy director at Frukt, a music consultancy, said: “EMI and the rest of the recording business are going to have to change really significantly. It is going to have to learn to change on a fairly constant basis. There’s no sign that we are going to reach a status quo as there was 10 years ago — when CDs were put out and sold through the same distribution channel.”
EMI’s shake-up is partly intended to strengthen marketing of digital music, which is growing rapidly, at least in Britain, thanks to mobile-phone ringtones and online stores such as iTunes.
However, Ged Doherty, chairman and chief executive of Sony BMG UK, recently warned that digital sales are not growing fast enough to replace the lost revenue from CDs, whose sales he expects to halve over the next three years.
A Sony BMG spokesman said: “Because of the decline of the CD market, and the fact that mobile is not taking up the slack, the music industry has to re-engineer.”
Faced with the loss of old certainties, EMI and its major label rivals are being forced to experiment. Universal Music struck a deal with Microsoft that is thought to give it a $1 royalty on every Zune music player sold by the software giant. Universal was also an early backer of Spiralfrog, an online venture that will sell “free” music funded by advertising.
Warner Music has made alliances with Google Video and You Tube, and has begun a “groundbreaking” partnership with Motorola giving the handset manufacturer access to exclusive songs, ringtones and videos.
And after a largely fruitless battle to defeat online music file-sharing, the record companies have recently started to sell songs without the so-called digital rights management (DRM) that provides copyright protection.
There are many who believe the existing DRM is on the brink of collapse. Although it restricts illegal music sharing, the conflicting technology standards make it much harder for consumers to buy digital music with confidence that it will play on their chosen device. This plays into the hands of Apple, which dominates digital music with its combination of the iPod and the iTunes store.
Martin Stiksel, a founder of Last.fm, the music website, said: “Everybody hates Apple’s dominance. This ossified technology (DRM) is holding people back (from buying more digital music). If the music industry is giving its customers a crippled experience and treating them badly, then it is encouraging people to share files illegally.”
The risks involved in giving up on DRM makes this perhaps the toughest of the challenges that Nicoli faces. Perhaps he should try singing Fix You to shareholders.
“Tears stream down your face,” the song continues. “I will learn from the mistakes ... and I will try to fix you.”
Shareholders will be watching closely to make sure he does.
