You’ve got to hand it to Robbie Williams: he has a flair for timing. Although
he wasn’t even at the Brits last week, and missed out on the award for best
live act, the singer still managed to dominate the headlines surrounding
Britain’s annual pop-music jamboree.
His decision to spend his 33rd birthday checking into an American rehab clinic
made him the butt of jokes by Brits presenter Russell Brand, and earned him
the sympathy of Joss Stone and the scorn of Liam Gallagher.
Eric Nicoli, the record-company boss whose eight-year reign at EMI is closely
associated with the Williams soap opera, also displayed the art of timing
last week — bad timing. Only hours before the rock stars and music
executives gathered for the awards dinner in London on Wednesday, EMI issued
its latest profit warning to the stock market, its second in two months.
Collapsing CD sales in America had prompted “an exceptionally high level of
product returns” from distressed retailers, the company said. Even with the
success of the new Norah Jones album, EMI now expects recorded music sales
to be down by 15% in the current financial year. Only a month ago, Nicoli
thought he could hold the decline to as little as 6%.
The news sparked a fresh slump in EMI’s share price and heaped more pressure
on Nicoli — described as “a dead duck” by one shareholder.
Nicoli was EMI’s executive chairman until last month when he stepped down to
become chief executive. He is accused of repeated overoptimism and of
failing to grasp the scale of the industry’s trauma as consumers switch to
listening to digital music on their iPods and mobile phones.
“There is no hope,” said Claire Enders, founder of the media and telecoms
consultancy Enders Analysis. “CD sales will have halved by 2010. Virgin,
HMV, all the multiples in the US, they’re reallocating space. They’re all
selling mobile phones now.
“The total retailing space that will be lost in 2006 and 2007 is something of
the order of 20%. EMI doesn’t actually understand the change which is going
on, which is very, very rapid.”
Last April, EMI was hailing a turnround as the company achieved its first
increase in group sales in five years. At the time, EMI was contemplating a
merger with Warner Music Group, an on-again, off-again deal that has been
under consideration for years.
Nicoli was still upbeat in July when he told shareholders: “We remain
confident that the global music industry has excellent long-term prospects
driven by the rapidly expanding demand for digital music. We believe that we
will, in this financial year, again deliver a strong operating performance,
achieve our financial objectives and make good progress.”
He was sorely mistaken. By October EMI was warning of a 3% decline in
first-half sales, and its projections have just got worse and worse.
EMI was the talk of the Brits on Wednesday evening, but for all the wrong
reasons. Nicoli, a big music fan who usually enjoys the awards, spent much
of his time on the phone in his car, trying to avoid the hordes of
journalists in attendance.
He didn’t have much to celebrate in any case. Artists signed to EMI, the only
major record company run from Britain, won none of the awards on offer.
ROBBIE WILLIAMS has enough to worry about, but he exemplifies the problem that
EMI has traditionally faced in America, the world’s largest music market. It
lacks enough of the right sort of artists.
Enormously popular though he is in the UK, Williams’s British sense of humour
— naming albums after football chants, for example — has kept him from
cracking the American market. His US album sales are reckoned to be less
than 1m.
EMI’s troubled American arm has long been “a massive weakness,” according to
insiders. “It’s just failed year after year to turn round its American
business,” said one. “Without America, it’s very hard to succeed as a global
music company.”
With a world market share of about 10%, EMI is much smaller than the other
major record companies: Warner (15%), Sony BMG (25.6%) and Universal Music
(31.7%), according to Nielsen Sound Scan. That means the loss-making
division, comprising Capitol Records and Virgin Records America, must
struggle to support its overheads on a smaller revenue base.
EMI compounded these problems by missing the boom in “urban” or hip-hop music.
Much of its American management is drawn from Capitol, which made its name
with crooners like Frank Sinatra and Dean Martin — “about as nonurban as you
can get,” said one executive.
Nobody doubts for a moment that the American market is extraordinarily
difficult. The bankruptcy of Tower Records last year, store closures by
Transworld and Circuit City, and Apple’s rapidly growing iPod/iTunes
juggernaut (now America’s fourth-biggest music retailer) have hit CD sales
for six.
Last week’s warning from EMI pointed to Sound Scan, which shows that all CD
and other “physical” sales are down 20% so far this year. But some industry
rivals suggest that EMI is making too much of six weeks’ data. “There’s no
question that everybody is feeling market pressure,” said one expert. “But
it’s only February.
The biggest hit that’s in the market is Norah Jones; it’s not like everybody
has fired their big guns. It’s way too early to say the sky is falling.”
Some accuse EMI of making life worse for itself by overshipping, a practice
for which it is allegedly “notorious” in America. Overshipping — supplying
more CDs than retailers expect to sell — enables companies to book revenue
early, but they run the risk of large numbers of costly returns.
EMI’s statement last week acknowledged the exceptional level of returns meant
net sales had “been lower than anticipated and . . . the negative impact on
gross margin has been higher than normal”.
Market sources said that EMI had shipped 1.6m copies of Norah Jones’s Not Too
Late, which debuted at No 1 in America and has sold 642,000 copies after two
weeks. A source familiar with EMI said retailers had expressed exceptional
demand for the album.
The company rejects claims of overshipping. “Don’t confuse people gossiping
with hard facts,” said a spokeswoman. “The exceptionally high level of
returns are across the board. It’s affecting new releases and catalogue.”
EMI has already begun laying off hundreds of staff to slash overheads and
focus on a narrower roster of artists. Much of the pain is being felt in
America, where Virgin and Capitol have been brought together under the
management of Jason Flom, who previously ran the Virgin business.
Nicoli has taken direct control of the recorded-music business himself, having
forced out Alain Levy, its previous boss.
Although Nicoli continues to talk publicly about the music business’s
“exciting growth potential”, the internal mood is much more gloomy.
Senior managers are now talking about working for a declining industry. Martin
Stewart, the chief financial officer who was highly regarded when he held
the same position at BSkyB, is said to be worried by the potential damage to
his reputation.
“It’s a very difficult atmosphere,” said a senior executive this weekend.
Managers have grown wary of Nicoli and Stewart as everyone tries to avoid
the finger of blame.
Levy is being held responsible for moving too slowly to tackle costs, and
failing to follow through on earlier initiatives. He could not be reached
for comment.
One person familiar with the situation said: “They’re completely reengineering
their cost base, recognising that the business has fundamentally changed.
The previous cost structure is completely out of kilter with the business.
They need to get rid of 25% of costs.”
This looks a more aggressive target than EMI’s stated plan to reduce
costs by £110m by March 2009. This is understood to equate to 20% of the
costs of the recorded-music business. EMI’s other big failing, according to
its critics, is the slow progress it has made in developing its digital
business. Although sales of mobile ringtones and downloads are booming, up
68% in the first half, they remain less than 10% of group sales.
Yet it is now eight years since the arrival of Napster, the original
file-sharing service, forced the record companies to take digital music
seriously. The industry’s defensive and litigation-led response has cost it
the initiative, largely surrendered to Apple, and slowed the development of
alternative business models.
One insider said: “In Levy’s day, there were dozens of signatures that were
required internally before a digital deal could be done. EMI is going to
have a much more aggressive approach in digital.”
EMI, like its major rivals, can point to a number of digital initiatives. It
is setting up an online music service with Baidu, the Chinese equivalent of
Google.
It has also been exploring the possibility of selling digital files without
restrictive copyright protection, known as digital rights management. DRM,
and the problems it causes for consumers when using their music players, is
blamed by many for the modest scale of digital sales. A solution that will
allow players from Apple, Sony and others to work with all available online
stores is increasingly seen as a necessity.
The fear is that these initiatives are too little too late. Many critics
believe the music industry has lost a generation of teenagers and
twentysomethings, who have got used to taking free music from illegal
file-sharing services. The record companies’ response — to sue many of the
biggest consumers of music — has made it commonplace for the industry to be
accused of hating its customers.
There are two more reasons why EMI may be wrong to believe the growth in
digital sales will come to the rescue.
Downloading individual tracks makes it much easier to avoid what one former
music-industry executive called “the bundling scam” where “we’ll put a bunch
of average tracks on a CD with some good stuff. Now people are able to pick
and choose what they want, their business model falls apart”.
Another problem, said Enders, is that as more people carry their music around
with them, the demand for “best ofs” and compilations is diminished. “People
are no longer buying any compilations,” she said. “They’re making their own.”
The dreadful irony, of course, is that music has never been more popular or
more widely consumed — as one can see from the Brits awards, from the
ubiquitous use of music in advertising, and from the boom in festivals and
other live music.
This is an issue facing all the industry giants, not just EMI. There are no
easy answers and that is why so few investors were publicly calling for
Nicoli’s head last week. EMI investors had a chance to sell out last year
when the price was above 310p and the group was in merger talks with Warner.
They didn’t because they were confident there was further upside.
With the shares now down at 221p, investors still maintain there is huge value
to realise. The problem is they still don’t know how to release it and that
is the big frustration.
TIME FOR THE MUSIC BUSINESS TO THINK OUTSIDE THE BOXED SET
At the 3GSM mobile phone conference in Barcelona last week, Edgar Bronfman,
chairman of Warner Music Group, said record companies would have to do much
more than simply digitise their song catalogues if they were to succeed in
the digital era.
In America, Warner has tried bundling videos, photos and other extras with
digital albums, and selling them at a premium price. For example, last
year’s Depeche Mode album could be bought with a digital booklet, and with a
code that gave priority access to concert tickets. Warner is finding that
the more expensive bundles typically sell much better than the album alone.
Tim Grimsditch, strategy director at Frukt, a music consultancy, said the
industry, spoilt by the 1990s, had remained overreliant on CDs: “It’s like a
car industry that only sells Vauxhall Astras. You can have one in any colour
you like, but you can only have an Astra. It’s a one-format industry, which
is pretty odd.”
While there have been small experiments - for example, with box sets and
licensing music to online start-ups - these have mostly generated minuscule
revenues.
Grimsditch said: “The experiments let them defuse criticism, but as a
proportion of overall sales it does not really stack up. For all the boasted
creativity of the majors, where’s their creativity in business?”
