EMI remains on the long and winding road to recovery

EMI Music is far from being turned around, but the company is working hard on that plan. Back in February we learned that the company’s half-year figures were quite an improvement. Last night EMI released some details for the first nine months of its fiscal year.

Here is what the Financial Times wrote: 

For the nine months to December earnings before interest, tax, depreciation and amortisation rose from £12m to £104m at EMI Music. Earnings from the music publishing division incr eased from £81m to £91m but revenues were 1.6 per cent below budget.

Nevertheless, it appears that Terra Firma doesn’t expect to recoup its investment in EMI any time soon. The private equity had to write off a huge chunk, “accepting the likelihood of losses on one of the most eye-catching deals struck during the credit bubble.”

The NIN model – making money in a digital world

For those of you who didn’t go to Midem this year (like me) there has been a lot of blogging about the event. The coverage of one specific presentation went online today. Mike Masnick of TechDirt talked about the Nine Inch Nails business model at MidemNet. He boiled it down into a simple formula, too: 

Connect With Fans (CwF) + Reason To Buy (RtB) = The Business Model ($$$$)

Find the article here and watch the clip from Cannes below (be patient, it might take a while to load). 

How Irving Azoff saved Warner Music’s quarter

You’ve got to hand it to Warner Music CEO Edgar Bronfman. The man sure knows how to make shit smell good. The spin doctors went in overdrive today and Wall Street bought it. Warner Music Group this morning reported a revenue drop of 11.2% for its fiscal first quarter (Dec 31) to $878 million. Profit turned back into the black with net income of $23 million – after a $16 million net loss in the year-ago quarter. 

But … the only reason Warner turned a profit was the sale of its stake in Front Line Management to Irving Azoff’s Ticketmaster Entertainment last year. That’s important to point out and only few did it as well as Glenn at Coolfer. Wall Street was undeterred, though. WMG stock climbed a ridiculous 24% today to finish at $2.49. 

Wake up, people. The music industry a growth business? Bronfman might want you to believe that but his own numbers prove him wrong. All indicators in Warner’s Q1 report point south. And this claim of Warner being a leader in the development of digital business … well, I don’t know how a 19% share of digital in overall revenues qualifies for a leadership position. Both Universal and Sony Music are well north of 20% by now. Hell, even EMI makes 21% of its business with digital formats. 

Maybe it’s time for some people to read the WMG assessment by Pali’s Rich Greenfield again.

No need to worry about Sony Music

The fact that Sony Music ended its third fiscal quarter (Dec 31) with sales down 22% shouldn’t get you worried. The company might have just closed its well-known GUN Records subsidiary in Germany but the fundamentals of the major label seem to be strong. German Manager Magazin recently portrayed the company and its CEO, Rolf Schmidt-Holtz, saying that in an adverse environment Sony Music had the best management in the business. 

Even though they expect yearly revenues (FY ends March 31) to decline to around $3.6 billion, down by appr. 6.5% from $3.85 billion last year, Sony predicts operating profits to exceed $300 million. That would represent an operating margin of more than 8% – quite a good figure in today’s distressed markets. 

Moreover, Sony seems to be really happy with the conditions of the buy-out from Bertelsmann. According to internal files, Bertelsmann will be paid for their half of former Sony BMG mainly by the label’s cashflow. Until the end of the FY Sony will only transfer $126 million in cash to the Germans. 86% of the purchase price will be covered by cashflow from ongoing business.

EMI’s half-year figures: bottom line still red, but not as bright

Sure, EMI Music’s balance sheet (PDF) for the six-months period that ended September 30, 2008 isn’t pretty. But it’s a whole lot better looking than its most recent full-year figures. So even if it might not look like they are catching up at first sight, they actually are. 

That’s why I don’t really understand the bashing the company got today in the Wall Street Journal and by Glenn at Coolfer. Yes, there are risks involved in the way the new management is steering away from the golden calf that is the CD. But you have to give them credit for at least trying. 

No, Terra Firma has not turned EMI around yet – of course not. But numbers are improving significantly. Please find the details at Billboard or in my news story for MusikWoche. I am not going to recap them here. But I think it is important to point out that EMI’s net losses decreased by more than 50% while group EBITDA grew by 202%. Even the recorded music division could transform a negative EBITDA of £12 million into a £59 million pre-tax profit. 

Still weighing heavily on the company are its finance costs. Don’t be fooled, though. That had to be expected with all the debt Terra Firma has to lift after having bought EMI at an inflated price and at the peak of the buy-out boom. The company will indeed remain vulnerable in trying to meet its covenants. But there still is Terra Firma’s cash reserve of £250 million of which they had to inject only one third into EMI so far. 

So let’s all take a step back and take in the big picture. EMI is on its way out of a very deep whole. Regardless of how much market share they have lost, I believe the company is recovering noticeably. 

Additional reading/previous coverage: 

• EMI to be sold again in “five to seven years”
• Leoni-Sceti wants EMI to be #1 consumer driven label, expects FY operating profit
• Terra Firma: Don’t worry, EMI will meet covenants
• EMI is worth less than the sum of its debts
• Terra Firma may need to put more money into EMI to avoid defaulting on Citi loan
• EMI: The view from within
• New EMI CEO inaugurates himself with slightly improved numbers
• EMI reports losses of $1.2b for year one under Guy Hand’s leadership
• EMI financial woes: Just the Faxon, please
• EMI’s digital business isn’t catching up fast enough

Ownership of master rights as determining factor in label deals

The always interesting Helienne Lindvall has a smart post on her blog over at the Guardian about the question of musicians’ rights in today’s label landscape. She makes the the case for acts who refuse to sign with a record company that tries to obtain too many rights. The article highlights the push by the recently established Featured Artists’ Coalition (FAC). A good read.

The issue of ownership is a hot topic among artists and managers at the moment. Traditionally, when an artist signs a record deal (particularly with a major label), they assign the copyright of their recordings to the label. This means they no longer own them and only have a right to royalties. In fact, the only way artists might get them back would be if the label went bust.

One of the main problems with labels owning recordings is that once artists are no longer under contract, the label isn’t obliged to do anything with them. The label may have been bought by another, the people who cared about your music may have been sacked, or maybe the label is too busy focusing on “the next big thing”. This is known as your music being in “the lock-up”.

The plan to extend the copyright term in Europe – a good idea?

For years the recording industry in Europe and especially in Great Britain has been pushing for an extension of copyright protection for performing artists. Last year these plans arrived on the EU stage with Charlie McCreevy, the EU Commissioner for Internal Market and Services, introducing a term extension directive that will be voted on sometime this year, possibly as early as February. 

Most music industry trade organisations have welcomed McCreevy’s plans that tries to be balanced in extending the protection term from 50 to 95 years while including a “lose it or use it” provision that would pass copyrights back to the musicians if the labels don’t publish their work, and a fund for session musicians. But not all interested parties are seeing the balance in the EU’s plans. While McCreevy claims that under his directive session musicians would benefit considerably the Open Rights Group  says that some 80 percent of recording artists would only receive between €0.50 and €26 each year if the proposal becomes law.

McCreevy, however, is positive that the new proposal would allow performing artists to make a claim for remuneration based on sales, giving them an average yearly payment of €2,000. “Opponents to the extension argue that an additional annual income of around €2,000 per year for session players is not significant enough to allow performers to participate fairly in the millions that the proposal would provide for record companies,” McCreevy recently said. “Well, to that criticism I can say that the average annual pay-out might not appear significant to academic critics but €2,000 extra per year is significant for an average session player.”

But most study groups and economic experts have concluded that a term extension would give little benefit to artists and a lot to major media and record companies who could continue to market their catalogs. Most prominently, Andrew Gowers, the man who held a far-reaching investigation into copyright reform for the British government, called the proposals “out of touch with reality” and Prof. Bernt Hugenholtz at the University of Amsterdam, who advises the EU on copyright matters, called McCreevy’s directive a “deliberate attempt to mislead Europe’s Parliament”. 

Add to that Martin Kretschmer, a professor at the University of Bournemouth, who said that the market penetration of the four largest music labels is so vast “there are almost no significant recordings reaching back more than 50 years which are controlled by other companies.” More than 70 percent of the revenues resulting from a copyright extension would go to the record labels, he added. As lengthening their exclusivity over pieces of music would enable them to charge higher retail prices, they could reap extra profits of between €44 million and €843 million per year. Notably, the only study supporting an extension came from UK label body BPI. 

The Open Rights Group doesn’t want to let this proposal pass by the Commission and the European Parliament. That’s why they produced a little clip to inform MEPs on the background: 

Becky Hogge, director of the Open Rights Group, accuses McCreevy of concocting a “fairy tale” with the story of the “poor performer who has played on a track in the 1960s and has collected royalties for 50 years. We are told that [without extension] he will lose the main source of income at the very time he needs it most. This looks simple enough for MEPs to give it a happy ending.” However, Hogge adds, “all the evidence shows that the term extension directive will do very little and almost nothing to help the poor performer and everything to line the pockets of the world’s record labels.”

The directive will be discussed at a meeting of the EU Parliament’s legal affairs committee, scheduled for February 11 & 12. 
What do you think? Should Europe introduce a term extension? Who would benefit from it most? And why would that be a good/bad thing? Drop me a line in the comments.

The music business is no place for pessimists and naysayers

Yesterday I allowed myself to look at recent events in the industry with a worried attitude. Wrong, say people who know better. Pierre Perrone at the UK’s The Independent walked the grounds of Midem and talked to some industry figures who all seem to be rather upbeat about the times ahead. Here are some examples of their quotes. Quite infectious. 

“The doom and gloom people, it’s time they left and retired” – Harvey Goldsmith
 ”It’s tough out there, nobody’s denying it, but what do we do to get out of it? (…) How can new bands utilise the internet to help them break through? How does it all work for the fans? How do the fans hear about new artists and start to get involved with them? The new braves, Reverb Nation and Hot Spin, and all these new technology opportunities, basically help acts break through and help fans get to the acts. MidemNet showed the solutions are coming through. There are ways of connecting fans with new acts so everyone’s gung-ho. The doom and gloom people, it’s time they left and retired. Every day you wake up, somebody sends you a track to listen to or you hear about a band you go and see them live, you just get really invigorated and turned on by it. (…) We’ve got ourselves in a mess, now let’s dig ourselves out of it and just get on with it. I feel we’re going to have a great year.”

“I’m very optimistic about the future of live music” - Michael Eavis
“This is my first Midem and I got this green award. I’m very optimistic about the future of live music. People respond to an artist, they buy the records, or now the downloads and they come to the concerts. Live music, especially in Britain, is a very vibrant force. It’s very attractive and it’s good fun.”

“This industry has always lived with piracy” – Alison Wenham
“The British are good at internationalising their business – we only have 8 per cent of our sales in the UK. This industry has always lived with piracy. The supply chain has been disrupted by the demise of Pinnacle but the independent industry is mercurial. We don’t like the duopoly, Sony and Universal, routinely controlling 80 per cent of the charts and the visibility, but I’m always hopeful. You’ve got to remember this industry has been going through an agonising decline for eight years. We haven’t suddenly hit the buffers like the finance industry. So we are rather war-torn but we’re also hardened and resourceful.”

“Are music fans going to stop enjoying music? It’s not going to happen” – Feargal Sharkey 
“All of us have to grapple with a little thing called evolution which has a nasty habit of sweeping you aside as irrelevant should you decide not to cooperate. But the most important thing is the music. We know 63 per cent of 14- to 24-year-olds in Britain are downloading music and not paying for it but, on the upside, we also know they are passionate about music. It registers above mobile phones, game consoles, DVDs. Are young people going to suddenly stop wanting to be creative and make music? Are music fans going to stop enjoying music, wanting it as part of their lives? It’s not going to happen. All the music industry ever did was provide a bridge between creators and fans. That bridge is always going to be there.”

“We have to accept that there’s going to be a new way of doing things” – Brian Message 
“I’m really optimistic about the future of the music industry. It doesn’t mean it’s going to be easy. The gravy train of the past is gone. It was a great production line, great returns, being able to buy copyrights and own them forever. Managers used to make 20 per cent commission for no investment. We have to accept that there’s going to be a new way of doing things. Flexibility is the key. There are no rules anymore. The key word is value. Free music is a valuable part of the artist proposition. If we need to get into a market where we don’t have a base, we can do something with free music to stimulate interest. Let’s focus on that artist-fan relationship. But there’s a myriad of choices out there. There’s no one model any more. It’s not easy. Everybody needs to be creative and come up with what they think is the best plan for their artist. “

EMI to be sold again in “five to seven years”

Much has been said and written about Terra Firma’s real intentions for EMI Music. Some commentators never let go of the idea that TF head Guy Hands might try to combine EMI and Warner Music – a match made in heaven for many financial analysts, not so much for the people actually working at either company. 

Won’t happen anytime soon, though. Roger Faxon, EMI’s publishing CEO and a man known for only going on record when there is something substantial to say, told the Times that EMI will remain in TF’s hands for the overseeable future. “Do we need a huge alternative catalogue when we already have the best in the world? I don’t think so,” Faxon said in regards to ongoing speculation about a possible merger of EMI Music Publishing with Warner/Chappell Music. 

His publishing business represents a “standalone structure” within EMI, Faxon said. He did, however, acknowledge that Terra Firma isn’t interested in holding on to the music business forever. “Terra Firma’s aim is to sell EMI as a whole or spin off separate businesses within five to seven years.” Buyers, start saving.

The spiral keeps turning

The new year in the business of music is already off to a lousy start. And it’s not even February yet. Lay-offs, bankruptcies, paltry sales, etc. 

Here are some of the worst news from the last couple of days: 

• Incredibly low sales figures in the U.S.
• Alliance Entertainment consolidating even more
• Clear Channel cuts 1,850 jobs after Q3 losses
• Sony forecasts annual loss
• Midem attendance was down
• Trans World Entertainment/f.y.e. to close another 70 stores

Are these signs of an accelerated downward trend? Or just singular results that examplify the recurring weakness of the slack season?
What do you think? Drop me a line.