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.

No investor – TMI is over

When Germany’s entertainment distributor TMI filed bankruptcy in late September last year people involved had hoped that there might be a chance to save the business, or at least parts of it. These hopes have now been shattered. Trustees, who already in mid-December had terminated the TMI headquarters in St. Leon-Rot, have now also given up on the remaining TMI locations in Bremen and Alsdorf.

The administrators had been trying to keep up trading throughout the fourth quarter but more and more TMI clients defected to competing ditributors. That basically left the company without sufficient business. In total, some 500 jobs are affected by this collapse. TMI was founded in 1989 and during better times generated annual revenues in the area of €280 million ($360m).

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

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. “

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.

Sony Music cuts staff

The renaming at Sony is done – with the start of 2009 Sony BMG became Sony Music Entertainment – but the slimming down isn’t. Billboard reports that the second-biggest major company has started to reduce its staff in the U.S. At least 30 people were let go on January 15, the majority of which at the company’s distribution arm Sony Global Digital Business and U.S. Sales. That is the devision headed by Thomas Hesse. 

More cuts happened at RED, Sony Music’s distribution arm for third party independent labels, and at Columbia Records, where several regional promotion staff members were handed their pink slips. According to Billboard, the layoffs will be completed by January 16. No details have been released on how many employees will be let go in total.