What the sell-off of EMI tells us
Matthew Lynn Nov 18, 2011
There isn’t much shortage of bad news about the British economy. The trade gap keeps widening. Growth is slackening. We may be about to go into another recession. Unemployment is up and the eurozone remains on the brink of a messy, chaotic implosion. But in truth the most disappointing piece of recent news was the sale of EMI.
EMI was once one of the most iconic brands in Britain and a huge player in one of the few major industries that this country happens to be very good at. It has 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 this was a global industry and one that was going to last. So the trick was to build the business 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 EMI 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.
That was true even with the internet. EMI was experimenting with digital music when most of us were still wondering what an email was. 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. Throughout, it remained pretty good at its basic business. There is no bigger music brand in the world today than Coldplay, a band EMI discovered and turned into an international success.
But what it couldn’t do was keep the support of the City through what was always going to be a difficult transition from a CD-based business to one that is largely digital. EMI used to be a major FTSE company, but as soon as it got into trouble the City started pressing for deals. 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 remain independent and selling itself to Guy Hands’s Terra Firma private-equity firm in 2007.
That was always a crazy idea. What EMI required was a long period of support from people who understood the music industry inside out. Instead, it got a private-equity house that knew nothing about music, loaded the company up with debt, and started stripping out costs as if it was running a cardboard box factory in Middlesbrough. In the end, Terra Firma lost control of the business and the company ended up in the hands of its bankers.
Lead indicators for Britain's economy
The result? Last week, EMI was split in two and finally sold off. The recorded music division was sold to Universal, a division of France’s Vivendi, for £1.2bn. The publishing business was sold to Japan’s Sony for £1.3bn. The chances are that both units will disappear within huge conglomerates. EMI will effectively cease to exist as anything more than a subsidiary brand. Shockingly, Britain will have no major music company left – even though this industry is indisputably one of the sectors in which this country leads the world.
There is a salutary lesson in that about how poor the City is at supporting British companies. True, the music industry went through a seismic shift. The explosion of the internet was a challenge to everyone in that business. But it was only to the British company that it proved fatal.
There are already signs that the music business is turning the corner. Worldwide sales of albums – which includes traditional formats as well as digital downloads – are rising this year for the first time since 2004. They are only up by 3%, but that compares with a 13% decline in 2010. Digital single sales are up by 10% this year, to more than a billion tracks. Services such as Spotify are starting to make real money – and paying a share of it to the labels. Spotify already has two million subscribers paying $5 to $10 a month to stream digital music. After a decade of decline, it looks as if the industry has touched bottom, got to grips with new business models, and is about to embark on a decade of solid growth.
Japan managed to support Sony through that process, and France successfully supported Vivendi. However, in this country, the shareholders went into a panic and decided that something had to be done immediately. What EMI needed was a big, supportive parent company, much like Vivendi. But imagine if it had been owned by United Utilities or British American Tobacco? The shareholders would have been complaining that it was a distraction from their core business – and demanding it be sold off right away.
The irony is that Britain is as good at producing new pop stars as it always has been – the biggest selling album in America this year has been 21 by Tottenham’s Adele. It is just that the City is no good at supporting companies that go through a difficult time. The City failed to do its most basic job. There is a lot of talk among regulators about reforming the financial sector – it is that failure that they should really be focusing on.
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