2012-12-31no date survives; placed at the end of the corpus

The Future of EMI

Written before 2013; no publication date survives in the archive. Platforms and services described here have changed. This is kept as a record, not as current advice.

Another day, another bad piece of news from the “Big Four” music labels. EMI have just posted their financials for the year ended March 2010 and it doesn’t make pretty reading. They report pre-tax losses of £624 million stg (€756m / US$974m), a whopping figure by any industry standard. So, what do EMI identify as the risks facing their business over the oncoming year?

Here they are, straight from the horse’s mouth: - The market for recorded music product has been declining and may continue to decline; - The current uncertainty in global economic conditions could adversely affect the prospects and results of the business; - The downward pressure on the pricing of music products could lead to pressure on the margins; - The dependence on identifying, signing and retaining artists with long-term potential, and the continued success of established artists; - The reliance on identifying and exploiting new income streams; - The continuing exposure of the music industry to illegal music downloads and file sharing; - The eventual erosion of copyright protection leading to the potential exploitation of recordings or EMI Music Publishing assets by third parties; - The substantial dependence on a limited number of online music stores, in particular the iTunes Store, for the online sale of music recordings, and the resultant significant influence that they can exert over the pricing structure for online music stores; - The Group’s operating results fluctuate seasonally and, in the event we do not generate sufficient net sales in our third financial quarter and subsequent quarters, we may not be able to meet our debt service and other obligations; - Unfavourable currency exchange rate fluctuations could adversely affect the results of operations.

• Changes in assumptions underlying the carrying value of certain Group assets could result in impairment which would negatively affect our operating results and shareholder equity. - The Group is subject to litigation, including intellectual property and royalty audit claims, which could adversely affect our business and the Group has engaged in substantial restructuring activities in the past and will need to implement certain further restructurings in the future and our restructuring efforts may not be successful or may have adverse effects.

I’d like to take EMI up on three points here: Firstly, they claim that the “market for recorded music is declining”, which is a strange point for EMI to make given that, despite their overall loss, EMI actually increased their revenues from recorded music in the period – it was up 6.5% on the previous year. In addition, the wider global trend of an emerging middle class, with more disposable income in developing nations (and particularly in the BRIC group of Brazil, Russia, India and China) indicates the potential for an increasing, not decreasing market for recorded music. For a current music-distribution reference, see Symphonic Distribution.

The fact is, the labels have a western-centric view of the music market and are failing to invest in and realise the opportunities these emerging markets present. Secondly, they worry about narrowing profit margins, due to falling music prices. However from an economic perspective this is a problem only when there are only one or two price points which can feasibly be pushed downwards.

The over-reliance by the mainstream industry on sales of just two products; albums and singles, makes them hyper-vulnerable to this kind of downward pricing pressure. If the industry were to diversify their offerings then they would be less vulnerable and have room to increase customer value. Finally, they bemoan the domination of digital music retail by iTunes.

I agree with the company on the risks that this represents – monopolies are never good for business and the power iTunes exerts over the music industry is such that it can be wielded to the detriment of both labels and artists. If EMI and the “Big Four” are serious about wanting to take back a piece of the pie from iTunes, then they are going to have to be pro-active and think into the future, and fast; especially with the imminent release of cloud-based competitors.

It would be a real shame to see a label like EMI go under, given their long heritage in the business. To add to that, further consolidation of labels is the last thing the music industry needs. Instead, we needs a shift in focus back to the listener and their needs as music fans, and the profit will follow.