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February 17, 2007

Lex Column on EMI futures

Follow-up to Steve Jobs and Digital Rights Management Systems from Kinoeye

Lex on EMI 17/02/07: Is there value in a busted flush?

Well its good to be marginally ahead of Lex the 'agenda setting' FT column. Today's was talking about EMI amongst other things.  You'll need a free trial to read the full account which starts off nicely with the comment:

EMI and Warner Music appear locked in a race to the bottom. This year, both listed music groups have seen their shares plunge by about 20 per cent. Since July last year, when merger talks broke down, they have tumbled 30 per cent and 40 per cent, respectively.

The column later notes that having entered into merger talks three times perviously this would be an especially propitious time to merge. However Lex notes that the EU is considering the BMG / Sony musci link up and would probably look unfavourably upon another merger on competition grounds. For Lex the value of EMI is in its publishing activities "relatively sheltered from the violent swings in recorded music." This provides an opportunity for a private equity company to move in and say that EMI is oversold. 

Whislt Lex is clearly putting out tempters it would indeed be a brave organisation who thinks that EMI is oversold at current share levels. What it does raise is the possibility of online music publishing as another add on activity for the new social networking generation. New bands are perfectly capable of publishing this material for themselves via the net although why the Arctic Monkeys didn't do this is a mystery.  Perhaps some straight cash did the trick?

Gene Kelly Singing in the Rain

Singing in The Rain : Part of EMI's Long Tail

Whilst the long-tail may tempt in private equity firms how they would release extra value from this is unclear. Would they also be open to needing to end contracts with leading celebrities from a now vanishing era, because a private equity company would hardly want to be running a business of this nature by themselves. The nature of private equity is to asset strip and or release value which doesn't appear in the sum of the parts. Whilst there is little room for error in terms of supermarket property valuations publishing rights to old pop culture songs is a rather more challenging thing to estimate. EMI is certainly upbeat as the statement from their website repeated below suggests:

EMI Music Publishing is the world's most creative music publisher with more than one million copyrights including some of the best known songs ever written: New York, New York, Over The Rainbow and Singin' In The Rain. Its current hit-making writers and producers include: Arctic Monkeys, Beyoncé Knowles, Natasha Bedingfield, James Blunt, Kelly Clarkson, Daddy Yankee, Jermaine Dupri, Eminem, Enya, Gorillaz, Jay-Z, Alicia Keys, Daniel Powter, Eros Ramazzotti, Scissor Sisters, Kanye West and Pharrell Williams.

Lex obviously picked up on the Brit Awards announcement which was more or less simultaneous with the dire profits warning:

London, February 14, 2007: EMI Music Publishing was celebrating tonight, as the publisher's bands and solo songwriters were victorious in a record six out of twelve categories at the Brit awards show in London. This is an unprecedented number of wins for the music publisher.

The Arctic Monkeys, Amy Winehouse, Take That members Jason Orange and Howard Donald and the Fratellis were all signed out of the publisher's London office, with International artist Nelly Furtado signed from New York.

Brit Awards and EMI Cartoon

For the immediate future 

Anyway what is going down seems likely to be going down for a while yet. EMI shares have a way to drop to ensure good value to a private equity company. Glum whistles will be heard in the comapnie's corridors for a while as they try and figure out a viable strategy and the vultures of private equity houses circle with their calculators as the once giant of music continues to stumble forwards rather aimlessly.  


February 16, 2007

Steve Jobs and Digital Rights Management Systems

Follow-up to Digital Music Downloading and the Long Tail from Kinoeye

The Digital Rights Management of Music Debate Continues

Thoughts on Music

Steve Jobs
February 6, 2007

Steve Jobs' Internet article has raised some controversy however it is worth reading to get an industry insider's overview of the situation. An important part of his argument is that CD sales in conventional shops are not sold with digital Rights Management Systems (DRMs) installed - unlike DVDs for example. As a result a CD can easily be bought and uploaded to a downloading site and quickly spread around the world. What stops the industry doing anything is that there are tens of millions of CD players unable to read CDs which are DRM enabled:

In 2006, under 2 billion DRM-protected songs were sold worldwide by online stores, while over 20 billion songs were sold completely DRM-free  and unprotected on CDs by the music companies themselves. The music companies sell the vast majority of their music DRM-free, and show no signs of changing this behavior, since the overwhelming majority of their revenues depend on selling CDs which must play in CD players that support no DRM system. (Jobs 06/02/07 my emphasis).

Jobs continues by asking:

So if the music companies are selling over 90 percent of their music DRM-free, what benefits do they get from selling the remaining small percentage of their music encumbered with a DRM system? There appear to be none.

Jobs' iPod still dominates the paid for download market but Apple and the music companies need to make more from this market to ensure that they keep ahead of their rivals.

iPod

A Sceptical Take on Jobs by Bill Thompson

Bill Thompson  evinces the specticism of a good journalist and comments that for all Jobs' heartbeating antics about how terrible it is that the 'Big Four' of the music industry (Sony / BMG, Warner, Universal and EMI) don't release their hold on DRM Apple do very nicely out of the deal thank you:

I don't believe him. If Apple switched off Fairplay then they would probably sell a lot more songs, on which they make very little money, and a lot fewer iPods, on which they make a lot. I don't buy songs from Apple's store because I don't like DRM. (See full Thompson article)

Thompson plausibly argues that Jobs is an excellent self-publicist who knows how to distract the crowds. Lets face it Vista seemed to get less attention than the much vaunted and very expensive iPhone. Thompson points out that the industry model of digital music is likely to change again. Perhaps with the music companies allowing fans far more freedom with the tracks than previously. Certainly they will need to work out something plausible soon because otherwise there will less and less reason for bands to sign up to them with social networking and alternative revenue models developing all the time: 

They are actively exploring alternatives to rigid control of sharing, like flat-rate permissive licensing that would track usage and reimburse artists without limiting what fans can do.

And they are - like EMI - looking to set up their own music stores selling unencumbered tracks direct to fans.

A BBC report produced on 15 / 02 / 07 acouple of days after Thompson's comments notes that:

Almost two-thirds of music industry executives think removing digital locks from downloadable music would make more people buy the tracks, finds a survey.

The Jupiter Research study looked at attitudes to Digital Rights Management (DRM) systems in Europe music firms.

Analyst Mark Mulligan, one of the authors of this report doesn't think that there will be any serious moves away from the DRM model in the near future at least:

"Despite everything that has been happening the record labels are not about to drop DRM," said Mr Mulligan. "Even though all they are doing is making themselves look even less compelling by using it."

Other Business Models?

At times it seems as though the Music industry and the hi-fi industry are ending up shooting themselves in the foot and we can see CD sales from the high street dropping through the floor as EMI gave a shock announcement on the 12th of February:

Blaming weak CD and DVD sales in the US, it said it now expects its profits for the year to 31 March 2007 to be 15% lower than 12 months previously.

This was the second profits warning in recent weeks. Old time invesment experts often say that the first profit warning is usually the prelude to a second one and EMI has not proved to be an exception to this adage. As I indicated in the previous article a week the music industry is being turned upside down. Don't put your pension into EMI whatever you do. If you want to throw money away at least do it for the 'good causes' on the National Lottery. Don't believe me? Just take a look at the share price chart below. This is at a time when the FTSE and the Dow Jones are on highs. Just imagine what it will look like when the markets soften!

EMI share price after second profits warning

February  2007 Share Price EMI

What the music industry needs to do is to consolidate fast in agreement with the manufacturers of music replay hardware. This is important because serious music lovers of classical, jazz etc tend to try and spend money on good hi-fi / AV-systems. The SACD / DVD Audio format war has been ridiculous. Nobody is prepared to accept the Betamax / VHS situation again. Now there is a replay with Blu-Ray & DVD-HD. Older people who would like the quality and the surround sound capabilities if music is being designed for this are unlikely to buy in until more all-purpose players are available.  The youth market who were once likely to buy CD singles and CDs just aren't. 

Can the popularity of artists like Kylie Minogue really save EMI? 

Kylie Minogue

Perhap one answer for the music industry to consider is that music targeted at teenagers only comes out through iTunes. If there are album length contributions in shops these should be in the latest high definition format with DRM. This however risks leaving the market wide open to savvy teenagers who are perfectly capable of marketing themselves over the web. Making an alternative downloads service with very cheap downloads is perfectly feasible entirely bypassing iTunes. 

One thing is for certain, if the US is currently the cause of EMI's profits problem where DVDs and CDs are so much cheaper than in the UK because people are turning to downloading, there is just enough time to get your pension out of Virgin Music and HMV because they are going to run into real big trouble soon. A danger I predicted for Viacom shareholders a couple of weeks ago. Only the most adaptable and clever of these older media organisations are going to survive. Some forced consolidation in several areas seems to be on the cards. This has been forced upon the EMI-Toshiba joint venture (see below) in Japan last December for example.

EMI_Toshiba Deal 2006

Conclusion 

There isn't one! Keep watching thing space there are planty of twists and turns to come but if they don't sort it out soon then that most enterprising of companies Google with very deep pockets may well come up with the new killer model. Just think of all the different kinds of music you could access whilst going round Google Earth for example :-).  


February 09, 2007

Digital Music Downloading and the Long Tail

Downloading is Promoting the Long Tail

The concept of the Long Tail has been discussed elswhere on this blog ( link to the original article in Wired ). 'Click' Presenter Kelly Spencer has noted that:

With music downloads outselling CD singles by four to one in the UK and the music charts revamped to include download sales, the digital revolution is having a big impact on the music industry.

But with music download sites now the UK's favourite place to buy singles, each with massive back catalogues of songs, it was decided that just listing the singles currently on release may not reflect the way people were actually buying songs.

So from 1 January 2007, every song that is available to download is now allowed to chart. (Kelly Spence article).

The Music industry is being turned upside-down

The onset of the 'long tail' menas that many analysts are now predicting that the new industry model of distribution and sales is likely to moving to small numbers of a large number of titles. This notion fits in well with William Mitchell's arguments about mass customisation which the presence of the
Nike executive on the Davos forum effectively confirmed. (Check out his contribution about on-line customised Nike trainers here).

Koopa the first successful unsigned online band

In January 2007 in the second week after downloads were officially recorded in the make up of the charts, Koopa became the first successful band who did not even wait to be signed up by a record company or have a record in the shops to make the charts:

We built our own website. Then we started advertising that on Google, places like that. From there it was just getting on MySpace and our website, and making sure you're keeping people up to date with regular newsletters, messages and blogs on MySpace.

Dinosaurs or adaptors: Where will the music industry go?

It remains to be seen exactly how the music industry will react. Many of the suits are saying that a band will always need the power of a big company to do the marketing. Possibly this will be true to create a number of supergroups doing spectacular world tours. On the other hand maybe the market will fragment further with young people increasingly sceptacle about paying ludicrous prices to go and see an overhyped  band when there is plenty of variety. With a bit of luck the download era may help spawn a much larger number of live acts and remove the overpaid parasites at the top of the pile. The sooner aspects of 'celebrity' (i.e. industry sponsored hype) are excluded by customers the better for music, musicians and audiences. Watch this space for more news on this.


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