I’ve a personal interest in the recording industry, as I (myself!) have a small connection with it – I was an executive producer on, and investor in, the debut album by Clear (a band whose lead singer was one of my oldest friends; a Mr Neil – you hum it I’ll sing it – Ward-Dutton). Alas, the debut album was also the last album – though not for want of talent or effort.

The EMI revolt has been triggered by the wholesale changes that Guy Hands (CEO of Terra Firma) has set out to make – notably a reduction in headcount of 2000, and a stated intention to drastically reduce the advances payed to artists (Robbie Williams reportedly negotiated an £80 million advance from EMI in 2002).

Hands is taking some flak from the “Artistes” at EMI, and there have been a few slightly snide remarks about his lack of experience in the Music industry. One side-comment that has caused some amusement is the smirking notion that the £200,000 that EMI spends each year on “fruit and flowers” for its HQ isn’t really for fruit or flowers… (wink wink).

But given the way in which the Music industry has responded to the changes brought about by technology over the past decade, perhaps it’s time for a new-comer (especially one who has a track record as a hard-headed businessman) to take over the reins.

Or… maybe Hands has gone a step too far? Is there any hope for EMI in a changed world?

Like many, I think that the music industry is in crisis. It’s in crisis because its forgotten a couple of the key rules in business -

1. Don’t expect to make profits if you don’t add value
2. Don’t expect to add value if you don’t know what your value proposition is

This post is going to take a look at “value add” in the context of the music industry – in a way that, I hope, will go some way to explaining the extent of the crisis that it faces.
The Acquisition

EMI is the one of the world’s leading music companys. In the 2007 financial year the EMI Group reported revenue of £1,751.5 million and £62.7 million in underlying profit before tax. The company is made up of two core businesses, EMI Music, one of the world’s biggest recorded music companies, and EMI Music Publishing, which manages a huge portfolio of artists’ work.

But times are changing, and the music recording and publishing industry has been struggling to adapt.

In August 2007 EMI was acquired by private equity firm Terra Firma which is run by Guy Hands, a veteran investor who began his career with Goldman Sachs (where he went on to become Head of Eurobond Trading). Terra Firma tends to focus on European investments and has invested nearly €11 billion since it’s inception in 1994. Terra Firma has acquired a number of British household names like the Odeon and UCI cinema chains.

The Old Model

The Pop Industry was born a a result of technology – The emergence of a cheap way to distribute recorded music (in the form of vinyl records) made it possible to build a massive multi-billion dollar industry around the discovery, recording and distribution of music and musical talent.

But this was a complex and expensive process, “finding” talent meant that you had to send A&R people to scour clubs and venues, listening to hundreds of dreadful musicians before finding one that might have what it takes. The process of recording music required a massive capital investment in a studio and the druid-like experts that knew how to make it work (“Engineers” were the real heroes in the 1960’s because it was their mastery of the technology that created a band’s “sound”).

Next you had to be able to promote the record – A new job description “Plugger” was created, for people whose job it was to get records played on the radio and to get the band onto the TV. Then of course you had to distribute those vinyl discs – getting them into record shops so that punters could buy them. Artists would be sent out on “Tour” – not to make money, but to promote record sales.

This was a hugely expensive, and risky, undertaking – And the expense and risk was used to justify deals which sometimes left musicians broke, while the record company made fortunes.

But the system worked because the music companies were adding plenty of value to the processes involved in making money by making music.

The process can be summarised fairly simply -

1. Discover talent
2. Record talent
3. Promote talent
4. Distribute music

And the music industry was able to add value at each of these steps because they were fantastically difficult for an individual artist to do.

But things have changed…

The new model

The discovery phase still has a fair amount in common with the “old days” – Most aspiring bands will set out to get gigs at different venues in order to play live to crowds of four or five of their best friends in the hope that that number will grow to the extent that they’ll become part of the circuit and build a “following”. But instead of a flyer listing their next gigs, you’re increasingly likely to be given the address of the band’s web-site. You’ll be offered the opportunity to buy a CD, but the chances are you’ll be invited to download their tracks from iTunes.

New bands often find themselves in a bit of a bind when it comes to musics sales though; they actually want as many people as possible to listen to their music – So they’ll often offer a bunch of songs for download without requiring any payment – They want you to tell your friends about it – they want you to share those MP3 files.

Lilly Allen’s career was given a huge boost by MySpace – at the beginning of her career a number of the tracks that eventually found their way onto her Debut album were available for free download on her MySpace sitelet. Whether this was an evil scheme by her management to promote her or whether it’s a true story of rags-to-riches doesn’t matter very much. I’m one of thousands who bought her album precisely because I’d been playing a downloaded version of “Alfie” on my iPod for weeks.

Talent discovery has been totally transformed by the internet – While sites like MySpace are undoubtedly full of the most hideous rubbish, the site itself provides plenty of mechanisms to filter out the dross.

For example – I’ve just been to MySpace, and this week’s “featured download” is Amy Macdonald . On this occasion, the banner ad was for Robyn (never heard of her) and her single “Be Mine (Radio Version)” – click on it and you’re sent straight to iTunes. Enough about the gorgeous (if somewhat oddly coiffed) Robyn, let’s get back to Amy Macdonald.

I’d never heard of Amy MacDonald…. Although now that I’m listening to her, I’m thinking I may have heard her on the Radio at some point, what’s important is that I’m listening to, and liking, her music.

But I’ve heard a couple of her tracks, and I’m getting to know her a bit – She’s from Glasgow, she’s cute (although something of a devotee of the slightly “angsty” facial expression that is, I think, intended to imply soul and depth). She’s talented, the music is great, the lyrics meaningful – I can imagine playing this stuff.

She’s signed to Mercury records, and she’s gigging all over the place. There are a couple of videos… I’m a nascent fan! Listen to her track “This is the life” and you might become one too.

So… I know she’s playing in Portsmouth on the 20th Feb. I’ll pop a couple of her tracks onto my iPod and if I’m still listening in three days time I might get tickets to hear her live.

Mercury haven’t had to work that hard to get me from “Who is Amy Macdonald?” to “Oooh… maybe I’ll take in a gig…”. Screw it – she doesn’t need to release a CD, I’ll go to iTunes and download her album from the store.

But wait a second! We’ve just gone from step 1 (Discovery) to step 4 (Distribution)… what the hell happened to steps 2 and 3?

Recording music…. You don’t need a million dollars to create a really good recording studio any more. You can record good music using a decent set of microphones and a computer. Sure, there’s a big difference in the quality you can get in a full on studio (they have really good microphones) but in a lot of cases – they’ll be using very similar techniques (and sometimes the same software) to edit the digital music that gets made. What about talent promotion? Well… MySpace did that. Perhaps Mercury paid to get Amy “featured” – but I could just as easily search for the top rated unsigned bands (and if MySpace’s search function had been working when I went looking, that’s what I would have done).

The point I’m making is that the old “process” is still there – but it’s being fulfilled in a host of different ways. And the Music industry needs to get out of the way… or figure out how to add value.

While it does that, look at the opportunities that are being created as this business process evolves… On myspace, you have artists offering alternative drum tracks to other people’s songs. There’s an opportunity for “internet only” pluggers to help “pimp your profile”… lots of NEW ways to add value.

Change or die

EMI has to change – and it has to change fundamentally. Because, essentially they’ve stopped being the owner of the process – they’re now just offering a set of services that allow artists to outsource some of the things they do.

They’re not in charge any more, and they have to get used to it.

And this could be precisely why Guy Hands has invested. His firm had a mandate to “release hidden potential” – And EMI has plenty of that. EMI’s “book” – the collection of songs that it manages is vast. There are a host of ways to get more bang out of that asset. The recording side of the business faces much greater challenges though – EMI’s recording business has to get it’s head around the fact that the days of owning artists are over, and that the recording business should increasingly see itself as a service provider. If Hands is prepared to make  the tough decisions – and all the signs are that he is, then maybe there is a future for a very different EMI.