Cover feature - Music in the digital age

Alex Blyth looks at how the music industry is having to evolve in the digital age.

The recent announcement by EMI that it plans to cut between 1,500 and 2,000 jobs worldwide was seen by many observers as yet more evidence of the ongoing decline of the industry. Indeed, record companies, music retailers, even artists themselves, have been struggling in recent years. The heady days of the 1990s when consumers were replacing tapes with CDs at £17 a go seem a distant memory.

According to the International Federation of the Phonographic Industry, although downloads rose by 40% in 2007, global music sales fell by roughly 10%. There would be significant fall-out in any market suffering such rapidly declining revenues. However, EMI appears to be bearing the brunt of it.

Private equity and the industry

The company had endured years of uncertainty and mounting debt before it was finally sold to private equity firm Terra Firma in August 2007 for £2.4bn, or £3.2bn including debt. Since then, Guy Hands, the owner of Terra Firma, has been taking a good look at his new acquisition. His conclusion, announced in January 2008, was that cuts were necessary.

EMI's UK chief executive Tony Wadsworth left the company after 25 years. Up to 2,000 staff will go over the next year. Hands declared that the restructuring will allow the firm to invest more in finding new talent and supporting existing artists.

And the names of those existing artists don't come much bigger than Kylie Minogue, whose record company, Parlaphone, is owned by EMI. Australian icon, actress, pop princess and cancer survivor, she now holds the record for the most played female artist on UK radio over the last 20 years.

In that time she has released 43 hit singles, nine studio albums, two live CDs, seven live concert DVDs, plus greatest hits albums and multiple video packages. This year, Minogue was awarded an OBE by the Queen in the New Year's honours list and last month won the best international female award at the BRIT Awards, one of the industry's flagship annual events.

EMI will be hoping that reports she is unhappy with its marketing of her latest album, X, since the takeover by Hands, prove to be unfounded. After all, artists have power (see box below); another of the company's main assets, Robbie Williams, in protest at EMI's structuring plans, declared that he would not deliver a new album this year.

Mutiny on the bounty

The challenge for the music industry does not just come from technology but from the artists themselves.

Radiohead, which was with EMI until 2004, released their seventh album, In Rainbows, online in 2007 for which customers paid their own price. Lead singer Thom Yorke had previously admitted that: 'I like the people at our record company, but the time is at hand when you have to ask why anyone needs one. '

Explaining the reasons behind the pricing scheme, guitarist Jonny Greenwood said: 'It was an experiment that felt worth trying … (and) it's fun to make people stop for a few seconds and think about what music is worth.'

The idea that technology can cut out the middle man is bound to force more record companies to find a business model that delivers value to artists, consumers and themselves.

Giving music away for free is not the loss leader it at first sounds. It drives demand for live tours - a ploy used by Prince when he hooked up with the Daily Mail last year and gave his latest album away to readers.

Such moves might yet prove to be a bigger problem for the record companies than internet piracy.

Under pressure

However, EMI is not the only record company to be under pressure. According to some estimates, the record industry has cut half its workforce since 2000. There are several reasons why this is happening. One is the price cuts supermarkets have imposed on CDs. Just as dairy farmers struggle to make a living from the prices supermarkets pay, so record companies have struggled to cope with their products being used as loss leaders.

At the same time, live music has enjoyed a revival in recent years, so artists can make more money from touring than recording. Music also faces greater competition than it ever has. While once record companies had bored teenagers at their beck and call, now with multichannel television, online gaming, Playstations, Wiis and so on there are not enough leisure hours in the day, and music is no longer commanding the share of the youth wallet that it once did.

However, by far the most significant factor in the decline of the music industry is online piracy. The arrival of the MP3 player has revolutionised how we consume music, and the established companies in the industry have been too slow to react. They have failed to adapt to the new world, have seen it instead as a threat, and the result has been catastrophic for them. In short, the problem for the industry is that the kids don't pay for music anymore - they download it for free from illegal file-sharing internet sites. The industry's love it/hate it relationship with the internet has seen it try stopping piracy and at the same time manipulate the digital downloading for its own benefit, with varying degrees of success.

The outcome of all this has been not only falling revenues but also massive change in how and where record companies make their money. In the last 10 years there has been dramatic growth in the value of music publishing. Revenue in that area has grown in Europe from $3.6bn (£1.8bn) in 1996 to $5.2bn in 2006, a rise of 40%. At the same time the value of European recorded music sales has fallen 17% from $9bn to $7.5bn.

It is not only music publishing. There are many other increasingly profitable areas outside of music recording. Danny Ryan, director of economic consultancy, LECG, says: 'The real money these days is in merchandising and live music. It's not far from the situation in the US television industry where there's no money in production at all. Very often US production houses have to pay to have their shows screened, so they can then make money from merchandising.'

Turning it round

Until now record companies have reacted to these seismic changes with ever more desperate attempts to protect their intellectual property. Arguing that they need to protect their profits so they can invest in finding and nurturing new talent, they have done all they can to stop the online piracy. They have had limited success.

However, there have recently been a few glimmers of hope in the courtrooms around Europe. In Belgium last year a court ordered the internet provider Tiscali to block users from file-sharing. In November French president Nicholas Sarkozy backed an industry agreement which could make internet providers block customers involved in piracy. In the UK the industry is working towards a similar voluntary agreement with ISPs.

At the same time that their war on the internet pirates begins to bear some fruit, there are finally some indications that the large record companies are beginning to embrace the concept of music downloading. The recently-launched Qtrax claims to be the world's first free and legal peer-to-peer digital music site, and to have the support of the major record labels.

It is early days for the service. We will have to see whether it produces a user-friendly interface. It is uncertain how readily consumers will accept the advertising that will appear every time a song is played. And it will need to overcome the concerns many people and organisations have about the security of peer-to-peer networks.

However, many industry experts believe that this is the model of the future for the music industry. James Bates, a director in Deloitte's media and entertainment division, says: 'We will have to wait and see exactly how the market responds to Qtrax but it would appear that it has crossed the first hurdle for any new entrant into the global music download market: a large library with quality content and the support of the four major record labels.'

While important, this is not the only way for the industry to cope with the threat of digital download. Bates outlines some other possibilities: 'Record companies could and should experiment with potential release programmes such as USB singles, download-only periods, and earlier deletion of products from physical catalogues.' Ultimately, the central challenge for the industry will be to stop viewing this new technology as a threat, and to start thinking about the opportunities it presents. Until it does that, it will continue to suffer from falling revenues.

All together now

It is not only in the technology that record companies need to change the way they operate. They also need to radically alter their relationships with their artists. Cliff Fluet, a partner in law firm Lewis Silkin, and former in-house counsel at Warner Music and Capital Radio, says: 'In the past year or two we've seen record companies start trying to get their performers on to 360 degree deals.'

He continues: 'In the past the companies only wanted to talk to the artists about recording contracts and record sales. Now, as revenue increasingly comes from merchandising, live appearances, and so on, they're trying to get a cut of this as well. The problem they face is that, so far, artists haven't been too enthusiastic about giving away a percentage of these new income streams.'

Bates at Deloitte agrees that this is becoming an important issue for record companies. He is though more optimistic that they still have something to offer in this area. 'Record companies are trying to get closer to their artists,' he says. 'They can do this by entering into more management-style relationships, and by using the skills of the A&R gurus to co-ordinate live events, appearances, merchandise and recorded material for an artist.'

He adds: 'Record companies need to offer services and value to artists that they can't get better elsewhere. In the past this was mass distribution and marketing muscle. The internet and digital distribution have eroded the value of these skills, so they need to look elsewhere at what they can offer and re-focus themselves around that.'

Money, money, money

So, while the music industry is facing some major challenges, there is hope on the horizon. Jonathan Morrish is director of PR & corporate communications at PPL VPL, the organisation which licenses recorded music and collects broadcast revenue on behalf of over 3,500 UK record labels and over 47,000 performers around the world. He says: 'Music is being listened to, bought, and played by growing numbers of people in many new formats and in more and more locations. This will provide the music industry with a healthy future.'

The key is for the industry to change enough so that it can successfully monetise this growing consumption. To meet these many challenges and to enact these dramatic changes, it will need to have the best financial professionals on board. Paul Bibby, chief executive of financial recruitment firm Elements, says: 'In a nutshell, the industry has to get more commercial and effectively re-align its thinking to find ways of reducing unnecessary overhead if it wants to prosper in the digital age.'

He continues: 'It doesn't have to be as drastic as is likely to be the case with EMI. Employing some strong finance interims with experience of industries that have had to face up to a similar market and to e-commerce pressures could help provide senior management with the clarity and independent perspective necessary to be able to set new strategic direction and make some tough decisions.'

Musical talent

While recruiting capable and experienced finance professionals will undoubtedly be crucial to the future of the music industry, recruiting talented and innovative musicians will be even more important. Steve Oliver spent a decade running music retailer Music Zone, until the company was unexpectedly forced into liquidation by what he describes as 'an overly nervous bank'. He is only too well aware of the problems the industry is facing, but, despite it all he remains in the industry, now running, an online CD exchange site.

'The major record labels are focusing on downloading,' he says. 'Ultimately though it's not that different to taping the charts on a Sunday evening which we all used to do 20 years ago. 90% of tracks on iPods are still side-loaded from CDs. The real problem is the lack of new talent coming through. Two of the top five albums last Christmas - Take That and Amy Winehouse - had been there for over a year. There needs to be more talent coming through.'

He concludes: 'The danger with what's happening to EMI is that they'll cut investment in new bands. If there are no good bands coming through, EMI and the others will soon find that their sales are falling. If they invest now in finding good bands, and if they nurture them properly so that they're producing music that people want to hear, then all the other issues are peripheral.'


1. Bleeding Love: LEONA LEWIS

2. Umbrella: RIHANNA FT JAY-Z

3. Grace Kelly: MIKA

4. How to save a life: FRAY

5. About you now: SUGABABES



8. Hey There Delilah: PLAIN WHITE T'S

9. Rule the World: TAKE THAT


Source BPI.

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