The Wall Street Journal-20080122-Can New EMI Owner Strike a Chord-- Private-Equity Dealmaker Discovers Music Acts A Hard Product to Manage
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Can New EMI Owner Strike a Chord?; Private-Equity Dealmaker Discovers Music Acts A Hard Product to Manage
As the chief executive of Terra Firma Capital Partners Ltd., Guy Hands controls companies that lease jets, operate natural-gas pipelines, and, most recently, sell music.
The big difference among those businesses is Mr. Hands doesn't have to worry about keeping the planes or the gas happy. But the musicians signed with EMI Group Ltd. are a different story -- and they've been less than pleased with the British private-equity mogul.
"He's either really stupid, or really smart," says Jazz Summers, who as chairman of an organization called the Music Managers Forum has found some of Mr. Hands's statements "not very artist-friendly," but credits him with taking a big gamble on EMI.
Terra Firma bought the 77-year-old British music company last summer for GBP 3.2 billion ($6.25 billion), taking control of what was already the weakest of the remaining major recorded-music companies. Terra Firma's deal for EMI raised the question of whether tough-minded private-equity dealmakers would do a better job of solving the company's problems than the traditional music-industry executives who have overseen the decline.
"You need to get people to buy in to what you do," Mr. Hands says. "We believe in a structure where people share responsibility." He adds: "Everyone in the company will have equity. People will be paid based on the success of the whole company."
With compact-disc sales collapsing and high-profile artists abandoning traditional record contracts in favor of lucrative arrangements with retailers, concert promoters or consumers themselves, the labels that once dominated the music business could soon face the talent equivalent of a run on the bank. Nowhere is that process more advanced than at EMI where the Rolling Stones are considering joining recent defections by Paul McCartney and Radiohead amid heavy criticism of EMI's new owners.
People who do business with the company say that Mr. Hands has inadvertently contributed greatly to the alienation among artists and their representatives. A series of missives and remarks by Mr. Hands has given many in the artist community the impression that he is out of touch with many realities of the music business -- including the need to carefully soothe the artists who actually make the hits.
On top of that, key portions of the restructuring plan Mr. Hands unveiled last week, which includes as many as 2,000 job cuts, some complain, treats music as an ordinary consumer product that can be marketed and sold in various territories like soap.
Responding to the criticism, Mr. Hands says, "Everyone needs to understand, notably the U.K. media, that there is not some huge collective trade union of artists and managers but a hugely diverse group of individuals with different objectives and needs. Ninety-five percent agree with what I have said. In most companies, 95% in favor is a big enough majority but in the music sector, opposition from just 5% makes for easier headlines."
As a result, EMI's problems have for now accelerated under the new ownership, despite the continuing strength of its giant music- publishing division, which continues to thrive because it is one of the largest players in a still-profitable line of business. The broader question is whether EMI is merely the first of the major music companies to confront the next harsh reality in the increasingly toxic global recorded-music market.
In an interview, Mr. Hands says the music industry spent too much time fighting piracy with lawsuits and other tactics, rather than dealing with the situation. "Instead of spending millions shutting down Napster, it should have been working harder," to find new ways to convince people to pay for music, he says.
Mr. Hands got off on the wrong foot last October with an internal memo that found its way outside the company. He wrote that EMI should be "more selective" about which artists the company signs, as many don't work hard enough to promote their music. These performers, he complained, "simply focus on negotiating for the maximum advance...advances which are often never repaid." Many artists and managers felt insulted by the comment, which was widely discussed in the music business.
When Mr. Hands tried to patch things up at a series of dinners with prominent artist managers, he got a chilly reception. At a London restaurant he described to several managers Terra Firma's track record, including its stewardship of United Kingdom movie theater chain Odeon Cinemas Ltd., telling them "the cinema business isn't the movie business -- it's the popcorn business," recalls Mr. Summers, of the managers' group. Mr. Summers, whose clients include EMI artists Badly Drawn Boy and the Verve, found the remark insulting to musicians: "I told him he's dealing with artists, not popcorn."
It hasn't helped that Mr. Hands, having ousted EMI's senior management, still hasn't named a new chief executive, choosing to run the company himself on an interim basis and bringing in music-industry outsiders for key roles. At the same time, some key industry veterans have been shown the door, including Tony Wadsworth, a respected executive who oversaw the company's British operations for 20 years -- including the long, steady erosion of the company's market share on its home turf. Among those brought in was Mike Clasper, the former chief executive of the British Airports Authority.
"They're bringing in a lot of executives from other industries," said Dave Holmes, manager of Coldplay, one of the biggest acts left on an EMI label. "I would say that's worrying. It's not very comforting to me."
EMI's North American operation has for many years been minimally profitable, if at all, according to people close to the company, even though the U.S is by far the world's largest market for recorded music and the most important source for acts that can be marketed abroad. According to several people familiar with the matter, things had gotten so bad that under one restructuring plan proposed by Roger Ames, the industry veteran who runs EMI's North American operation, the company's distribution in this country would be merged into a venture with Vivendi SA's Universal Music Group. Mr. Hands ultimately went with a plan that kept EMI's U.S. business intact. Mr. Ames couldn't be reached for comment.
Even some of the angriest managers recognize that EMI's finances have been a mess and needed to be brought under control. They just question whether Mr. Hands's approach will help, or simply deepen the pain.
"Guy in his wisdom decided to buy something that was in a massive state of flux," says Bryce Edge, one of the two managers of Radiohead, which recently left EMI. "There's been a lot of people trying to do what he's trying to do." Mr. Edge's partner, Chris Hufford, adds: "He is looking at it as an experienced and very successful businessman, and saying 'This does not add up.' Well, we on our side of the business have been saying 'This does not add up' for years."
Mr. Hands spelled out his strategy at meetings in London with artists, managers and staff last week. As many as one-third of EMI's 6,000 employees will lose their jobs. And borrowing an idea from big consumer products companies like Unilever and Procter & Gamble Co., Mr. Hands is setting up a centralized marketing department at the music company.
EMI will be the only one of four major music companies to do so. At Universal Music, Warner Music Group Corp. and Sony BMG Music Entertainment, the joint venture of Sony Corp. and Bertelsmann AG, marketing is controlled by the individual record labels owned by each company.
Currently, the labels' artists and repertoire executives have a say in almost all aspects of the creation of an album, including: marketing, public relations, legal contracts, how many CDs are sent to shops, and how much the artist gets paid. Under EMI's new system, the so-called A&R executives will concentrate on discovering new artists and serve as their link to the record company. But their input on marketing strategy and budgets will be limited.
Many of the biggest acts in EMI's history signed in the U.K. to its mass-market Parlophone label, including Coldplay, Kylie Minogue and the Beatles. Meanwhile, Norah Jones is part of EMI's Blue Note Records jazz label and Joss Stone is with Virgin Records, which an EMI spokeswoman says is considered a "maverick" label. Young bands are often more likely to want to join a label if they identify with other groups already on it.
The response, according to Mr. Morrison: EMI is going to become so good at selling music that artists will want to work with all its labels.
"I don't know whether that [answer] satisfies me," Mr. Morrison says. "But I would rather help him than hinder him."
Indeed, there may be signs of an incipient thaw in Mr. Hands's relations with the managers. Some who attended his briefing last week say they perceived a shift in Mr. Hands's attitude, and came away impressed. Mr. Morrison describes Mr. Hands's presentation style as humble and says it was a hit. The audience broke into applause as the financier left.
