Hands can save EMI by making music free on Web

No one can deny that UK businessman Guy Hands has guts. At a time when most of the private-equity industry is battening down the hatches, and trying to survive the storm in credit markets, Hands has just embarked on his most ambitious venture yet.

He is trying to transform the music industry.

When his private-equity firm Terra Firma Capital Partners Ltd took control of the British music label EMI Group last year for 2.4 billion pounds, many people assumed he would strip the company's assets. He could have forgotten about new recordings, sold the music division, fired most of the staff, and used some clever financial engineering to make money out of its valuable publishing business.

That would be the easy option.

Instead, he is attempting a root-and-branch overhaul of the industry, bringing him into conflict with artists such as the Rolling Stones, Robbie Williams and Coldplay.

The trouble is, Hands must get more radical if he is to have any chance of success. The music industry needs a new direction, there is no question about that. Digital distribution has smashed up the old business, so something has to replace it.

The only future for recorded music - as bands such as Radiohead have already discovered - is to give it away free on the Internet. But whether a private-equity firm like Terra Firma can be that bold is open to question.

So far, his stewardship of EMI, which discovered groups such as the Beatles, couldn't be looking much worse.

The company has already said it plans to eliminate more than 2,000 jobs, or about 36 percent of the workforce, to save 200 million pounds.

EMI "has been struggling to respond to the challenges posed by a digital environment", Hands said in a statement. "We have devised a new revolutionary structure for the group that will improve every area of the business."

His problem is that the talent doesn't like the sound of all that cost-cutting. They are worried about their advances and marketing budgets. And if they aren't happy, they won't stay.

Radiohead declined to re-sign to EMI last year, and decided instead to put their latest album on the Internet, where fans could decide for themselves how much they wanted to pay for it. Coldplay have said they are in "no hurry" to deliver a new record. Tim Clark, manager of Robbie Williams, said Hands was acting like a "plantation owner". Williams' future on the label must now be in doubt.

And the Rolling Stones have given their latest record to Vivendi SA's Universal Music Group, and are now considering what to do with their back catalogue once the existing contract with EMI expires.

None of that is promising for EMI. Hands may be smart with money, but so are the Rolling Stones, and if they aren't sticking around, EMI will be in more strife. Hands paid 2.4 billion pounds for what was basically a roster of talent, which is now walking out the door. The deal is already shaping up to be one of the worst of all time.

And yet Hands is right about one thing: The old rulebook needs to be torn up. But he is wrong to think he can fix EMI with cost cuts. He needs to dig a lot deeper into his pockets.

In a world where digital distribution has made pirating music possible at the touch of a button, there is little point in trying to charge for it. Instead, why not acknowledge that reality and make all EMI's music free on the Internet?

Crazy? Well, consider this. Making music freely available needn't be commercial suicide. Almost four out of 10 listeners chose to pay for a download of Radiohead's new album, chipping in $6 each on average.

You can view that as being a glass that's half-empty or half-full, according to preference. When the record was released in a physical version this month, it went to No 1 in the US album charts, selling 122,000 copies in a week.

Just because it's free doesn't mean lots of people won't pay for the compact disc. So long as you price them realistically - $5 to $10 - buying a CD is a lot less hassle than downloading and burning an album. You get better sound quality and a picture on the cover as well.

Next, there are opportunities for sponsorship and advertising. Free tracks could come with a sponsored message attached. Songs can be licensed to advertisers and film producers. Then there is touring revenue, which is soaring even as CD sales decline. Record labels can demand a share of that money.

When you consider the multiple revenue streams, "free" music makes more sense than trying to bully people into paying for songs by threatening legal action.

Slashing costs at EMI might work for Hands if it is part of a strategy to create a business that can survive the switch to a free system.

But if it is just about saving money while the business declines, and if he can't take the artists with him, it simply won't work. Just attacking the music industry isn't enough.

Hands needs to lay out a genuinely innovative strategy now.

Given the rate at which the stars are heading for the exit, he doesn't have much time left.

Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.

(China Daily 01/24/2008 page16)