Major change in the music industry

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Music companies are in a real spin — battling falling profits, increasing competition and rampant piracy.

EMI.jpgSo the inevitable has happened, and EMI has fallen into the hands of the bankers, after one of the most spectacularly bad bits of business in history.The private equity firm Terra Firma has lost $2.7bn — its entire investment — and Citibank $3.5bn.

Back in 2007, when the deal was announced, Terra Firma planned to "accelerate the development of its digital and online strategy." The executive tasked with running EMI visited Linn at that time, when we were already seeing the ramp-up in demand for our Studio Master downloads. Naturally, we advised Terra Firma to launch a studio master download service. Sadly, they didn't take our advice.

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And it's hard to find any evidence of an online strategy at EMI since then. The only toe-in-the-water of digital seemed more about extracting maximum profit from Beatles fans than a strategy; the "limited edition" USB stick of Beatles studio masters is still available 16 months after launch, and at a reduced price. Anyway, the impetus came from the Beatles' Apple Corp, not from within EMI itself.

The opening quote of this blog comes not from analysis of EMI's current woes, but from a BBC News article in 2003 about the race to consolidate the music industry. Not much has changed for the Majors, except perhaps being able to replace "falling profits" with "accelerating losses".

What we are witnessing is the beginning of a new phase of consolidation, which may finally see EMI bought by Warner Music. Ironically, it is the emergence and dominance of Apple and iTunes that may allow such a merger to gain the regulatory approval that was uncertain to Warner in 2003 on the basis of anti-competition fears.

Another contender to buy EMI is Apple itself; it's been apparent for some years that Steve Jobs sees Apple's endgame as becoming a media company with both hardware and software delivery mechanisms. Regardless of whether or not Apple buys EMI, iTunes looks set to secure a deal with the Majors for CD quality downloads, with huge ramifications for the future of the music industry Majors.

Why would the Majors allow this to happen, bearing in mind it cedes even more control of the music market to Apple? Well, Apple has the advantage that as soon as it negotiates a deal with one Major, the others topple like dominoes, for fear of missing out on their share. Furthermore, the Majors are unable to negotiate collectively, or even discuss a collective position, because, as one senior Major exec told me: "if the Majors are in a room together, an army of lawyers is present to ensure nothing remotely resembling cartel behaviour occurs."

Finally, as the EMI story tells us, the Majors simply can't compete directly against iTunes with their own branded download sites. Because they aren't consumer brands in their own right, attempts to develop their own portals are either too costly to pursue or failing to gain traction (Warner's Rhino.com). Right now, Apple holds all the cards.

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Or does it...? The biggest music download site in the world, by far, is... YouTube! So perhaps the least bad outcome for the Majors is that Google enters the fray with a viable, alternative service to iTunes, introducing competition that would give the Majors some leverage in price negotiations with Apple.

A battle royale for control of the global mainstream music industry is looming.

P.S. To get an idea of the mind-boggling complexity of a "Major" record company check out the Wikipedia page of Universal Music Group (UMG).

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