VideoYet it's questionable whether this will be enough to give EMI the boost it needs. Mulligan of Jupiter Research, for one, doesn't believe it can. "Digital is not about to save the music industry, and digital is not about to replace the CD," he asserts. "What it does do is help to stop the slide of sales." In the US, Jupiter forecasts that overall digital sales will account for 12.5% of total sales by 2008, and in Europe for 5%.
Faxon is much more optimistic about EMI's digital prospects "You have to believe that the business will evolve incrementally into a digital distribution model," he says. "We think in five years, approximately 25% of our business will be digital, even more in some territories." Yet this won't include moving into digital retailing. "We're a content business, and a content business that has to excel with respect to how we develop the product, and excel in its understanding of its consumers so that we can properly market that product. What we are not—and we have taken this view for a long time—is in the business of being the consumer interface."
So where to go from here? Faxon says he'd like to see EMI tightening its grip on digital technology further. "We believe this business has to be digital from beginning to end," he says. "We record digitally and service consumers digitally, but what happens in between is anything but digital."
Echoing Faxon, John Jordan, a principal at Cap Gemini Ernst & Young, writes in a 2003 white paper: "Rather than start with the existing distribution model and attempt to digitise it, the labels have the opportunity to be the first big content industry to adapt to the rapidly emerging customer base." The question Jordan poses is: how can they move beyond pure broadcast and mass distribution models to "use peer-to-peer dynamics to spread word-of-mouth recommendations, for example, or move content faster than any existing supply chain"?
To this end, EMI is investing £75m in new technology over the next four years. Some of that investment will be for general upgrades and consolidation of back-office IT infrastructure. But EMI is also buying into new technology that will, for example, allow it to "digitise" the production of product packaging, and set up a massive rights database to tailor rights offerings for individual clients. The company expects to see cost savings from those investments as early as next year, and estimates that they will be between £20m and £25m a year starting, in 2006.
All this should ultimately help EMI achieve greater flexibility and "a completely different focus on consumers, one that gives EMI the ability to offer music in any number of formats," Faxon says. Even so, he adds, "there is not going to be, in my view, a single model for the way in which consumers will behave. Right now downloads are the thing that people are looking at."
In the Groove
Beyond the digital revolution, however, there's arguably a much more profound transformation going on at EMI. As Faxon explains, during the growth years of the 1960s, '70s and '80s—"when we were cash machines"—EMI was like all the other record companies, "putting employees first, then the artists and finally the shareholders." His aim since becoming group CFO has been to turn that perspective around, so that "shareholders come first, then the artists and then the employees. It changes the way we think. If you take the shareholder view, that means you're looking at long-term value growth."
And that means looking at profitability. "It's a very simple concept: We want profitable sales," he says. "The industry—including this company before Alain [Levy was appointed CEO of EMI Recorded Music in 2001]—was focused on how do you build market share. Well, how do you build market share? You spend a lot more money, on the marketing of the releases, on videos and so on. You can take it to such an extreme that you could almost do better without the sales." Hence EMI's decision to put an end to that cycle in 2002 and "reduce sales by 10% in the first year of our plan—basically taking 10% of unprofitable sales out of our release schedule." One high-profile victim of EMI's quest for profitability: Mariah Carey. She received a $30m payoff to break her $100m contract with EMI after a disastrous album release in 2001.
And of course, EMI wants to get as much revenue as possible from the artists it has kept on its roster. Shortly after Carey's contract ended, EMI entered into one of the biggest deals ever seen in the UK record industry when it renewed its contract with Robbie Williams.
At the time, rumours were rife that the 30-year-old singer, who had been with EMI since 1996 and had sold over 20m albums, was thinking about leaving the label. When a contract was finally signed in October 2002, EMI crowed that the deal was ground-breaking, giving the label a stake not only in Williams' recording but also, unconventionally, in non-recording activities—including touring, publishing and merchandising. "What we negotiated was the ability to participate in the Robbie Williams 'company,' and that's been very successful for us," says Faxon.
Though EMI refuses to divulge the details of the contractual agreement, it did say when the deal was announced that the value of the contract was "way south" of the £80m figure had been bandied about by the press, and it has confirmed that Williams would have to sell 3m units of each of the six albums agreed to under the contract in order for the company to break even. So far, so good—his first album, Escapology, sold 6m units.
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