EMI spends $50 million a year destroying CDs..but is waking up

Marc Andreesssen points to today's FT and says:

"EMI, the big music company, spends 25 million pounds a year "to scrap unsold CDs...

"To destroy unsold physical inventory in a world of ubiquitous digital distribution.

"Oh my."

I agree. It's stupid, stupid, stupid to spend money destroying CDs (because no one wants to buy them), then turn around and sue down-loaders (because you can't bring yourself to accept a digital world).

But the Financial Times article is a far more interesting read. Guy Hands, the Terra Firma buyout guy who will be leading EMI, is quoted:

He identifies three characteristics of today's music business: "The industry is based still on the phenomenon of the 1990s and the CD. It is based on the belief that if you have hits you'll make sufficient money to cover everything else.

"It's based on the belief [that] if you have conglomerates of labels they can benefit from economies of scale through manufacturing and distribution sufficiently to make enough money.

"It is based on the belief that individuals who know a particular type of music in a multicultural and multi-demographic society can push a product to the consumer.

"All three of those, in my view, are complete fallacies," declares Mr Hands, who first studied a bid for EMI in 1995 when he left Goldman Sachs to join Nomura (spun off in 2002 to form Terra Firma).

At times Mr Hands sounds despairing: "Can you imagine what would happen if most consumer industries over-shipped by 20 per cent? Can you imagine any consumer industry having 10 per cent of employees as middle management? Can you imagine only 6 per cent of staff in production?"

The record business - in which 85 per cent of artists are lossmaking and EMI pays £25m a year to scrap unsold CDs - "is stuck with a model designed for a world that has changed and gone forever", he says.

His solution is to switch from pushing CDs to pulling consumers towards music in different forms. One element will be focus groups. "People say the music industry is more creative and the customer doesn't know, only the creatives do.

"When you look at which car companies are succeeding it's the ones which work with their customers. Are clothes not creative? Is fashion not creative? Is food not creative? The only real difference is these industries have learnt to work with the customer and not force-feed them," he argues.

Surprisingly, he says that Radiohead, the band that ditched EMI last year to launch their latest album online, made the right choice. "Radiohead had the right idea. They understand their fans. They realise some of them want the premium box set. I'm one who bought one, and paid the full price. What Radiohead showed the industry was that it isn't one answer for all artists or indeed for every customer."

If it takes investment bankers buying out record companies to get them to wake up to the 21st century, then bring them on!

Technorati : EMI, Guy Hands, Marc Andreessen, Terra Firma, corporate efficiency, recording industry

Posted by Allan Jenkins on January 14, 2008 at 07:08 PM in Corporate Management, Music, Online Media | Permalink

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