Shaking Up and Turning Around EMI

EMI Group was once hailed as the music company that brought the world the Beatles, Frank Sinatra and Nat King Cole.

But by the time record veterans Alain Levy and David Munns took over the British company’s struggling music operations last October, employees were joking that EMI stood for “Every Mistake Imaginable.”

Levy became chairman of EMI’s Recorded Music division, and Munns vice chairman. Their arrival followed a decade-long string of profit warnings, management shakeups and financial setbacks at the world’s third-largest music company. Last year EMI posted a loss of about $310 million.

After slashing 1,800 jobs, firing 400 artists and shutting down several record labels, Levy and Munns are finally putting some hits on the charts by such new acts as Norah Jones, Coldplay, Kylie Minogue and the Vines.

But the industry is suffering from piracy of music over the Internet, which is slowing CD sales. Levy and Munns, who previously transformed PolyGram, spoke candidly in their first joint interview about EMI’s problems and other troubles facing the music industry.

Question: EMI was a mess when you took over. The stock market now values EMI at about a third of what it was worth during the mid-1990s. How do you deal with that?

Levy: It’s very annoying to see the valuation put on record companies these days. The market is based on perception, and people now have a perception that the music industry is doomed. Is that the reality? I don’t think so. The only thing to do is work hard to build a quality music catalog for the future.

Q: Before joining EMI you took a break from the music business. What looked different when you returned?

Levy: What struck me most was how the music business is a world in itself, one where executives are often richly rewarded--even when they fail. In other industries, people understand that when [sales] go down by 10%, you take a salary cut. When the market is down here, these guys think it’s everybody’s fault but their own. When we arrived, we could see there was a total disregard for the shareholders in this company.

Some of these executives make the same amount of money as the heads of investment banking firms--plus they demand a guaranteed bonus, even if they fail to make a profit. We put a stop to it here.

Q: You cleaned house by firing hundreds of employees. You also notified many senior executives that they either had to accept a 50% salary cut or walk. Can you talk about that?

Munns: We said to quite a few people around the world, “We’ve got a job for you, and this is what we feel a fair amount in pay should be; do you want the job?” Few left.

Q: Your predecessors signed superstar Mariah Carey to an $80-million-plus contract. Then you backed out of the Carey deal after just one record and paid her $29 million to leave. Why?

Levy: I know that decision shocked people. We can’t really talk much about it. I just want to say that we have absolute respect for the artist and think she’s a great star. The issue was the lack of profitability of the deal and the risk profile. We ended it because the deal was unlivable for the company.

Q: Universal Music Group immediately signed Carey to an estimated $20-million, three-album contract and is preparing to release her next album. How will you guys feel if it’s a hit?

Levy: Believe me, if I had the same contract Universal got, we wouldn’t be having this discussion.

Munns: I can’t imagine any circumstance in the future where we would regret the decision we made.

Q: So why turn around last week and sign British rock star Robbie Williams to a $70-million-plus deal, paying him nearly $40 million upfront?

Munns: We can’t discuss the details about Robbie’s deal. After the Carey deal, we made it clear that we are not going to do crazy record deals that have a huge risk in them. I assure you that this is not a deal in that category. We’ll make money on it with no sweat.

Q: It’s an unusual deal. I’m told that you invested about $25 million for a stake in a management company run by Williams and will share in revenue generated by any of his sponsorship, publishing and acting deals as well as from concert receipts. Why do this?

Levy: Our goal is to transform EMI from a recording company into a music company that shares in all kinds of revenue generated by the artist. It’s less volatile than record sales alone. You spread the risk. Record companies spend an enormous amount of money launching and developing an act--and we only get about 10% of the revenue. The idea here is to tap into a share of the other revenues.

Q: When you took over, EMI was posting profit warning after profit warning. How do things look today?

Levy: The company is in pretty good shape now. It’s not hemorrhaging anymore. But now we need to rebuild the artist roster around the world, particularly in North America.

It’s funny though. I’ve got analysts already asking me why our market share in America hasn’t gone up in the last six months. This is a business built on artistic creation. It takes time to cultivate music careers. That’s something we’re very focused on.

Munns: Companies need to continue building music catalogs. We need to develop each artist’s career patiently with a long-term, multi-album approach. If we abandon that principle, we will end up with a very fragile company and industry.

Levy: What people have been concentrating on in the last five years is signing as many deals as possible in order to land blockbuster No. 1 hits. It looks great in the short term. But in the long term, it doesn’t work. That’s why we want to sign and support artists we can develop so that in 10 years we create a legacy, a rich catalog of music.

Q: Many wonder whether there will even be a music business in 10 years. With piracy eroding profits generated by new hits and obliterating profit from old catalog sales, what makes you so optimistic?

Levy: Because the issues we’ve been facing in the music business are now starting to affect film, TV and software companies. As [high speed-Internet] connections accelerate the [piracy] problem for other industries, intellectual property companies will unite into a strong coalition to lobby the government. There’s more pain to come, but the music industry will survive.

Q: What makes you think you can convince people that swapping music on the Internet is stealing?

Munns: Eventually, people will begin to understand that this is just plain wrong.

Q: Why should music fans feel any moral obligation to enrich music executives whom critics have accused of price-fixing and of cheating their own artists?

Munns: People enjoy bashing businessmen. I don’t have a problem with that. But I don’t believe the American public is corrupt at heart. People don’t allow banks to be robbed. And they don’t allow cars to be stolen out of showrooms. We are in a business in which we own intellectual property. We pay for it legally and we have a right under law to be compensated for its use.

Levy: I came up in an era when management believed a hit record could solve all problems. But no amount of hits will end the piracy epidemic. We’re operating in an unknown arena here. We need to put the brakes on piracy. But we also need to develop a consumer-friendly product in the digital delivery world. And we need to do it fast.

Q: Some of your competitors believe that EMI is destined to be gobbled up?

Levy: Some of our [competitors] have great uncertainties about their futures and whether they fit into their parent company’s schemes. We don’t have those problems.

Some of our friends say we’ll get gobbled up. We know nothing about that. We just do our jobs as well as possible to increase the value of the company for our shareholders and artists. Everybody--including the so-called gobblers--is afraid of the future right now.

Munns: We’re the third-biggest record corporation in the world. There is no reason why we can’t stand alone and be a successful independent music company.