Recent Financial News in the Music Industry

Over the last year, as the economy and the music industry lingered, many asked where the money was . Indeed , a hot topic at Billboard’s 9th Annual Music and Money Conference, early in March, was the financial situation of EMI, one of the big four record labels.

In 2007, EMI was acquired by the private equity firm Terra Firma for $4.73 billion. EMI had reported a 61% fall in profits, and pinned its hopes for recovery on Terra Firma’s acquisition and restructuring plans. At first, EMI saw small signs of improvement, but progress was slow thereafter. Many of EMI’s successful artists, such as The Rolling Stones, Radiohead, and Pink Floyd, soon left or will leave the label.

Moreover, Terra Firma has struggled to find investors for the second half of the multi billion-dollar deal. EMI now holds on to life with its lucrative publishing catalogue, and is resorting to selling off its assets to stay in business. In February there was even speculation that it was going to sell the historical Abbey Road studios. The most recent development has been an EMI offer to rival labels for the management of their North American catalog- at a price of $600 million. Terra Firma, believes that such a deal could potentially save EMI’s financial problems, and prevent them from losing the label to Citigroup (however, some artists are unhappy and have threatened to take their music to another company). [i]

There is also the potential acquisition of EMI by Warner Music Group. Nothing has ben confirmed officially, but there has been speculation of talks between WMG and another private equity firm about buying EMI. If such a purchase were to happen, it would be a major game changer in the music industry, leaving only three major labels.

As large investments in the shrinking record industry are risky, investors may begin to direct their money elsewhere. Billboard has tracked music related deals from 2008 to early 2010 and found that one third of these deals were small venture capital infusions[ii]. While the music business is in a state of flux, firms are only investing in new models that show promise. Last summer Nettwerk, Mama Group, and ATC started a new fund for new artists, and called it Polyphonic. Polyphonic will offer a new model of investment that is very different than the standard record label deal, allowing much more artist freedom, while adapting concepts of a 360-deal. Artists will keep all of their copyrights, while Polyphonic receives a share of the artist’s income. All artists wanting to “make it big” need, of course, strong financial backing, and these deals would allow for more of them to grow. Co-CEO of Mama Group Adam Driscoll recently told MusicWeek, “ It has been apparent for some time that there is a real barrier to artist development – and that is a lack of available investment capital.”[iii]

Other companies innovate in the delivery of music. Online Streaming service Spotify has received capital investments from private firms as well as some major labels. By the end of Summer 2009, Spotify had received $50 million from Wellington Partners and the Li-Ka Shing Foundation.[iv] The company’s net worth is around $270 million, and in February Spotify was reported to have received another multi-million investment from the Founder’s Fund[v]. Spotify has convinced most Europeans that it is the new way to listen to music, but they are having trouble convincing labels in the United States. If Spotify were to launch in the US, they could possibly see a significant increase in investment funding.

Mobile music applications are continuing to grow, and are getting more support from investors. The mobile music “app” Shazam has rapidly grown in popularity. At the end of 2009, it had over 50 million downloads. In 2010, Shazam hopes to double that. Shazam has received funds from investors such as DN Capital, Acacia Capital Partners, and Kleiner Perkins Caufiled & Byers (KPCB has invested in Google and Amazon)[vi]. No official amounts have been disclosed, but if Shazam continues to grow at the same rate, more investors are likely to jump on board. As technology continues to change, mobile music is likely to adapt, reducing risk. Many companies that have cleverly adapted to technological change have done extremely well and are continuing to grow: Nimbit and Topspin Media, in particular, have continued to capitalize on the potential of a direct-to-fan artist platform.

Many online streaming services have been acquired or have received funding from capital investors- Apple’s acquisition of Lala being the largest of 2009. Mobile music applications have innovated the way we listen to and find music and are receiving backing from investors that have supported Google and Amazon.

Overall, the problem is that the industry seems to be less in control of its destiny than in the past, and investors cannot assess risk as clearly. Established publishing catalogs may be the exception, as returns there are more predicatble. But publishing is in much less need of an overhaul than the recorded music business. That is unlikely to happen in the short-run, if at all—and may further dampen spirits at next year’s Billboard’s Music & Money symposium.

By Steven Gringer

References
[i] Peoples, Glenn. “Analysis: Where’s The Money?” Web.
[ii] “Mama, Message and Nettwerk Go on Polyphonic Spree.” Web.
[iii] “Spotify Reveals Investment From VC Hommels, Adds Him To Board.” Web.
[iv] Saint, Nick. “Spotify Picks Up “Substantial” Investment From Founder S Fund.” Web
[v] Wray, Richard. “Shazam Secures Heavyweight US Backing.” Web.

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