EMI Sale: The Continuing Destruction of the Major Labels

Filed in archive Commentary , Companies , Finance , Major Labels , Society & Public Policy on June 12, 2007

This article is part of a series on the changing music business.

1. Weakly Album Sales

2. It's Not About the Album

3. Album Sales Are Like US Box Office

4. EMI Sale: The Continuing Destruction of the Major Labels

Major recording label EMI has been in talks to sell to fellow heavy Time Warner Music. But instead it's decided to be acquired by Terra Firma, a private equity (PE) group, for over $7 billion in cash and debt.

Some people believe that that would be good for the industry. An outside investor would bring a fresh perspective and be more receptive to the digital transformation of the music business. I believe that's naïve but that it indeed would be good for the industry.

PE acquirers are not industry experts, they are financial geniuses. They exist not to advance the industry, develop risky products or markets, or hike company sales, but to maximize value to ensure a high return on investment.

PE firms do bring a fresh perspective, one not bound by history and driven purely by economics. They work by extracting and exploiting the essence of a company. They strip unperforming, underperforming, or unproductive operations to focus the company on its core assets. The business earns more money on lower expenses, a recipe for high company valuation.

In the case of EMI that means focusing on the existing catalog and its distribution, not investing in artist development and marketing.

Why is that good? Because the music business is irrevocably changing back to where it was 50 years ago. There is no place for major labels. For the past decade they have distorted the marketplace and public policy as they've fought to survive. They've glacially adapted through consolidation and layoffs. It took the labels 8 years to sell digital singles and 12 years to sell files without DRM.

The faster they can be Torn down, the better for consumer and artists to explore a future unencumbered by old institutions that are no longer relevant.