Time for the City to tune up its knowledge of record industry

By George Pitcher. George Pitcher is joint managing director of media consultancy Luther Pendragon. Analysts of the music industry, wrong so many times in the past, are still getting it wrong over newly- demerged EMI, Britain’s only major labe

The news on Monday that EMI has signed the Artist Formerly Known as Prince focuses my attention on the Group Formerly Known as Thorn EMI. As Prince demerged his identity, so the mysterious corporate entity that has now acquired his services has also become something very different. I look forward to EMI renaming itself as a silly symbol.

As far as analysts in the City are concerned, that symbol should be an arrow pointing unequivocally downwards. But the City has never really understood the record industry. It was nearly two years ago that I last expressed that view. That was around the time that other commentators were claiming that the CD would go out of fashion because it was over-priced and that the single was dead because pop-pickers (or whatever they are now called) were playing with Sega video games and the like.

Well, CDs now represent 80 per cent of the entire market and sales of singles in the UK grew last year by 22 per cent, passing 70 million units for the first time in ten years. Time, I would have thought, for the City to review the contracts of those from whom it receives its advice.

I say that because it appears that the newly demerged EMI is suffering the selfsame problems at the hands of the City which was so bearish about those committed to CDs and singles. A couple of weeks ago, a report from the international trade association for the record industry, the IFPI, suggested that music sales in some parts of the world are flat. As a direct result, EMI’s shares lost 16p on the day – not a vast collapse, since the quote opened this week at 1289p, but a wobble nevertheless.

Now, there are two possibilities in relation to this wobble. Perhaps the worldwide music market really is flat. But, if it is, I have to ask why the City didn’t know that already and have the market in record shares discounted accordingly (again, perhaps the salaries of well-paid analysts should be reviewed). Or, alternatively, the market is not flat – in which case, the IFPI is wrong and market-makers should not have marked down EMI’s shares.

The truth, I gather from the industry, is rather more complex than either of those simplistic extremes. Some parts of the world are stagnant in terms of unit sales, while some are less stagnant and still others are most definitely not stagnant.

Take the UK. Recent figures from the British record industry trade association, the BPI, showed that the total number of certified awards for sales volumes (silver, gold, platinum and triple platinum) were down. Some observers took this to mean that there had been a decline in UK record sales. The reality is somewhat different.

The number of silver awards has indeed fallen dramatically. But these are low-value volumes. The numbers of gold, platinum and triple platinum awards have actually risen. Sales of albums (or units) which lay behind this level of success in the higher-value award have risen from around 20 million to some 29 million.

The relationship between unit sales and the value of the business is further complicated by the advance of reproduction technology and the regulation of markets. Only concentrate on unit sales, for example, and you fail to take account of the falling prices of CD players, which means that the market is shifting from low-value cassettes to high-value CDs. As to regulation, increased efforts in some markets to combat piracy is enhancing the value of music copyrights to the companies that own them.

Why, then, should superficial research results have such a direct effect on the rating of a company such as EMI? Part of the reason must be geographical. Hardly any major international music companies are now quoted on exchanges in Europe. EMI is really the only one, apart from a lump of PolyGram. The sector is bound, therefore, to attract less analytical attention than it does, say, in the States.

Furthermore, EMI is the only British-based major record company left. If its value is unduly depressed by ignorance or lack of interest, then it will be delivered into foreign ownership precisely because the value of music markets may be appreciated better abroad. Two of those with such an appreciation are said to be Disney and News International.

I don’t expect City analysts to grow all sentimental about Britain’s popular musical heritage. In business terms, saving something for the nation is usually the language of the Eurosceptic and should be eschewed by the international commercial community.

But it is perhaps worth mentioning that EMI has some national treasures – music’s equivalent of the Three Graces, as it were – in The Beatles, The Rolling Stones, Jethro Tull, Sir Cliff Richard and Queen.

The commercial point is that EMI has a history and a culture for fostering talent, which have formed the backbone of its earnings. One shudders to think what might become of that tradition under the control of a Disney or a Rupert Murdoch.

As I say, this is not a point about heritage, so much as a point about how much money such talent can generate. I am, it occurs to me, talking about their cash generation.

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