Players line up to add spice to EMI

Looking older, but something good has happened to me,” is a line from George Michael’s album Older which appears on page two of EMI’s 1997 annual report.

Since then the pop star has been arrested for “lewd behaviour” in a Beverly Hills public lavatory, and EMI – in its 101st year – has again being linked as a takeover target for Canadian drinks conglomerate Seagram. Both the company and the artist must be looking ruefully at that line.

Speculation that EMI is up for sale has been regularly aired since it was demerged from electronics and retail group Thorn in August 1996. Its suitors, apart from Seagram, are thought to include a number of companies with deep pockets such as Disney, News Corporation, Bertelsmann and entertainment group Viacom, which includes Paramount Studios and Blockbuster in its portfolio.

EMI will not comment on whether it is in talks with Seagram. And it will also make no official comment on whether it is the company’s policy to remain independent. However, Seagram chairman Edgar Bronfman Jr was in London yesterday [Tuesday] and EMI’s share price rose 9p as a result. EMI will not comment on whether any of its executives plan to meet him.

One City analyst says: “The deal would make sense because Seagram owns MCA Records which is strong in America but not elsewhere. EMI is strong across the globe, but its one weak spot is North America. However, this deal is not inevit able. EMI is big enough to remain independent.”

The reason a company that demerged less than two years ago – and is valued at 3.9bn – is constantly the subject of takeover speculation reveals much about the state of the music industry.

Part of the reason is that super groups aren’t what they used to be or, at least, they do not sell albums in the numbers they did in the Eighties. The times when acts such as Michael Jackson, U2, Phil Collins, and Elton John would sell over 10 million copies are gone.

Some of these stars, like Jackson or Collins, are in semi-retirement, releasing albums once every two or three years. Or if the acts are still working they simply cannot shift the albums they once did. U2’s Pop, and George Michael’s Older, released by PolyGram and EMI respectively, last year have performed well, selling 5 million copies each worldwide, though industry executives hoped they would sell twice that.

Over the past two years The Spice Girls have propped up EMI’s un-derperforming acts. The group’s first album, Spice, sold about 13 million copies, and the second, Spice World, has sold 7 million so far.

“The Spice Girls are the most profitable way to launch a band,” says Ivor Jones, music analyst for broker Salomon Smith Barney. “They are a new band signed on a long-term contract at a low royalty rate. Now, when the band came to do the second album, the royalty would have been increased. But negotiations would have started from the original low base.”

Artists get between nine and 30 per cent of an album’s wholesale price. The average cut is 12 per cent. A few established artists get 20 per cent. Superstars get 30 per cent. A record company built solely on stars carries high overheads, because they are paid well and demand expensive marketing and advertising budgets. That is partly why the industry constantly searches for fresh talent; in the first few years of an artist’s success they are cheap to run and the returns are extremely high.

However, there are few acts around these days that can do what the Spice Girls can do. The first two albums from Alanis Morrisette and Oasis have sold well but as one industry observer says: “There are fewer of those global striding artists out there anymore. The old supergroups’ teen audience has grown up; the boy and girl bands that have replaced them, Spice Girls apart, have a local, rather than a global, appeal.”

This has lead to low global growth since the middle of the decade. The growth of retail music sales fell from 9.8 per cent in 1995 to 5.5 per cent in 1996, according to the International Federation of the Phonographic Industry (IFPI). Last year sales grew by only between one and two per cent, according to Salomon Smith Barney.

These figures mirror EMI’s results last year. The company produced an operating profit of 399m on a turnover of 3.4bn, which represents a rise of three per cent on the previous year. EMI chairman Sir Colin Southgate described the UK market as “sluggish” and in the US, which accounts for 30 per cent of world sales, the company had only enjoyed “modest growth”.

Last week PolyGram reported operating profits of 10.6m for the first quarter of this year, compared with profits of 56.6m for the same period last year. Only PolyGram’s girl band All Saints and classical tenor Andrea Bocelli managed to sell more than 1 million albums in that period. President Alain Levy blamed flat music sales and forecast that the second quarter would not be much better.

“The industry is at a very uncertain point at the moment,” says SSB’s Jones. He says the demise of the supergroups means that, to keep margins up, record companies may have to release more new acts, and more tried and tested compilation tracks. The “Now that’s What I Call Music” series sell roughly 1 to 1.5 million copies each edition and two are released annually.

The music market has been kept buoyant over the past 15 years by people replacing vinyl albums with CDs. The end of this replacement cycle partly explains the slump.

However, Jones thinks music sales can recover the underlying six per cent yearly growth they enjoyed between the early Seventies and mid-Nineties, when the market began to turn down. Youth unemployment in big European markets like Germany, France and Italy has affected music sales heavily. “Europe is beginning to come out of that and this will help sales,” says Jones.

One EMI insider thinks there is far too much doom and gloom written about the industry. She says: “All we need is another couple of hit bands to spark the industry again. That will turn things round. We all know what happened when Freddie Mercury died.”

Record sales went up. However, waiting for the death of a legendary recording artist is a poor business strategy. EMI’s share price has slumped from a 738p peak in August 1996 to 498p earlier this week. For EMI and its shareholders, it may make more sense to sell out to the highest bidder.