Music giants made to sing Net’s tune

Sex, drugs and rock ‘n’ roll are barely mentioned at music industry parties these days. Instead, former hell-raisers spend their time debating the latest obsession: the Internet.

The “big five” music companies – the EMI Group, BMG Entertainment, Sony Music Entertainment, Universal Music Group and Warner Music Group – are being forced to redraw the traditional business model because of one tiny statistic: one per cent of record sales are now through the Net.

But this figure is set to soar. EMI last week predicted ten per cent of its sales will come from the Net within five years.

EMI startled the industry last week by announcing plans to phase out handling CD production and distribution. Instead, it will develop talent, such as Geri Halliwell, and greatly extend its Web presence.

The move to the Net is affecting every record company department, from artists and repertoire (A&R) to marketing and performance rights. But while it was once thought the Net would undermine the power of the big five and favour small independent bands, the majors now believe they can reinvent themselves digitally and continue to dominate the business, worth £1.6bn in the UK.

EMI Records UK new media director Fergal Gara says: “We may be seen as a steady, old corporation but we are reacting with ferocious speed to the new opportunities the Net offers.”

Marketing is at the centre of this seachange. “The Net puts a whole new slant on marketing. Online marketing is now becoming a mainstream activity – one of the most significant parts of the marketing plan,” Gara says.

The most significant change to the music business model mirrors the Net – in that it’s global rather than regional. Music was previously marketed regionally: US fans have different tastes to Europeans; Germans buy different records to Italians. Different songs are released in different territories, at different times.

Ginger Media Group director of online John Ousby comments: “The issue record companies need to get their heads around is that the Net is global and music is territorial. They need to change the business model to reflect that.”

Gara says: “The Net is forcing us to think more internationally about activity and co-ordinate marketing more across territories.” But Gara admits this global overview requires a local flavour.

He believes the Net offers marketing teams a more controlled medium than TV or radio: “An online campaign can include Webcasts and Webchats. It allows people to listen to, pre-order and buy the album, and you own every part of the chain.”

According to Gara, marketing budgets are being transferred from traditional media. But rather than there being a war between record companies and Net upstarts, co-operation has broken out.

Alliances are being forged not only between record companies and new media companies, technology specialists, such as Packard Bell and Microsoft, and media owners, but between the record companies themselves.

A skills exchange is underway. Record company executives – label bosses and A&R men – are joining Net outfits. Last week Creation Records boss Alan McGee left the label he founded; he has announced an investment in online music retailer Clickmusic.com.

At the same time, record companies are hiring Net experts. EMI appointed Jay Samit as senior vice-president for new media this summer. It has since signed five deals, including equity swaps, with new media companies. EMI plans to accelerate its new media strategy and forge up to 30 more deals in the coming months.

In June, EMI acquired a 35 per cent stake in Musicmaker.com. It licenses 500,000 songs for inclusion in custom CDs consumers create on the site.

The record giant also has alliances which provide it with the encoding, delivery and e-commerce capabilities needed to pursue a new media strategy – driven by Samit.

EMI label Virgin Records is to sell downloadable music at the Packard Bell-owned Urocketmusic.com site, and next year will link up with an online retailer – “such as Amazon.com or HMV online” says Gara. EMI owns 43 per cent of retailer HMV.

A deal to link EMI’s Net services to mobile phones is in the pipeline.

In April, BMG and Universal combined their online marketing and sales operations in a single Web outlet: GetMusic.com.

Meanwhile, Sony and Warner are partners in music and video retailer Columbia House, which is merging with online retailer CDNow. The two giants will each own 37 per cent of the new publicly-quoted company.

Because customers wouldn’t frequent a “bricks and mortar” shop that only stocks one company’s records, “clicks and mortar” sites offer rival recordings. BMG and Universal’s GetMusic.com site sells music from all record companies, but only promotes titles they released.

But the seachange is not only about selling CDs mail-order over the Net. A huge debate rages over the downloading of files using technology such as MP3, which cuts out CD production and distribution, causing copyright nightmares. MP3 allows files to be copied, often free of charge.

No wonder record companies are working feverishly to establish secure download delivery systems.

Next year, EMI plans to offer tracks as downloads, although it shuns MP3 technology. Gara says: “We have to be responsible and launch a legal market for downloads. Artists, as well as the record companies, need to be paid.”

The Net is also changing the way artists interact with record labels. A new breed of cyber company, such as MP3.com and new UK outfit Peoplesound.com, provide unsigned artists with a well-known, well-visited and global site to showcase their work. Peoplesound has 500 talent scouts in the UK and signed 1,500 artists – over 40 genres of music – within four weeks of going live.

Artists are paid a £100 advance on royalties – pegged at 50 per cent, compared with the label’s traditional 16 to 19 per cent rate – and are not held to an exclusivity deal. Consumers can download tracks free of charge and then buy the band’s music on CDs which Peoplesound has manufactured.

Zac Leeks, senior A&R manager at Peoplesound, says the site serves record companies as well as the artists: “Artists don’t have to spend on making and distributing demos, and can be heard around the world. Record companies can check out artists without scouring the country, and their potential will have to be tested through sales on our site.”

One City analyst says EMI is considering floating its Net interests as a separate company: EMI.com.

With the established music business model so thoroughly shaken, record companies have no option but to change. How quickly and effectively they adapt will dictate their success as the entertainment and digital worlds collide.