Two horrendous calls by financiers on the music industry

G

Ghost of Cutten

Ok, correct me if I'm wrong here, but hasn't it been blindingly obvious to anyone that the record label industry (as we know it) is dead because of file-sharing and downloading?

Well, apparently not. Can you believe that not one, but TWO notable financiers put serious money into a record label investment in the last few years? Can you believe that? I mean, it's equivalent to investing in buggy-whip manufacturers after cars became popular; or investing in British seaside resorts just as commercial jet flight and the package holiday industry took off.

Anyway, the people in question were Guy Hands, an experienced buyout operator, and Hugh Hendry, the hedge fund manager. They bought into EMI. I remember Hendry at the time saying he invested because he bought a CD by the Beatles and realised the record company was still making money from the recording over 40 years later. Lol, talk about missing the big picture! Luckily for him an even bigger fool came along and made a takeover offer. As for Hands, I have no idea whatsoever why he wanted to buy the whole company - using debt to do so as well!

Can anyone give a remotely plausible reason why these guys thought EMI, an old-school record label, was a good investment? Were they just hopelessly out of touch, or was there some genuine reason e.g. hidden real estate assets, some new business model they thought would work etc? From here it looks like possible the worst and most obviously wrong investment in the history of financial markets.
 
Radio stations still pay to play those songs. Its a kind of complicated formula for how they pay, but its based on the revenue of the radio station. If you look at the total number of radio stations out there, you can quickly deduce that the 15,000 radio stations that exist in the US are litterally paying billions of dollars to record companies.

And thats just 1 income stream. You can bet they are paying with TV too.
 
Quote from peilthetraveler:

Radio stations still pay to play those songs.
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Speaking of Beatles, not for long. In just 2 years, the first Beatles songs will become copyright free, because it is 50 years for songs...

So beside filesharing, the passing of time will make ANY song copyright free....
 
The music industry suffers as there is no REAL music being created in 2010...

I've never seen such a lack of talent in music today!
 
Quote from Ghost of Cutten:

Ok, correct me if I'm wrong here, but hasn't it been blindingly obvious to anyone that the record label industry (as we know it) is dead because of file-sharing and downloading?

Well, apparently not. Can you believe that not one, but TWO notable financiers put serious money into a record label investment in the last few years? Can you believe that? I mean, it's equivalent to investing in buggy-whip manufacturers after cars became popular; or investing in British seaside resorts just as commercial jet flight and the package holiday industry took off.

Anyway, the people in question were Guy Hands, an experienced buyout operator, and Hugh Hendry, the hedge fund manager. They bought into EMI. I remember Hendry at the time saying he invested because he bought a CD by the Beatles and realised the record company was still making money from the recording over 40 years later. Lol, talk about missing the big picture! Luckily for him an even bigger fool came along and made a takeover offer. As for Hands, I have no idea whatsoever why he wanted to buy the whole company - using debt to do so as well!

Can anyone give a remotely plausible reason why these guys thought EMI, an old-school record label, was a good investment? Were they just hopelessly out of touch, or was there some genuine reason e.g. hidden real estate assets, some new business model they thought would work etc? From here it looks like possible the worst and most obviously wrong investment in the history of financial markets.
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Is it just the record label EMI or the publishing side as well? Because EMI publishing is huge. Every time you hear an old song on the radio that's a few pennies in some publishing company's pocket (not literally, but it all depends). Plus there's music licensing, which can be huge for major motion pictures and commercials.

And as far as labels in general, someone mentioned on the other thread how they are now getting a piece of every little aspect of the artists' income ... touring, merchandising, etc. Can you imagine the merchandising revenue generated by someone like a Justin Bieber?? Teen idolatry is certainly not dying, and these really big artists know their only real shot at superstardom is with the backing of one of the powerhouse labels. These labels will always be affiliated in some way with the top-selling artists, simply because they have the muscle, the money ... basically the "machine" to get things done.

The industry is still changing every day, but I think there will always be a place for at least two or three of the majors.
 
Quote from tomahawk:
Is it just the record label EMI or the publishing side as well? Because EMI publishing is huge.

The industry is still changing every day, but I think there will always be a place for at least two or three of the majors.
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Exactly, there's still lots of money to be made on the publishing side, and although I didn't hear about this EMI deal, I don't have to ask - it includes the publishing side.

As tomahawk said, merch is also huge, and corporate acts like Justin Bieber will always be run by businessmen.
 
Quote from Ghost of Cutten:Can anyone give a remotely plausible reason why these guys thought EMI, an old-school record label, was a good investment? Were they just hopelessly out of touch, or was there some genuine reason e.g. hidden real estate assets, some new business model they thought would work etc? From here it looks like possible the worst and most obviously wrong investment in the history of financial markets. [/B]
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I do not know what copyrights and licenses EMI owns but if a Hollywood movie were to use one of these songs then there could be a large royalty paid to EMI. I suspect a music business can be much like a trend following system: place a lot of bets and occasionally experience a big winner.

Some music assets might be unusual. For example, someone may own the original magnetic tape storing the master recording of "Hard Day's Night" by The Beatles. Such a tape might have value in the same sense that a great painting by Monet or Van Gogh has value.
 
But how much did they get paid when they signed the deals?

Often if doesn't really matter if they deal makes or loses in the end because all the people at the top get paid in advance, signing bonuses that sort of thing.

Same with sub-prime, they all got paid via fees when the person signed.

Always look below the surface, that's where the real action goes on.
 
Guy Hands had in mind treating music industry like any enterprise with slimming margins: institute heavy cost-cutting. His business is buying poorly run companies, replacing management, and extracting underlying value. Naturally, this didn't bode well pop stars who expected indivisual treatment and ddin't like to be only considered purely as a source of revenue.

When million surplus copies of Williams's last album, Rudebox, are being shipped to China to be recycled for use in road surfacing, the artist is threatening to go on strike, and his manager, Tim Clark, has accused Hands of behaving like a "plantation owner".Some artists defected decisisvely: Mick Jagger (with his movie sound tracks), Queen, Paul McCartney, The Rolling Stones and others. Pink Floyd are selling their records over the Internet by themselves.

Regarding the business model of EMI, it has both recording and publishing business. Recording has proved troublesome... Say, 30% of the artists signed up with the company never produce an album. One of the low points for EMI came in 2001 when it paid £19m to get out of a contract with Mariah Carey, one album into a five album deal. Ms Carey went on to have one of the top-selling albums of 2005 with EMI's rival, Universal.

On the other hand, publishing business is highly profitable. When Guy Hands's company Terra Firma bought EMI there was speculation that they are gonna close or sell the recording division and stick with publishing. Naturally, recording is a way to attract new talent. Artists tend to stick with the chosen label for decades.

What should be noted is music publishers usually don't own the songs. Instead they are running revenue sharing deals with artists. Sometime they have 10-20 year exclusive publishing deals. Naturally, established artists have less restrictive deals that let them take business elsewhere.

"The press has resounded with lurid tales of excess, after Terra Firma, Hands's company, unearthed a supposed £200,000-a-year slush fund to buy sex and drugs for artists (disguised as "fruits and flowers" in the company accounts), bizarre bills of £20,000 for candles, and revelations of a £5 million company house in Mayfair for the use of senior executives."
 
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