EMI Faces the music: If the merger with Time Warner's music division succeeds, this great British institution will lose its independence. Should we cry? It has a tumultuous past - the US shutout, the awkward pairing with Thorn, the blown Seagram deal - bu

EMI Faces the music: If the merger with Time Warner's music division succeeds, this great British institution will lose its independence. Should we cry? It has a tumultuous past - the US shutout, the awkward pairing with Thorn, the blown Seagram deal - bu

Last Updated: 31 Aug 2010

Former punks among MT's readership might remember Johnny Rotten's view of EMI, his one-time record label. 'It was all a frame,' he charmingly 'sang', 'they only did it 'cos of fame.' It was an EMI cock-up back at the tail end of 1976 that brought punk to the attention of the world when a PR operative unwisely substituted the Pistols for the indisposed members of Queen on a Bill Grundy ITV interview. This was the first time the great British public had ever heard the F word on prime-time television, and a legend was born. A few months later, Rotten was picked up carrying amphetamines and EMI dropped the hot Pistol potato, kissing goodbye, in the process, to the pounds 40,000 advance it had paid the group.

'They only did it 'cos of fame.' Certainly, EMI has enjoyed a fair bit of fame in the City over the past couple of years. And not all of it has been of the positive variety. While it lost sales and its share price dropped, the autocratic head, Sir Colin Southgate, became involved in brawls, first with his chosen successor Jim Fifield and then with Edgar Bronfmann of Seagram. Finally, last year, the leadership was handed to Eric Nicoli of United Biscuits, a man more familiar, it was muttered, with Hula Hoops and Jaffa Cakes than CDs. (He had been labelled 'the biscuit bungler' because of United Biscuits' poor market performance.)

City flak has been flying around Nicoli's ears ever since his appointment. Most observers considered him an unconvincing successor to the forceful Southgate. And cynics suggested that Nicoli's arrival was simply the latest tragi-comic episode in a boardroom soap opera that had left EMI, one of the jewels in corporate Britain, a lacklustre victim ripe for any predator. All the usual suspects were mentioned, from Disney's Michael Eisner to a sore Bronfmann or Rupert Murdoch's News Corporation.

So when news of the impending merger started leaking out on a Sunday at the end of January (confirmed by a turbo-charged Monday morning press conference full of high-fives and visionary pronouncements), it came as a big surprise. In a highly complex and convoluted mating game, EMI was getting into bed with Time Warner's music division. The joint-venture structure of EMI's proposed link-up with the Americans, who had just forged their liaison with AOL, impressed many who admired the fit of the two groups.

Under the terms of the pounds 12 billion hands-across-the-ocean deal, EMI will own 50% of a newly created company called Warner EMI Music, into which EMI and Warner Music will inject their music assets. Roger Ames, executive chair of Warner Music, will be the chief executive of the new Warner EMI, which will be the biggest music business in the world, controlling a huge 27% market share. Ken Berry, chief executive of EMI records and his old friend, will be Ames' number two. Although Nicoli remains as co-chairman of the new group (with Warner's president Dick Parsons), some question whether he hasn't effectively negotiated his way out of a job and will want to claim a leadership role elsewhere.

It was Ames' intervention, calling Berry when news of tenta-tive EMI discussions with the Seagram-owned Universal broke in the US last summer, that got serious talk of a merger under way. Ames and Berry are regarded as two of the great mavericks of the music business and, according to US magazine Music Week's editor Ajax Scott, represent 'the risk-taking entrepreneurial spirit of the music industry. If there was to be any marriage, these are the two people who could get along.' Nicoli is also bullish. EMI has never had a management team left in place in the US for more than 18 months, and some 'continuity of management' will make a positive difference.

Even if the merger succeeds - and either Brussels, US anti-trust laws or an outright bid could scupper it - we are faced with the final loss of independence of what was a great British institution. Chairman Nicoli did his best to steady corporate nerves with weekend calls to key colleagues and artists, and a videotaped message was sent out to all staff on the Monday morning of the announcement. Both firms face an edgy wait before an EGM can approve the deal in the spring.

Trauma has never been far from EMI. (This is rock 'n' roll, after all.) In the company's 100-year history it was ever thus. The group's path from formation is a roller coaster of squandered opportunities interspersed by bouts of such wonderful fortune they were unmissable even by the most slippery-fingered company executive. If Warner-EMI represents a final safe-haven option for the company, it could and should have been very different.

Even though it was the first record company to sign a major star - Enrico Caruso cut his first disc, in April 1902, for pounds 100 - EMI's commitment to the music business has been far from consistent. The company was quick to note the importance of intellectual property rights - it snapped up the Francis Barraud painting of Nipper the dog entitled His Master's Voice for pounds 52.50 in 1899, which it quickly turned into one of the most recognisable brand icons in the world.

But its success in rebuilding overseas earnings after the first world war was later kyboshed in the 1950s with the loss of long-standing licensing arrangements in the US, notably the end of its deal with RCA Victor, which had given access to blockbuster stars such as Elvis Presley - a deficit that the purchase of Capitol could not rectify. That loss at a time when America had become the powerhouse of pop music was a setback from which EMI has arguably never recovered. The Warner tie-up may help to fill the gap in its revenue streams.

When EMI merged with Thorn in 1979 to form a mini-conglomerate, its over-dependence on the UK market was exacerbated - this was the very weakness from which Thorn had suffered. For a while there was an attempt to build up the technology side of the group, using music as the cash cow to fund the expansion. But this foundered on the problem of the implacably unprofitable Inmos microchip business, and music sales began to falter rather than shore up the group.

Southgate swiftly set about whittling away at the Thorn part of the group, creating an enterprise that was effectively an electrical rentals business alongside music. However halting and erratic the progress, the scale of the transformation that Southgate achieved can be grasped by recalling some of the brand names that were jettisoned from the Thorn EMI stable - there was Ferguson televisions, Kenwood kitchen appliances, a stake in Thames Television, Bendix, Parkinson Cowan and Tricity. Who wanted a Ferguson rather than a Sony and who a Bendix rather than a Bosch?

Southgate ploughed most of the money into EMI with acquisitions such as the huge SBK library costing dollars 337 million in 1990, which ensured the company's position as the world's largest music publisher; Chrysalis (acquired in two stages - '89 and '91 - for a total of pounds 100 million); and Virgin Records (pounds 510 million acquisition in 1992), which added names such as the Rolling Stones and Phil Collins to the group's already enviable roster of artists.

As a result, EMI shot up the global charts to reach the number-three slot - after Sony's CBS and Time Warner but ahead of Bertelsmann's BMG and PolyGram, now in the hands of Seagram, the Canadian drinks group, which also owns Universal Studios.

In the realm of classical music, EMI has remained pre-eminent. Under UK producer Walter Legge the group signed artists such as Elisabeth Schwarzkopf (whom Legge later married) and Maria Callas. That strength persists today with singers such as Placido Domingo and Dame Kiri Te Kanawa on EMI's books. The track record in pop was less sure until the late 1950s, when the likes of Cliff Richard, Adam Faith and Helen Shapiro were signed.

It was the burgeoning of British pop in the mid-1960s that transformed EMI. It couldn't help but get rich with the talent that came knocking at its door. But it was only a bit of fancy footwork by George Martin, then one of the talent-finders for EMI's Parlophone label, that led to the Beatles being signed after the firm had rejected them. Despite such a near miss, EMI still turned down the rights to the band's songs and, in 1963, rejected the chance to acquire the booming Motown Records for a mere dollars 17 million.

Although there was a revival in group fortunes during the 1970s with bands like Pink Floyd and Queen, the company again seemed to be suffering from a predilection for known artists but a failure, or difficulty, in cultivating new ones. As a result, EMI has paid extremely large signing-on fees - Janet Jackson's contract in the early 1990s was said to have set new highs (a four-album, pounds 51 million deal) - and become over-dependent on particular artists, such as the Spice Girls.

Critics argue that EMI's age-old problem of being slow on the uptake of new trends has not disappeared. The recent reshaping of the American operation came, according to some, only when the wolf was coming down the chimney rather than blowing at the door. PolyGram had already issued a profits warning and set about axing 500 jobs; likewise Time Warner.

In all the tumultuous history of the company it was Southgate's dance of the seven veils with EMI's potential suitors that created most controversy.

Southgate - who publicly insisted the firm had never been for sale - argues that it was his duty to maximise value for shareholders. He is a passionate believer in British champions and feels EMI has a role in the national wealth. But if that was to be lost to an overseas bidder they were damned well going to pay top dollar.

In mid-1998, it was this approach that confronted Edgar Bronfman Jnr, the head of Seagram, when he made his last offer, believed to have been a bid of 620p a share. Southgate sent him away with the words 'seven pounds, not a penny less' ringing in his ears. It was, however, the last time Bronfman was prepared to come begging at the Hanover Square HQ and the Canadian promptly opened his arms to a more willing partner, PolyGram.

This outcome could not have been worse for EMI. It had rejected the company - Seagram - widely regarded as the most suitable partner. But it was also left on the shelf as the exposed PolyGram found succour by exchanging the deep pockets of the Dutch Philips group for those of the Canadian firm at the end of 1998 for dollars 6 billion cash and 12% of Seagram stock.

For nearly two years now EMI has been the only lone player in a field where its competitors could count on sugar daddies. And with a soaring pound adding to problems in the US and the crumbling Asian market, it was not a propitious time to take centre-stage as a corporate soloist. Few investors in the City were ready to shed tears about the group's fate. EMI shares underperformed in the market in 1997 by some 38% and by another 29% the following year. The sight of the company coming to the market with another profits warning began to seem almost commonplace.

The Bronfmann incident came hard on the heels of the so-called Fifield meltdown. Two years ago Sir Colin Southgate had been stepping out of his executive role to make way for the confident, designer-dressed American, Jim Fifield (or Lucky Jim, as he had been dubbed, thanks to a fat remuneration package). He had made a dramatic impression since being lured from CBS Fox and insiders say it was clear that Southgate had marked out this performance-driven executive to step into his shoes.

But Fifield was to overplay his hand fatally. EMI's top echelon had begun to fracture and two opposed factions were starting to dig in. One of those at the eye of the developing storm recalls: 'It was a very, very nasty time. The whole place was pretty treacherously divided into two camps. I really don't have the appetite even to remember that time, let alone want to be back in the thick of it.'

February 20, 1998 should have been Fifield's moment - his installation as an all-powerful chief executive. But instead of being wreathed in laurels, he left the meeting heading straight for his lawyers.

Not only was Fifield after a four-year rolling contract worth dollars 10 million, he had tried to insist that his new contract as chief executive should contain a clause effectively prohibiting Southgate from having any say in the way the business was run on a day-to-day basis in the future. No dice from Sir Colin. The succession planning was in tatters.

The smooth transfer of power was supposed to cement the reshaping of the group, which had recently seen the spin-off of HMV retailing into a joint venture with Waterstone's book stores. This was the final element of a strategy that had culminated in EMI separating from its long-term sibling, Thorn, in a de-merger during the summer of 1996.

Instead EMI finally picked Nicoli, then chief executive of United Biscuits and an EMI non-exec, to be chairman. Despite the early jibes, the company's shares more than doubled during his reign from their low point of 312p at the end of 1998. Now he has found a deal to remove the doubts over EMI's future and, unsurprisingly, he is selling the merger hard, claiming to have achieved better terms in the wake of Time Warner's mega-deal with AOL. Nicoli was already three months into his negotiations with Warner Music when news of the AOL deal came through to him, on his mobile phone, dutifully conveyed by his PA.

With his genial manner and interpersonal skills, Nicoli appears slowly to be settling EMI's staff and winning support from the City. He had already seemed genuinely excited by the prospects for music and new media on the internet and ready to tackle the dangers that lie ahead.

The development of MP3 technology, which enables surfing fans to download music digitally from the internet, looms large as a potential threat and the record companies are gearing up for legal action against the developers of its technology.

But it's not just the EMIs and Sonys who are threatened by changes in the marketplace. Virgin Megastores has grumbled publicly about being 'disintermediated' by the internet, and is fighting hard to protect its margins. And, in the run-up to the crucial Christmas selling period, Asda - now part of the giant Wal-Mart retailing empire - sliced the price of CDs for the second time in 12 months. More threateningly, though, it has told record companies that it wants to start selling hit discs at pounds 9.99 by the end of 2000. To do so will mean the labels having to accept a return of pounds 2 less per disc. Asda, which helped smash the Net Book Agreement, has taken the first slug out of their retail margin.

Time Warner's merger with AOL shows where they think music is going, and now EMI can haul itself aboard the bandwagon. There will soon be a safe payment system on the net, and web sales will cannibalise perhaps only a minority of mainstream sales (still 95% through stores) for years to come. With the digital download of David Bowie's latest album offered on the internet last September two weeks ahead of its release in the shops, EMI became the first group to put out an entire album from a major artist in this way. Like other record companies, EMI risks losing some of its big names to the net, but Nicoli has argued that this overlooks what music companies contribute to the success of global artists by way of promotion, distribution and marketing spending.

EMI is now ready, together with Warner Music, to concentrate on exploiting one of the world's most impressive current and historic music collections.

Other internet investments, including the recently floated musicmaker.com, should ensure that the group's music comes out faster and earns more quickly than the catalogue of some of its rivals, while online involvement will help Warner EMI Music foster relations with new artists, unblocking EMI's historically sclerotic approach to nurturing new talent.

In the meantime, however - and not for the first time - EMI's future hangs in the balance. But shareholders are optimistic: What Time Warner is offering could amount to as much as pounds 10 per share. That hardly looks like the great rock 'n' roll swindle.

1899 - 1960s

1899: The company buys copyright to the painting of 'Nipper' (His Master's Voice), which will become one of the world's most familiar brand icons

1902: Enrico Caruso cuts his first disc with the company. He heads a long line of distinguished classical artists

1930s: The company diversifies into home appliances

1957: End of 20-year licensing agreement with RCA Victor. Vital revenue stream from the US (especially from Elvis Presley sales) dries up

1960s: Key talent signings: Elisabeth Schwartzkopf and Maria Callas in classical, while George Martin secures the Beatles for EMI's Parlophone label

1970s - 1980s

1970s: After the peak of the '60s, EMI struggles to maintain performance with only a few artists such as Pink Floyd and Queen selling impressively

1977: The firm's bust-up with the Sex Pistols symbolises its difficulty with managing talent

1979: At the end of a disastrous decade, EMI agrees to merge with electricals group, Thorn

1982: Colin Southgate's software firm Datasolve is bought by Thorn EMI. After an 18-month sabbatical Southgate returns to become head of Thorn EMI's technology business

Late '80s Chairman Colin Southgate repositions the group in a series of sales and acquisitions. The group's list of artists and recordings is boosted with the purchase of SBK music library for dollars 337m and 50% of Chrysalis for pounds 46m

1990 - 1998

1991: Spending spree continues with pounds 510 million acquisition of Virgin music, bringing The Rolling Stones and the Sex Pistols (again) into the EMI fold. Remaining 50% of Chrysalis also acquired

1996: EMI is re-established as independent music business after demerger from Thorn Rentals. The Spice Girls are signed

1997: Virgin's Ken Berry becomes head of recorded music

1998: Southgate appointed chairman of the Royal Opera. Jim Fifield leaves with pounds 12.5 million payoff after his accession as chief is vetoed. In March, EMI confirms bid approach from Seagram

1999 - 2000

July '99: Eric Nicoli, CEO of United Biscuits and a non-executive of EMI since 1993, is appointed chairman as successor to Southgate

Sept '99: First contact between Time Warner and EMI over possible deal

Nov '99: Interim profits up 72%

Jan 2000: The dollars 337 billion Time Warner-AOL deal confirms intense levels of activity in entertainment and media sectors. On 24 Jan, Time Warner announces pounds 12 billion merger with EMI. Time Warner president Richard Parsons warns of 'diminishing barriers to getting into this business'.

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