Big Cuts Planned at EMI

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Carl de Souza / AFP /Getty

EMI Record company building in London.

From the pack of assembled media that were waiting for him, to the protective arm of his bodyguards, Guy Hands must have come over all rock 'n' roll when he pitched up for a meeting with staff at his record company EMI on Tuesday. Hands, though, isn't an artist. His singing career hasn't gone beyond karaoke. And instead of cutting records with EMI — one of the world's leading music companies, and a home to musicians from Lily Allen to Coldplay via The Rolling Stones — he's more in the game of cutting costs.

Business was brisk today. Hands, whose London-based private equity company Terra Firma picked up EMI for $6.5 billion last year, told his staff that as many as 2,000 of them would lose their jobs over the coming months as part of a plan to pare EMI's costs by around $400 million a year. More effort had to go into finding fresh acts, Hands said, as well as into getting more out of those the firm already has. Out will go diverse sales, marketing, manufacturing and distribution units, to be replaced by a single division. "We believe we have devised a new revolutionary structure for the group," Hands rallied, "that will improve every area of the business."

EMI could use some help. A lack of big hits — just as CD sales are falling off a cliff — has left its recorded music business out of tune. (Its sister publishing business, which licenses the use of tracks from a bulging back catalogue, is still a massive money-spinner.) Lacklustre sales from artists like the British singer Robbie Williams meant revenues tumbled 16% in the year to last April to $3.4 billion. But is a former Goldman Sachs trader with no experience in the music business the man to make EMI sing?

You'd expect a private equity firm to find the excess fat in a company; and one that operates in the decadent music business ought to be easier than most. But ensuring that company has a long-term future is trickier. On that score, Hands has a decent back catalogue. First with Japanese bank Nomura, and more recently at Terra Firma, the 48-year-old boosted the fortunes of a slew of companies, from a waste-recycling group to a chain of pubs.

But taking on EMI is a different proposition altogether. Private equity firms, unlike the stars on EMI's books, prefer to toil in, well, private, dissecting a business well away from the glare of the media. Way before Hands took an axe to EMI's payroll, Terra Firma's management of the business was caught in the spotlights. Worried that Hands wouldn't know his A&R from his R&B, alt-rockers Radiohead severed ties with the label shortly after it was sold to the private equity firm, and took the radical step of allowing fans to download and name their own price for the band's album In Rainbows. Others let their music do the talking. Robbie Williams, who bagged a $130 million record deal with EMI in 2002, has threatened to withhold his next CD, fearing the firm won't be able to market and promote it. "All we know," Williams' manager Tim Clark told The Times of London this week, "is they are going to decimate their staff."

And by shedding more than a third of its workforce, EMI didn't allay Clark's fears. But with only a few hundred of its 4,800 staff deployed in A&R — the business of scouting for and developing artists — Hands's plan to make it more central to EMI seems sensible. But it's also obvious. And by trailing something you'd expect to already be an aim of record companies everywhere, Hands has drawn suspicion. "Here's a business person trying to turn [EMI] into a more creative company," says Dave Allen, bass player with British post-punk band Gang of Four, a former EMI charge. "In my mind, it's smoke and mirrors."

Still, don't assume private equity chiefs can't work fruitfully in the creative industries. Since Permira, another leading U.K. private equity firm, took a majority stake in ALL3MEDIA in 2006, the British TV production company has been performing well, says Rob Donaldson, head of private equity at consultants Baker Tilly in London. A bigger worry for EMI: the publicity generated by the shakeup pushes more artists to withhold their music. "It's difficult for artists to invest in a company going through such change," says one record industry exec. "Will the A&R man who believes in you be there next month?"

Whether he is or not, chances are he won't have soothed music's biggest headache. As is the quandary elsewhere, digital sales of EMI's music, which account for a tenth of revenues, are rising — just not quickly enough to make up for plummeting sales of its CDs. And piracy remains prolific. Almost 20 billion tracks were illegally swapped or downloaded on the net in 2005. Dreaming up new ways to make money is vital. One solution: teaming willing artists' albums up with corporate sponsors, as EMI plans to do. That might have some artists turning in their grave — just imagine that, John Lennon — but with music arenas often branded these days, EMI is confident it can sell the idea to some of its talent. Coldplay's next CD, brought to you by ExxonMobil, anyone?