Friday 23 December 2011, 10:59 | By Chris Cooke
CMU Review Of The Year 2011: The music business
CMU Business Editor Chris Cooke looks back at the key trends and developments in the music industry in 2011.
Electric & Musical Industries has featured heavily in this here end of year review for years now, though this could be its last appearance. Well, probably the penultimate. There may well be no EMI this time next year, but the story is not quite over yet.
As expected, Terra Firma’s ownership of EMI ended this year, quicker than we had expected when the Citigroup bank repossessed the music major in February. We knew a sale would follow, though serious talks with bidders didn’t begin until early summer. EMI CEO Roger Faxon insisted the best option was to keep the EMI recording and music publishing business in common ownership, though few expected that to happen. And it didn’t.
After months of negotiations, in November EMI’s rivals Universal and Sony beat the favourites Warner and BMG to buy the EMI labels and publishing catalogues respectively. Though both deals are subject to the approval of competition regulators, and indie label trade body IMPALA is already opposing them. So, while EMI is at the end of its eighty-year history, we can expect a few more dramas in 2012 first.
02 WARNER MUSIC
While the EMI sale was expected, Warner Music’s announcement in January of a business review that could lead to a sale of some or all of its assets was more of a surprise. Was CEO and key shareholder Edgar Bronfman Jr looking to raise some extra cash to make a bid for EMI? Or had other key shareholders noticed a temporary surge in interest for content companies and spotted a good time to sell out?
Probably the latter. In May the company was sold outright to Russian billionaire Len Blavatnik’s Access Industries. In August, Bronfman Jr stepped down as CEO, staying on as Chairman to work on a bid for the EMI labels. When that bidding was over (and lost) Bronfman gave up that role too. With Access now fully in charge, many expect big changes in 2012, as Warner deals with being the smallest music major competing with two much bigger rivals, ie the soon-to-be expanded Universal and Sony.
03 A UNIVERSAL/LIVE NATION ALLIANCE
Despite the various shifts in major label ownership this year, two companies still dominated over all, Universal Music and Live Nation, the former in music rights, the latter in live entertainment, ticketing and artist management. Smaller rivals of these two companies are already critical about their size and dominance, and will therefore be watching closely an alliance between the two firms, which began this year.
While Universal owner Vivendi moved into Live Nation’s territory by buying British ticketing firm SeeTickets in early September, less than two weeks later Universal and Live Nation bosses were announcing a new joint venture business focused on brand partnerships and direct-to-fan platforms. The actual outcome of that joint venture is yet to be seen, though the indie sector won’t like the two biggest players in their industry getting too cosy. And as the year ended, another Live Nation/Universal alliance was announced, with the two companies set to collaborate on Madonna’s next three albums.
Two years ago, as Terra Firma’s ownership of EMI started to crumble and it looked increasingly likely that the British music major would be split up and sold to companies abroad, some speculated that perhaps the then expanding HMV would end up being the UK’s last big music business. Buoyed by the demise of all its high street rivals, and with interesting moves into the digital, live and artist management sectors, HMV had become a very interesting company. Though City types worried about its core retail operations.
And rightly so, as it turned out. 2011 was not a good year for His Master’s Voice. General high street woes, and continued competition from Amazon, Apple and the supermarkets, meant HMV’s key retail revenues slumped, making it hard to service the debts run up by the aforementioned expansion and diversification.
The sale of Waterstones and HMV Canada raised some cash and placated bankers for now, but with retail revenues still in decline, and talk of having to sell live division the MAMA Group to survive, a move that would reverse those clever diversification efforts, many now wonder if 2012 will see the demise of HMV as well as EMI.
05 VAT LOOPHOLE
If HMV does indeed bite the dust, it’s arguable that a curious VAT loophole that aided offshore online music sellers played a part in its demise, even though HMV decided to become one of those offshore VAT-dodgers itself. After a long campaign, the UK government finally announced the loophole would go this year, though that decision came too late to save the many mainland indie retailers arguably put out of business by the tax dodge, and may be even HMV.
The loophole meant that mail-order companies on the Channel Islands selling products under £18 back to the UK – including CDs – didn’t have to charge VAT, giving them a 15-20% advantage on mainland retailers. All the big mail-order operators benefited, and although HMV joined the party, by that point it had lost far too much market share to Amazon, Play.com and websites operated by The Hut Group.
The loophole – called Low Value Consignment Relief – will be axed for Channel Island companies in 2012. Perhaps unsurprisingly, the founders of Play.com sold the company on this year, just before the loophole closed, for a neat £25 million.
06 ON AIR, ON SALE
Some in the industry continued to stress about piracy in 2011, though others would argue the big record companies have missed a trick in that domain by failing to get ‘on air, on sale’ off the ground. The artist management community in particular reckon that a certain portion of file-sharers primarily access illegal sources of music in the period between new songs appearing on radio and them going on sale a few weeks later, when legit purchases are not an option. “Why not put songs on sale as soon as they go on air?” they ask. “Because we can’t maximize first week sales to ensure a good chart position” the major label marketers argue.
Of course the impact on chart-based marketing plans would be less if every label embraced ‘on air, on sale’ for every release. And at the start of the year it looked like they might, with both Sony and Universal officially adopting that policy in January. But with EMI and Warner keeping their options open, and therefore getting a competitive advantage chart wise, Sony and Universal’s commitment to ‘on air, on sale’ soon started to wane. The Music Managers Forum was not impressed.
07 COPYRIGHT EXTENSION
The music rights industry was nervous of a government review of copyright law when it was announced late last year, aware that the review had been in part instigated in a bid to placate Google. In the end the recommendations of Professor Ian Hargreaves weren’t as radical as some expected, though labels and publishers are likely to lobby against his proposals to expand fair use rights in British copyright law in 2012. A government consultation on those proposals has now begun.
However, the big copyright development this year went in the record industry’s favour as the copyright term for sound recordings in Europe was expanded from 50 to 70 years, and just in time to ensure the Beatles catalogue, the earliest tracks in which date from 1962, don’t lose copyright protection in 2013. Record companies convinced the UK government of the case for extension in 2009, but it was only in September of this year that agreement was reached at the all important European level.
Elsewhere in copyright news this year, efforts to get a three-strikes system up and running, forcing ISPs to send their file-sharing customers warning letters, didn’t come to much, even though the Digital Economy Act, which allows such a system, passed in April 2010. Media regulator OfCom is apparently still busy figuring out exactly how ‘graduated response’ will work. Meanwhile BT and TalkTalk have been busy trying to get the whole thing scrapped by taking the DEA to judicial review. Twice.
Internationally, three-strikes is now operational in New Zealand and France, while other countries – Spain and the US in particular – have been considering another approach to combating file-sharing, a system that forces ISPs to block access to copyright infringing websites. The UK’s DEA included such a system too, but with a ‘wait and see’ clause delaying its implementation. Though the Motion Picture Association found an albeit slower way to get such web blocks in place without the help of the DEA, forcing BT to block access to file-sharing website Newzbin through the courts, setting a precedent the BPI is now trying to use to force net firms to block The Pirate Bay.
09 TAKEDOWN FRUSTRATIONS
In the US, and beyond, some labels and artists spent the year becoming more and more annoyed with the ‘takedown principle’ set out in America’s Digital Millennium Copyright Act, which says that user-upload sites like YouTube, that routinely host unlicensed content, can avoid liability for copyright infringement provided they remove such content when made aware of it. American sites often assume protection globally under this system, though technically it is US copyright law.
Some rights owners claim certain websites operate deliberately shoddy takedown systems, so they get protection from the DMCA but are also able to host lots of unlicensed content, which generates traffic. This is possible, they argue, because the US courts have ruled user-upload sites need only operate very basic takedown procedures to get protection – a precedent reaffirmed most recently in the Universal v Veoh appeal ruling. Some now expect the US record industry to lobby for a change in the DMCA that sets out some specific requirements for such takedown processes.
Universal Music plays a big role in this saga, not least by leading the legal battle against one website accused of hiding behind a shoddy takedown system, Grooveshark. Universal launched a new legal attack this year – now supported by Sony and Warner – accusing Grooveshark staff of also uploading unlicensed content, which, if true, would deprive the US streaming service of DMCA protection.
Some on the other side of the fence, meanwhile, accuse the big rights owners of abusing takedown systems too. It was on those grounds that MegaUpload sued Universal earlier this month, claiming the major abused YouTube’s takedown process to have a video promoting the file-transfer site taken offline just because it didn’t like it.
10 THE DIGITAL ROYALTIES DISPUTE
Talking of Universal, lawsuits and all things digital, possibly the most significant bit of litigation in the music business this year was a dispute within the music community. A number of heritage artists in the US with pre-internet record contracts have previously criticised record labels for classifying download revenue as ‘record sales’ rather than ‘licensing deal income’. It’s a key distinction, because many artists get a significantly larger share of licensing money.
Most efforts to have that classification changed through the courts have failed, but then this year, on appeal, producer FBT Productions, who have a stake in the early Eminem recordings, won a lawsuit against Universal on this issue. The music major insisted that ruling relates only to FBT’s specific contract, and does not set a precedent. But the estate of Rick James, then Rob Zombie, and then Chuck D, all begged to differ, and are now suing for a bigger cut of digital revenue. If they were to win, the impact on all records companies could be huge.
That – and an argument over whether a 1978 clause in US copyright law, that allows the creator to regain control over their works after 35 years, applies to sound recordings (the labels insist not) – are likely to be big debates in the US record industry in 2012.