CMU Review Of The Year 2012: The music business
By Chris Cooke | Published on Friday 21 December 2012
CMU Business Editor Chris Cooke looks back at the key trends and developments in the music industry in 2012.
As 2012 began, it seemed certain that EMI, the British major music company, would be split into two this year, and sold on to its biggest rivals, Universal and Sony. US bank Citigroup, which had repossessed the music company from its former owner Terra Firma a year earlier, had done both those deals already, but both were subject to regulatory approval in various jurisdictions around the world.
However, it was the regulatory investigations in the US and the European Union that mattered. And while US Congress did invest some quality time into considering Universal’s purchase of the EMI record company, really it was in Europe that the two acquisitions were given the most scrutiny. Though even there the Sony-led bid to buy EMI Music Publishing, actually the bigger of the two deals, and one that could have a major impact on the collective licensing system long term (such things being a bigger concern in publishing), went through with only a basic investigation, and with relatively small concessions on the new owners’ part. That half of EMI basically became a subsidiary of Sony/ATV in June.
The Universal deal, making the world’s biggest music company even bigger, proved more controversial. Despite the mega-major initially insisting it could get the deal through Brussels without making any concessions, in the end it had to commit to sell off more than half of EMI’s European assets, including the worldwide rights to the Parlophone and Chrysalis catalogues (The Beatles and Robbie Williams excluded).
So much so, while there is now no major music company owned or headquartered in the UK, if a London-based independent Parlophone Music Group emerged in 2013, that could be quite exciting. That final chapter in the long running demise of EMI should conclude next spring. Then we can all refocus on the sale of live music giant AEG, which was put up for sale back in September.
While EMI ceased to exist as a standalone entity via multi-billion pound takeovers, one-time EMI subsidiary HMV could well cease to exist through a no pound bankruptcy. Certainly the flagging retailer did little in 2012 to convince the world it had a long-term future, beginning the year with gloomy Christmas sales figures, and a pledge to sell off its live music division MAMA, thus ending the sensible-if-expensive diversification strategy that had given the high street retail firm a glimmer of hope three years earlier.
MAMA’s biggest asset, the Hammersmith Apollo, was sold for £32 million to a joint venture between AEG and Eventim in May, with much of the rest of the live music and artist services business being bought in a £7.3 million management buy out in early December. Having already offloaded its Waterstones and HMV Canada chains, there was little left for the HMV Group to sell as it posted a loss for 2011 and reported further declining sales in store; only its stake in 7Digital remains in the rainy-day box. CEO Simon Fox, before his departure in August, did secure an important new deal with the major labels and DVD distributors in January, which has been crucial in allowing the HMV stores to continue operating in the run up to Christmas this year.
Though with loan covenants due to be broken in January, and Wall Street firm Apollo now buying up HMV’s debts with unknown intent, most are now braced for 2013 to be the year when Britain’s last major entertainment retailer disappears from the high street.
The decline of HMV, as with all high street record sellers in the UK, was arguably accelerated by the 15-20% advantage enjoyed by the big online mail-order companies, who didn’t have to charge VAT if the CDs they sold were mailed from the Channel Islands. Independent retailers had campaigned for years for the tax loophole to be closed, more recently arguing its exploitation by The Hut, Play.com et al breached European tax rules.
And finally this year they got their wish, when in April Chancellor Of The Exchequer George Osborne finally ended so called Low Value Consignment Relief for Channel Islands-based businesses (the Channel Islands having failed to block the move, originally announced in 2011, through the courts). Mail-order firms that had always claimed they operated from the English Channel because they liked the sea air duly shut down their Jersey and Guernsey warehouses. Some have since been looking for alternative ways to enjoy the loophole, though campaigners hope those attempts will be ultimately futile.
04 DIGITAL SALES
HMV’s woes are also linked, of course, to the ongoing shift of record sales to the digital domain, where His Master’s Voice has never done especially well (indeed this year it basically shut down its own download store and started sending customers over to 7Digital instead, in which it has a sizable stake).
In the UK, digital revenues accounted for (just) over 50% of record sales for the first time in the first quarter of the year, as an increasing number of labels, especially in the indie sector, reported that digital revenues, mainly from iTunes, Amazon and YouTube, were now very much the driving force of their businesses. Similar stats have come out of the US in the last eighteen months too, while many other markets are ahead in the shift to digital, with some European record industries (most notably Sweden) noting the increased importance of streaming service revenue too (more on which below).
That said, predictions in late 2011 that the CD would die as a mainstream format in the UK this year were, predictably, unfounded, with physical product still accounting for nearly half of record sales income overall. The demise of HMV in 2013, should it occur, could alter things in that domain, but for the time being the album looks likely to remain an important part of any mainstream album release.
05 DIGITAL ROYALTIES
In the US, of more interest than the amount of money being generated by download sales was what should happen to that money. When it comes to royalties paid to artists, traditional record contracts distinguish between money made from record sales and money made from licensing or other deals. The royalty paid on the latter is generally considerably higher than on the former. So, needless to say, when it comes to artists whose contracts pre-date iTunes, the major labels have treated downloads as record sales, and paid the lower royalty.
But many artists earning from such deals argue that download sales should be treated as licensing revenue and the higher royalty should be paid. And last year FBT Productions, the production team who worked on and have a stake in the early Eminem recordings, successfully sued Universal for a higher pay-out on digital, with an out of court settlement this year confidentially setting just how much higher.
Universal insists the FBT case does not set a precedent, but many heritage artists disagree, and Sister Sledge, Toto, Kenny Rogers, The Temptations, James Taylor and Weird Al’ Yankovic all sued on the issue this year, meaning all three majors are now facing digital royalty litigation. If and when any of these cases get to court they could set a precedent with major ramifications for the US record industry – so much so, Sony Music has been trying to negotiate a settlement to avoid that outcome.
06 COPYRIGHT REFORM
Back to the UK, and a consultation has been running for much of the year on reforming British copyright rules, stemming from recommendations made by Ian Hargreaves in his government-commissioned review of intellectual property law in 2011. In July, Richard Hooper published his report that expanded on Hargreaves’ proposal that some sort of digital copyright exchange be set up to make the licensing of copyright works simpler. Said report led to the creation of the Licensing Steering Group, which will now consider how to make Hooper’s ‘copyright hub’ a reality.
While the music industry, in the main, backs the copyright hub idea, there is less enthusiasm for the other set of proposals stemming from Hargreaves, which were published just this week. Basically expanding the so called ‘fair dealing’ exemptions where users can make use of copyright material without licence, the music rights companies are likely to lobby against most of the proposed changes when statutory revisions are presented to parliament next year, advocating instead the alternative proposals already set out in the ‘Licensing UK’ report published by various content industry trade bodies in early December.
To the political community, the more efficient licensing of copyright material is, of course, the flip side to laws designed to combat piracy. Though record labels and music publishers in the UK might point out that the three-strikes system for combating illegal file-sharing, despite being made law in the 2010 Digital Economy Act, still didn’t go live in 2012.
Instead, the music industry pursued an alternative strategy for fighting piracy, ironically the system that the DEA said was a lesser priority – web-blocking. With the British movie industry having successfully forced the internet service providers to block access to file-sharing community Newzbin in 2011 by securing web-block injunctions in court, the UK record industry did the same with The Pirate Bay. Such web-blocks remain controversial of course, and opponents point out how easily the blocks can be by-passed – though record industry trade body the BPI successfully pressured the Pirate Party into stopping helping with that process this month. And while The Pirate Bay boasts that the web-blocks, and resulting press coverage, has actually increased their traffic, it’s worth noting that the people behind Newzbin decided this year that it just wasn’t worth the hassle running a web-blocked website.
In the US, proposals to introduce a web-blocking system via new laws (either SOPA or PIPA) proved very controversial, with a Wikipedia-led protest resulting in the whole idea being shelved. It seems more likely, therefore, that 2013 will bring with it a three-strikes style system in America (although actually six-strikes), based on the deal US ISPs voluntarily signed up to last year and which is set to go live in the next few months (albeit with unclear final-strike sanctions).
08 LIVE MUSIC ACT
To live music now, and in a year when the recently buoyant live sector seemed to have a little wobble (in the UK at least), there was some joy to be had when the Live Music Act was passed by parliament, removing some of the unnecessary red tape that had been applied to small-scale music events by the 2003 Licensing Act.
A private members bill pursued by Lord Tim Clement-Jones, and backed by the coalition government, both the artist and live community welcomed the change in the law, hoping that it will revitalise the grass roots gigs circuit, which has suffered from pubs and such-like moving away from staging live music in recent years because of the paper work. Indeed, UK Music reckoned as many as 13,000 more venues may now stage live music.
Though some operating in the grass roots music community have questioned whether there is really consumer demand for a surge in pub music shows, worrying that if the bigger pub chains were to exploit the licensing law change to stage loss-leader music events, the already struggling smaller gig venues of Britain could actually lose out. It will be interesting to see what impact the Live Music Act has in 2013.
09 SECONDARY TICKETING
The other big issue in live this year remained the continued growth of secondary ticketing. Indeed the online touts debate, which had gone quiet in the UK in recent years (unlike in the US), was reignited when Channel 4’s ‘Dispatches’ threw a spotlight on the whole thing, confirming that a number of high profile artists and tour promoters were actually touting their own tickets via resale sites (one of the reasons said artist and promoters had been less critical of the secondary markets in recent years).
Post-‘Dispatches’, the Association Of Independent Festivals published a Fair Ticketing Charter formally opposing online touting, while those against the secondary market hoped that proposals by Sharon Hodgson MP to regulate ticket reselling might be newly considered in parliament. Though, despite the ‘Dispatches’ show, the secondary ticketing market continued to prosper, and hopes that paperless ticketing might be the solution to the problem hit some snags. All of which means this debate will continue to rumble on in 2013.
It wasn’t a good year for music festivals in the UK, that seems certain, even if a report presented at the UK Festivals Conference last month insisted that stories of gloom in festival-dom have been exaggerated. Of course smaller fests, with their incredibly tight profit margins, go under all the time (as the Bloc Festival company learned, one bad event and you’re history), but with Festival Republic forced to cancel The Big Chill, and Kilimajaro the UK date of Sonisphere, and Vince Power’s entire business going under, the big boys had a challenging time too in 2012.
The terrible weather, the ongoing recession, a lack of decent headliners in the rock domain, competition from Olympics events and market saturation were all in part blamed for the poor performance of the festivals sector, and all probably played a role. Of course if the main problem was too many festivals, then the inevitable closure of some fests (eg Guilfest and Hop Farm) and postponement of others (eg No Direction Home and Summer Sundae) should, to an extent, fix things. Though festival promoters will be approaching 2013 with a mixture of optimism and anxiety, whatever that Festivals Conference report might have said.