Music group bidders dance to different tunes

By Andrew Edgecliffe-Johnson 03/23/11 Financial Times

If optimism can be measured by the number of people coming into a market, the music business looks a remarkably positive place.

Forget for a moment the figures about CDs going the way of the 8-track and consider two statistics: 67 legal digital music companies now operate in the UK alone from just a handful a decade ago; and at least six bidders have shown their hands in the US auction for Warner Music.

The fact that so many parties have bid in what could be a $3bn contest is even more startling than the notion that 66 rivals think they can beat Apple’s dominant iTunes store. Record labels and music publishers were supposed to be the croaking canaries in the digital coal mine, the first of the old media to be snuffed out by piracy, downloads, and social networks.

More surprising still is that the competition for Warner (and for EMI, the UK music group now in Citigroup’s hands waiting for the bank to start a formal sale) is turning into a lively battle of new ideas about the future of the music business.

A wide range of views is no surprise from a pack that includes a Los Angeles buy-out group, a Finnish billionaire, a Japanese electronics group, an American-Russian émigré, a German former cover band member, a US grocery magnate and an ex-hacker from Silicon Valley.

Auctions often pit private equity financial modellers (a role played here by Platinum Equity and Poju Zabludowicz’s Tamares group), against strategic synergy-seekers (represented by Sony, which would find scale and savings in a Warner deal if regulators allowed, and perhaps by Warner’s management, which could yet sell only the Warner-Chappell publishing house and bid for EMI).

Nor is it uncommon to find a wealthy industrialist with an angle on such deals (Len Blavatnik’s Access Industries owns 2 per cent of Warner). But two other groups bring fresher, if more controversial ideas.

First is BMG, the music publishing joint venture between Kohlberg Kravis Roberts and Bertelsmann. Hartwig Masuch, its chief executive, learnt the business playing Kinks songs 30 years ago. He could find growth and savings at Warner-Chappell, but he has a further ambition: to tear down the divide between labels, representing recording artists, and publishers, representing songwriters.

The split made sense when recorded music was mainly about getting millions of CDs to stores for an album launch. Now, with music retailers dying and thousands of digital revenue streams to manage, the label business looks more like publishing’s licensing model, Mr Masuch has argued.

His unified rights management approach, also favoured by Roger Faxon, EMI’s chief executive, would turn companies such as Warner into less glamorous service businesses, giving new artists tools to take advantage of the digital distribution offers available to them, while collecting revenues for artists and songwriters. TV talent shows, such as American Idol and The X-Factor, will take on the business of hit-making, he reckons.

Many digital start-ups despair of having to deal with separate recorded music and publishing bosses at the same group and the sixth bidder in the Warner race also seems to favour such a rapprochement.

But the bid from Ron Burkle’s Yucaipa Companies, the Los Angeles buy-out group, is also a bet that digital music can now produce the upswing industry executives have been waiting so long for.

Mr Burkle, a retailer turned activist investor, has consulted Sean Parker, the ex-hacker, who founded Napster, earned Hollywood fame from his early role at Facebook and is now backing Spotify, the European streaming music service.

Mr Parker has yet to join the Burkle bid formally, but it would be a dramatic way of putting his money where his mouth is and betting on the sunny digital future Spotify is painting. It would also be ironic if the man who once threatened the record labels’ survival was to bid for a venerable stalwart of the music industry.

According to one analyst: “The prevalent view is digital will grow at 20 per cent a year from 2012.” That sounds optimistic, but the optimists see devices in need of content, emerging markets willing to pay for rights, and a bloated industry run by fewer people on lower pay. They are outnumbered by pessimists who say it makes no sense to split frontline recordings from older catalogues; that streaming models are unproven; better systems won’t break new acts; buying standalone music businesses risks a repeat of Guy Hands’ tale of woe at EMI; and that music mergers are usually sunk by culture clashes.

Soon, battling theories will encounter M&A realities, such as who pays most and who can get a deal past regulators. But whoever wins Warner or EMI, expect these theories to shake up traditional industry members as much as newer entrants.


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One Response to “Music group bidders dance to different tunes”

  1. Rear Parking Sensors Says:

    In India also very different tunes

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