The EMI restructuring continues and the latest Maltby report (PDF, 566 KB), released by EMI last week, provides many insights into the company’s progress and ambitions. Where its competitors or focused on adding parts of the value chain, EMI is slimming down and preparing for an era where corporate marketing, sponsorship dollars and partnerships are its key growth drivers.

The company says it is on track to achieve between £85 and £100 million for the year ending March 31, 2009. This will be attained through sales of property, improved distribution and manufacturing contracts, and the outsourcing of the finance function. Restructuring charges will keep EMI with a net loss until the second half of 2010.

But there’s a risk in its strategy. In reshaping the organization and transforming its roster, EMI has given recorded music market share to its competitors. The company believes it can save money — and use money more wisely — by putting the “emphasis on artists with genuine potential to come to market in a realistic time frame.” Such omnipotence is rare. In the crap-shoot that is the record business, one does not always know which artists will succeed and which will not. If success was so easy to predict, there would be no failures. Alas, failure is a part of the business, and aversion to risk a vice. By creating more stringent standards for signing and developing new artists, EMI risks losing out on some of tomorrow’s stars. If that is the case, the value of its catalog — and all those musical toothbrushes — will drop relative to its competitors.

One mission of the new EMI may play a part in the quality of its catalog. EMI is setting itself up as a sponsorship-based consumer product company — more than its competitors in this area. It is unlikely that the needs and preferences of potential corporate sponsors will not play a part in the acts that EMI signs and develops. The traditional model is based upon expected consumer reaction. The new model is based partly upon expected corporate reaction. Whether or not the new model lends itself to long-term success is one of the bigger questions surrounding EMI’s strategy.

In spite of these question marks, EMI has made some real progress. In the half-year ended September 20, 2008, EMI revenue was up £60 million — or 10% — to £737 million. EMI’s net loss improved to £155 from £324 in the second half of 2007. In the previous year, EMI’s profit too a £192 million hit from a downward fair value adjustment. The recent finance charges were greater than EBITDA of £130 million. Finance charges totaled £150 million (including a net £25 million loss on exchange fluctuations) in the second half of 2008 versus £130 million in the previous period. As a percent of revenue, that’s an increase of less than a point to 20.35%.

Digital revenue rose almost 50% and digital market share for EMI Music rose to 12.6% from 11.0%. CD sales represented 62% of revenue while digital accounts for 21% of total sales.

There were notable examples of improved efficiency as EMI did a bit more with roughly the same expenses. Overhead dropped 1% (I expected more) while cost of sales dropped 4%. With a decent increase in sales, gross margin as a percent of sales rose to 43.9% from 32.2%. A&R costs as a percent of sales dropped five points to 5%, and sales & marketing costs as a percent of sales fell six points to 14%.

In the EMI Music division, physical sales dropped 8%, digital sales rose 38% to £102 million, sync revenue increased 5%, total revenue increased 1% and gross profit jumped 38%.


Posted by: Amy Sikkes