Why is the Music Business So Difficult?
So, Guy Hands, the CEO of private equity firm, Terra Firma, which purchased EMI in 2007 for $6.4 billion is having a hard time making EMI work.
There were two things that stood out from the NY Times piece on the deal.
- How bad recorded music is and how profitable music catalog is
- How difficult it can be for a private equity guy to handle highly nuanced businesses like music
So Hands points out that he paid about 80% of the $6.4B for publishing and the rest for recorded music – the music side he says he feels like he overpaid for.
I’ve heard this so many times before – recorded music is horrible and the only profitable line is publishing.
But it makes me think…isn’t publishing’s value partly (or predominantly) derived from the recorded side.
Think about it. If you have a go-nowhere artist, the value of the publishing is nil. But if you a multi-platinum artist like the Notorious B.I.G., then the value is exponentially more.
So the cost a company puts into recorded music will ideally be recovered by the stream of revenue from publishing. Economically, the costs are shared, since the value is shared.
There needs to be a model that will help predict this, especially since there’s so much historical data. Something like an algorithm that factors in popularity of the artist and number of records (or downloads) sold/acquired.
Stereotypically, business types and creative types haven’t mixed well. That’s what partly explains why the EMI deal isn’t going over well. An analogy is AOL and Time Warner…young, tech folks, mingling w/ old media. It also reminds me of how superficially ludicrous Carl Icahn’s interest in Yahoo is (superficial because he seems more suited to bothering ExxonMobil or Chrysler, not new media companies).
I can see what Hands wants to do – should be able to wring out cost, although growing top line revenue is more difficult. Just that music isn’t a business for finance types, not yet at least. It doesn’t run like a creative tech company (which can be very querky and moody…like me), nor a typical non-tech company. In other words, it relies HEAVILY on intuition.
I don’t particular like music for this reason. I like a more predictable business model – one that uses a little intuition and a lot of hard core facts to build a sustainable business. That’s why I wrote about the potential for using predictive models in developing a business model for entertainment companies.
What’s funny is that if people were still buying music like they did in the 90s, I don’t think this would be a problem. It’s just that, now, the business model has to change and no one has figured it out yet.
It makes me think of stocks. So, in a bull market, the average stock picker looks great. Many use intuition and it works (like in the late 90s). After the crash, you saw the great pickers do well. They used a methodology, a system, that works when the market is more rationale.
This might be why publishing is doing well now. While derived from something that’s more risky (the music), the revenue streams can be more predictable and is the rental/passive income model that I like so much (build it once, and keep selling it).
Nonetheless, I’m not saying that music business owners need to forget intuition. Music is a business that must rely, in part, on intuition. But I think having a systematic approach, clear goals, and a focus on the bottom line will allow these business to flourish…after all music will be here as long as man is. Think about it, once P Diddy and Jay-Z began to surround themselves with experienced business people, their fortunes improved.
