• Tech

Pump Up the Volume

4 minute read
THOMAS K. GROSE

When Alain levy was executive vice president at PolyGram records in 1989, a representative for Island Records came to see him with an offer to sell the independent label for $300 million. Levy knew that Island’s roster of popular acts, including U2 and Bob Marley, could boost PolyGram’s efforts to build market share quickly. But there was a caveat: if Levy wanted the deal, it had to be inked before the agent left the premises. Business executives negotiate for weeks, even months, before spending that kind of money. Not Levy. By 1 a.m., the deal was sealed. “He had the brains to assess the label’s financial and creative assets, comprehend their value, put it through to his bosses — and be proved right,” recalls Michael Kuhn, then a board member at PolyGram.

His latest job will require all the business acumen and musical sense the 55-year-old Frenchman can muster. Since October he’s been chairman and CEO of recorded music at EMI, a venerable British label with a roster that includes the Beatles, Frank Sinatra and Radiohead. Despite those assets, the company’s market value of $3.5 billion is about 40% lower than a year ago. It recorded a net loss of $76.9 million in the first half ending Sept. 30 on sales of $1.5 billion, down nearly 7% from the previous year.

Levy is used to turning music companies around. He and his new vice chairman at EMI, David Munns, were pivotal in pushing PolyGram (now part of Universal) from third place to the world’s largest music company between 1989 and ’98. But the rhythms of the music business have changed since then. EMI’s troubles are a microcosm of what’s ailing a $40 billion industry that can no longer rely on fans buying CDs by the armful to replace outmoded record collections. Too many expensive-to-maintain artists are selling too few CDs to an increasingly fragmented public. U.S. sales fell 3%, the first drop in a decade. Add huge losses from pirating and downloading free music on the Internet and it’s a drumbeat of bad news. EMI tried to solve its problems with two recent merger attempts, but Europe’s regulators rejected bids to hook up with AOL Time Warner, this magazine’s parent, and Bertelsmann.

Levy is expected to announce next month measures designed to trim costs by at least $92 million by either dumping manufacturing and distribution operations or rolling them into joint ventures with other labels. Poor performing artists aren’t secure, either, including such legends as Mick Jagger and Paul McCartney. Last month, EMI gave pop diva Mariah Carey a $28 million payoff to free itself from the $80 million contract it signed her to last year. Carey, whose 1993 album Music Box sold 24 million copies, could only generate sales of 2 million for her first and only EMI release, Glitter, which left the label $10 million in the hole.

“But there is only so much cost cutting can get you,” warns Michael Nathanson, European media analyst at Sanford C. Bernstein & Co. EMI needs to sell more CDs. And that means finding global superstars. To accomplish that, EMI will have to improve its talent-spotting operations in America, where its market share is a puny 10%. The U.S. is the world’s biggest music market and it’s impossible to create world megastars with poor sales there. Deutsche Bank analyst Mark Beilby doubts if any of the five major music companies are willing to invest the time and money needed to create “overnight” sensations. But Munns, who last week was also put in charge of North American operations, says EMI is willing to go that route: “Alain and I have always focused on long-term artist development. In a business that seems so short-term right now, this is not easy to do — but that is our central aim.”

Another potential source of profits is the Internet — once legal and technical hurdles are overcome. Though music sold online will likely be priced very cheaply, savings in manufacturing and distribution could once again fatten margins. While the major labels have been slow to embrace the Internet, EMI insiders say Levy understands its potential. The company has already licensed music to more than 50 online music companies. If in the meantime Levy is successful in trimming costs and breaking new acts, EMI could be well positioned to reap the benefits of converting clicks to cash. That should have investors singing his praises.

More Must-Reads from TIME

Contact us at letters@time.com