Even bankable stars like Michael Jackson and REM are no longer pulling in the loot for troubled industry, write James Harding and Ashling O'Connor.
Where have all the good times gone? Michael Jackson, Mariah Carey, Mick Jagger and REM used to be the guaranteed money-spinners of the global music business. But not any more.
Sony Music spent a rumoured $58 million (€66 million) getting Jacko into the studio to record Invincible, an album that proved he was anything but. It had sold less than six million copies by the end of last year. EMI paid £38 million sterling (€43 million) to end its short but nightmarish relationship with Mariah Carey, the once multi-platinum pop diva whose last album, Glitter, sold just two million copies.
Jagger's album Goddess in the Doorway has just limped over the one million mark. And REM, signed by Warner Music for an estimated $80 million, have had $3 million worth of marketing behind their new album and still only sold just over three million.
The efforts to discover or buy new talent can prove even more bloody. Universal Music spent $2.2 million promoting Carly Hennessy, a Dublin teenager, in the hope that she would become the next Britney Spears. But Ultimate High, her debut album, has sold less than 500 copies - costing the world's largest music group roughly $4,400 for each one.
Universal also paid an estimated $100 million for control of Def Jam Records, only to discover that the main attraction, best-selling US rapper Jay-Z, was signed to his own label, Roc-A- Fella, which only had a distribution deal with Def Jam.
The economics of the music industry are miserable. This year, the global recorded music business is set to shrink for the sixth consecutive year. Merrill Lynch estimates that recorded music sales will fall from $36.9 billion in 2000 - the total music market was $41.1 billion, but that includes an estimated $4.2 billion in pirated tapes and compact discs - to $31.8 billion in 2003.
With little to sing about when it comes to near-term revenue growth, EMI has sought to appease investors by dealing with the other half of the equation: costs. It announced 1,800 job cuts - 20 per cent of the workforce - to achieve nearly £100 million in annual cost savings. It also knocked a quarter of its acts off the company roster.
"There are some real challenges facing the music industry at the moment," admits Alain Levy, the head of recorded music at EMI, who has overseen the restructuring. "We are positioning EMI for revenue growth from a much lower cost base."
Another London-based music executive puts it more brutally: "If you walked into the City (of London) and asked for money to start a record label, you would probably get a less welcome reception than if you wanted to set up a dotcom."
It was not supposed to be like this. Less than two years ago, the world was told the music industry was poised for take-off.
In June 2000, Jean-Marie Messier and Edgar Bronfman Jr sealed the $34 billion merger of Vivendi and Seagram, owner of Universal movies and music, on their forecast that the recorded music business was set to grow from $40 billion a year to $100 billion a year over the next decade. At AOL Time Warner, Jerry Levin and Dick Parsons were also enthused about the prospects for selling Warner Music's recordings over the AOL network.
The thinking was that the internet, broadband cable and next-generation mobile networks would offer a multitude of new ways to sell their product. After all, new technology had come to the rescue of the music business before.
But the internet has failed to produce the promised bonanza. If anything, it has done more to imperil the music business than to save it. Napster, the song-swapping service, produced a flood of internet downloads for free. Sales of recordable CDs more than doubled between 1999 and 2001, to 4.8 billion units, leading to estimates that there are as many pirated CDs out there as there are legitimate ones for sale.
"The alarm bells should be ringing," says a former EMI executive. "How many college students actually paid for their last 10 albums? It is incredibly scary if you answer that question."
Two years on, the potential of online distribution is far from clear. Informa Media, the market research group, estimates that subscription services will continue to be a minor revenue stream. By 2007, online sales are expected to increase to $9.7 billion, or 25 per cent of worldwide music sales of $41 billion. But most of this will still be accounted for by the physical sale of CDs via the internet. Only a quarter of the $9.7 billion will represent subscription services and just 6 per cent of that will be for one-off downloads.
Chris Groner, co-author of the Informa report, predicts that online services will not lift sales until 2004 at the earliest.
In the meantime, music companies have little choice but to reduce costs and try to improve the strike rate in the hit-and-miss process of finding, developing and marketing stars. Bertelsmann Music Group has cut 1,100 jobs. Warner Music has shed 600.
As the EMI cost-cutting revealed, jobs in the music industry can be pretty lucrative. The head of a regional sales branch may earn $400,000 a year, a US promotions executive $500,000-plus, while a label head is into the millions. EMI has put in several new chief operating officers, whose job, according to Mr Levy, is squash the expensive ideas of excitable young music executives.
The music companies are also trying to co-ordinate their marketing better, so that the stars they develop in one territory are promoted in others. But no amount of corporate re-engineering can get around the fact that the music business is about panning for gold. As one veteran says: "You can cut only so far and then you simply have to start selling records."
When EMI signed up Mariah Carey for more than $75 million, it seemed like a smart thing to do. In her prime, she could sell 20 million copies of one album. "She was a proven goal-striker and she came onto the transfer market," says one rival executive. "So if you were EMI, you would go for her. It was a no-brainer." The no-brainers, though, have this year mostly turned out to be headaches.
Mr Levy says the music business "has lost its magic". Michael, Mariah and Mick, it seems, have lost theirs too. - (Financial Times Service)
