Tech Mediums

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.

1. How bad recorded music is and how profitable music catalog is
2. How difficult it can be for a private equity guy to handle highly nuanced businesses like music

 What’s more profitable, Recorded Music or Publishing?

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.

 Private Equity and Entertainment, eh?

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?

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. 

“Don’t call it a comeback, I’ve been here for years.” - LL Cool J’s “Mama Said Knock You Out”

I gotta give it to MySpace!  Looks like they are coming up with a way to unlock the value in the site.  Based on a lot of feedback from current and former MySpace users, the current model was getting stale.   The new venture is ripped (in a good way) from the page of how to unlock intrinsic value while protecting your ass from current and future lawsuits. 

The Quicks: MySpace is spinning out its music service as a separate venture with minority shareholders being 3 of the 4 major labels: Universal Music Group, Sony/BMG and Warner Music Group (there’s some speculation that EMI will likely join given that the other 3 are in).  The deal was made on Wednesday after UMG agreed to drop its lawsuit.  The ad-supported site will offer free music and video streaming, DRM-free downloads for any device including iPods, concert ticket sales and merchandise and social networking features such as sharing customized playlists with friends.  Check these sources for more info: NYTimes, Tech-Ex and Yahoo News.

So why would they do this?  Among a few, here are three:

·        creates a formidable competitor to iTunes,

·        aligns record labels interest with MySpace’s, and

·        unlocks some value within MySpace.

 The iTunes Play

It’s no secret that iTunes is enormously popular.  In 2007, iTunes became the largest music retailer overtaking the behemoth marketplace that is called Wal-Mart.  Since iTune’s primary format is digital, then it has a pretty enormous share of the digital download market – the only part that’s actually growing (increase of 21% to 29 million downloads in 2007).

So it’s not exactly rocket science that the majors want to help mitigate the impact of one company’s (Apple’s) influence over the market. 

 The Align Interest Play

“Keep your friends close and your enemies even closer.”  That pretty much sums this one up.  With the labels having a stake in the company, their interests are aligned with MySpace’s.  Thus the threat of another Label v MySpace lawsuit is significantly reduced.  Each can make money on the mega trend of streaming content, and, at the same time, creating value (enhanced by litigation reduction – see Value Reason Play below).

Thus, it makes sense for the labels to partner with MySpace in spinning off it’s music division, since it already has a large footprint (about 30 million uniques/month and 5 million artists).  It also diversifies the labels revenue stream, which I’ve argued for before.  This is smart!!!

 The Value Reason Play

Often, spinning out a division of a company unlocks the real value of that division (i.e., the sum of the parts is greater than the whole).  Think of it this way…RJR Nabisco had tobacco and food divisions.  Tobacco, because of the litigation, limited the growth of the company’s stock price.  Consequently, the value of the food division was hindered because of the tobacco.  So RJR spun off the foods division into a separate company.  Corporate raiders of the 80s did this kind of thing all the time (buy a company on the cheap and sell off the parts and make a killing).

So maybe this is what’s being done here.  Outside of this deal, MySpace’s growth prospects weren’t looking so good.  We sampled 20 non-artists who have MySpace pages and asked if they still used it.  If not, what social networks do they used?  17 of them didn’t check their MySpace pages frequently (generally going to it once every 2-3 months).  The social network that’s grabbing 15 of them…FaceBook.  Artists still use MySpace as I found out at the Urban Network Summit a few weeks ago.  It’s still a great platform to showcase their wares.  Just that the fans don’t seem to be clamoring for MySpace the way they used to…so outside of this deal, MySpace was dieing.

So the good thing is that MySpace has a stake in the new venture that will enhance it’s own valuation. 

 What about Independent Artists?

The one thing that MySpace did was help even the playing field for independent artists.  With the majors owning a stake in the new venture, what does that do for the indie artists?  This wasn’t clear in the MySpace press release.  Logically, the labels will want to have their artists featured, but it’s the indies that really made MySpace what it is.  There’s a LOT of them and their enormous fan base.  I wonder if they’ll have to fight to get exposure.  You know?

 Btw -

I presume that the labels will not exclusively distribute their content on the MySpace music site.  I can see arguments either way, but

 Facebook

FaceBook has always been rumored to be talks with the labels to establish a similar music service.  It already has music services, but nothing to the extent of a full-feature music service (the current system is more of a application).