EMI Has Something to Prove on Its Own

The pride of the British media establishment didn’t want to go it alone anymore. But after failed attempts to merge with larger entertainment companies AOL Time Warner and then Bertelsmann, EMI Group finds itself the only stand-alone music company in the $40-billion record business.

Since the collapse of the second merger bid in May, investors have been unsure how to view the company as it seeks to prove it is just as valuable a music company as it was a takeover target. EMI’s stock has plummeted 40% in the last 12 months, and on Friday, American depositary receipts hit a 52-week low, ending at $12.05 in over-the-counter trading.

EMI claims 11.6% of U.S. record sales, ranking fifth out of the five major record companies, according to research firm SoundScan. In worldwide sales, it ranks third.

Operating alone may still be a blessing. Record executives at larger conglomerates worry their parent companies will use the music division merely to market other company products.

Still, EMI faces a long and winding road to prove itself as a successful solo act.

Last year’s smash Beatles album symbolizes the media company’s current situation. “1” sold an estimated 22 million copies worldwide. It was the sixth-biggest album in the U.S. last year and continues to sell an astonishing 28,000 copies a week here.

Yet it’s a record powered by 30-year-old hits. Its huge sales dramatized the fact that EMI failed to break new American acts last year.

Now, without the cover of a diversified parent company and post-merger write-offs and staff cutbacks to boost its bottom line, any EMI missteps will be on full display.

Overpaying for talent or botching the marketing of a promising album could hit the company’s stock like a hammer.

“We’re a public company and we looked very responsibly at the possibility of merging,” said EMI Music chief Ken Berry. “If [either deal with AOL Time Warner or Bertelsmann] had been successful, the outcome would have released a huge amount of value for our shareholders. But we’re more than proud of the business that we have.

Berry is planning to look for modest cost savings in EMI’s manufacturing and sales operations while trying to crack the U.S. market.

Following his promotion to head of the U.S. music division four years ago, Berry shut down EMI’s corporate office, fired the flagship Capitol label’s president and closed several unprofitable labels.

As part of the renewed U.S. focus, Berry is planning to reopen a New York office within six months and transfer a team of senior executives from EMI’s London headquarters.

In March he installed a new president at Capitol, artist manager Andy Slater, who developed the careers of such American acts as Macy Gray and Fiona Apple.

EMI management sources say they believe Capitol has missed opportunities to become a player in pop and black music, two genres that have thrived since the late ‘90s. The label’s recent top sellers have come from its old catalog and from acts imported from EMI’s international operation, such as rock bands Coldplay and Radiohead.

But there will be chances to build momentum in the months ahead. Radiohead’s new record is expected to enter the nation’s pop charts at or near No. 1 this week. Slater is gambling on new U.S. acts such as Chicago rock band OKGO. EMI’s two other labels, Virgin and Priority, are preparing releases from Mariah Carey, Aaliyah, Snoop Dogg and N.E.R.D.

The end to the distractions caused by EMI’s two merger attempts could bode well for new acts.

“The last two years have not been pleasant for anyone dealing with them. . . . They haven’t really been taking care of business,” said artist manager Tony Dimitriades, who handles the careers of such acts as Billy Idol, who recently left Capitol, and Tom Petty. “But now they have the opportunity to use the fact that they’re the underdog to put themselves forward as an artist-oriented company.”

Flying solo leaves EMI with one possible disadvantage, however. Unlike its four larger competitors, EMI doesn’t own a distribution outlet to supplement traditional retail sales.

“Clearly, they’re at a disadvantage in terms of cross-promotion. They don’t have the same distribution channels to leverage,” said Brett Hucker, a media analyst at Merrill Lynch.

But many record executives remain unimpressed with the multimedia promotions being tried by their own parent companies.

AOL Time Warner, for example, recently underwrote a massive marketing push for the debut album from pop act Eden’s Crush, using its WB Television Network and its online service.

Though the album entered the pop charts five weeks ago at No. 6, selling an estimated 99,000 copies its first week, it has so far sold only 211,000 copies total, according to SoundScan.

For its part, EMI has positioned itself for Internet distribution by purchasing small stakes in more than three dozen Internet companies, including the MusicNet subscription service, which is co-owned by its two would-be merger partners, Warner and Bertelsmann.

Hucker said that though EMI “doesn’t necessarily have the scale of some of these other media conglomerates, it’s still viable on a stand-alone basis. There are a number of things they’ve got to get right. They’ve got to make something happen in manufacturing and distribution. [And] they need to continue to make market share gains in the States.”

The British conglomerate could score a quick jump in U.S. market share this month if it can grab Zomba Music Group, the independent label that is home to pop stars ‘N Sync and Britney Spears. There is speculation that Zomba will end its U.S. distribution deal with Bertelsmann and switch to another company.

EMI already distributes Zomba’s recordings in several territories outside the U.S., including Latin America. Spears’ recent blockbuster album ranked as EMI’s 10th-best seller for the year, even though the company didn’t distribute the pop queen’s albums anywhere in North America.

To be sure, EMI’s global business remains strong. Internationally, it ranks third behind Vivendi Universal and Sony. Its publishing division, which licenses songs by such hot producers as the Neptunes and Jam & Lewis, is the world’s largest and accounts for one-third of the corporation’s operating profit.

“There’s no reason to jump into bed with someone just for the sake of not being a stand-alone,” said Martin Bandier, EMI’s publishing chief. “There’ve been rumors for 12 years about this one buying us and that one buying us. But there are no other plans on the horizon other than to grow this business.”

Competitors say the company will remain a takeover target so long as it lags in America.

“I don’t think this thing is over yet,” said one senior executive at a company that has reviewed EMI’s financials. “I would not write off the Disneys of the world, the Foxes of the world, coming out of the woodwork and kicking the tires.”

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New Approach

British media giant EMI Group is coming off two scuttled merger attempts and plans to compete as a stand-alone music company. It has scored some recent successes by tapping its rich catalog, but has struggled to break new American acts. It ranks fifth among the five major record conglomerates in sales of current albums in the U.S. music market, according to SoundScan. EMI’s top worldwide sellers for the fiscal year ended March 31. Numbers are for records sold.

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No. sold Top seller (in millions) The Beatles, “1” 21.6 Lenny Kravitz, “Greatest Hits” 6.7 Robbie Williams, “Sing When You’re Winning” 4.3 Utada Hikaru, “Distance” 3.6 Coldplay, “Parachutes” 3.3 Radiohead, “Kid A” 2.6 Spice Girls, “Forever” 2.2 Snoop Dogg, “Tha Last Meal” 2.1 Ringo Shiina, “Shoso Strip” 2.0 Britney Spears, “Oops! . . . I Did It Again” 1.9*

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* Sold in limited territories outside North America

Sources: EMI Group, Times research