Music 2.0 - Exploring Chaos in Digital Music

With Guy Hands ringing in the changes at the helm of EMI and as a follow-up to the announced huge layoffs - reported to number as many as 2,000 - some of it will manifest itself with the closure of a significant number of EMI offices in Asia including their regional office in HK but excluding their better performing publishing arm.

Though no official announcement has been forthcoming and the final body count for Asia is still being worked out, an unnamed source has indicated that this will likely happen in June as previous reports from Billboard and One Two Music indicating March 26 as D-day have been proven to be wrong.

Already, EMI has effectively closed offices in Thailand and Singapore whilst those in Japan, India, Australia and China will remain to some level of direct EMI jurisdiction especially on the digital front. It is believed that EMI is currently in talks to license a partner to manage their catalogue in Asia, and rumours have Warner Music as the front runner.

Looking at the balance sheets from a purely financial viewpoint, it probably makes sense for Guy Hands to close any unprofitable operations as they currently exist, especially as overpaid label executives who cannot pull their weight in drawing the required revenues from the market combined with the now legendary ‘fruits and flowers’ expenses serve to impede his aim of expediently flipping the company for a quick profit. A cursory examination as reported by One Two Music confirms the troubles that EMI has been experiencing in Asia, with a reported monthly sales of only 15,000 units of international product per month in Indonesia, one of the world’s most populous nations. At the same time, it might also be a good move to rid the music industry of deadwood who are totally inept and unable to keep up with the changes brought on by technology, but unfortunately, the theoretical justification hasn’t borne out in real life as sites like the Velvet Rope noted that many of those culled in the US in similar exercises were unfortunately, the wrong people.
But it is also wrong to judge operations in Asia at face value based on the balance sheet as the picture has been fatally flawed due to head office straitjackets and dictation of global policies which were applied insensibly to the Asian markets.

It’s also all too easy to blame digital music piracy for the revenue drain as the fall guy especially for the ruinous digital Mechanical & Performing Royalty Rate War which raged on since 2002 for the best part of the development of the broadband and mobile explosion in Asia and which not only paralyzed major labels and publishers in Asia, but left them with restricted leeway in negotiating deals, and damningly resulted in easy pickings for unscrupulous Service Providers and carriers to use unlicensed content at will. While the War was being fought in the courts in the UK, the unenforceable and easily abused silly interim escrow systems and gentleman’s agreements which were observed in Europe and the US were scoffed at in the cut-throat Asian markets (excluding Japan) and was a contributory factor to the continued digital looting of major label and publisher content.

Despite this, the more innovative label executives in Asia tried to explore new revenue streams and business models via mobile applications but often had to contend with head office restrictions, much of it initially borne out of American and European ignorance on the potential of developing mobile opportunities in Asia (ex. Japan) – and also, the need to maintain control over their empire. Major label contracts with retailers were often filled with alien sounding head office lingo, unrealistic DRM restrictions, clauses and conditions that made no sense in Asia, and often Asian major label executives were driven to making quiet deals on the side with partners on the condition that as little be publicized about the deal as possible “so that my (head office) bosses will not ask me questions about it”.

For example, the unprecedented popularity of first, monophonic and then polyphonic ringtones in Asia gave music publishers in Asia, especially China an opportunity to their very own goldmine. However, as major music publishers themselves were ultimately reporting to old school label chiefs at the top of the pyramid who didn’t understand the potential of these newfangled ringtone thingies, licensing approvals from the head office were slow and laden with impractical constraints for partners. Once record label executives themselves realized the revenues that polyphonic ringtones were raking in while they sat on the sidelines with envy, they quietly made threats to publishers to seek their pound of flesh for the use of artist images and artist names in the sale of polyphonic ringtones. It was only when the master ringtone market boomed in the US, did the major label head office properly yield to the potential of mobile applications and then made it easier for their underlings in Asia to license rights.

It is thus frustrating to note the column inches devoted to so-called innovative concepts in the US and Europe like Spiral Frog, Q-trax, Imeem and last.fm and their courting of major labels when Asian label executives themselves had been rebuffed for years by their head offices to approve similar deals in their home countries.
Calvin Wong, Senior VP of Warner Music Asia in an astonishing and frank public tirade at Music Matters 2007, lashed out at his international colleagues for not understanding the needs of Asian markets and instead putting barriers in front of their Asian counterparts.

Major labels’ luddite tendencies are legendary but their slowness at the head office level in sanctioning the tapping of the booming mobile music market in Asia allowed faster moving Service Providers and carriers to land grab juicy revenue shares, and as a result major labels in Asia are still paying the price as they are left with the short end of the stick in deals with carriers. But this very lack of technological understanding as admitted by Universal Music’s CEO, Doug Morris in his now infamous interview with Wired, had a more profound effect in the faster developing mobile and internet markets of Asia, as more advanced and unforgiving Service Providers and websites that sprung up on the back of this new technology invariably engaged in stealthy methods of music piracy, resulting in easy-t0-use applications and products that consumers welcomed with open arms.

So with all these self-created own goals at the institutional level, major label executives in Asia are left with having to blame piracy as their convenient bogeyman to paper over the inefficiencies of their organizations. But even as digital music piracy spread like a raging forest fire in Asia due to label inefficiencies and slow technology adoption, their cries of foul play were not addressed with sufficient action in Asia - one major label global head of piracy who is located in the US is said to have visited China only once in the past few years. And more than one Asian major label executive has expressed frustration in private at the IFPI’s insistence of controlling anti-piracy actions in Asia out of London, even to the extent of running their online piracy monitoring crawlers on Chinese websites from London. As one music industry executive commented,

“It is tough enough being in China and trying to counter sneaky companies like Baidu but to sit overseas and direct anti-piracy operations whilst not understanding the language, culture, social norms and even technology in China makes it a futile exercise.”

Music industry apartheid has resulted in a few out of touch executives sitting in plush offices in their ivory towers far away dictating what the rest of the global market should be doing in a ‘charge of the light brigade‘ manner, and this ‘think global, act big brother’ attitude has been a serious major label foible even within its own ranks.

Throwing a curved ball into the system and in true ‘Good Copy, Bad Copy’ fashion, couldn’t some Asian or South American music industry executives familiar with both the American/ European model and also the developing world’s systems be better equipped to run a truly global operation as they have the innovative wherewithal and better understanding of the new economy and the developing conditions covering a wider footprint of the world? But instead, Asian label executives are now facing the cut and as some of EMI Asia’s top management are let loose, it is rumoured that they will be setting up another label or at least a music management agency – time will tell if they are simply the deadwood they were cast off as or if they have learned some valuable lessons from their erstwhile employers on how not to manage in this new economy.

Update 16 Apr 2008:
New York Post has an excellent article explaining the delay in executing the layoffs due to EU regulations and a purported cash crunch with Citigroup’s $4.9 billion in EMI debt being impacted by the delay in EMI’s restructuring.
EU regulations state that if more than 100 people are laid off, a 60 day announcement has to precede it, so there is every likelihood that the US and Asia will be the first victims of the axe.
In fact, in what could be termed as breaking news, as an epilogue to the restructuring announcements, Music2.0 has just been informed that the following major changes will be announced in the next 48 hours:
- Nick Gatfield from Universal/ Island is going to be named EMI UK Chairman or/ and in the capacity of head of A&R,
- Jason Flom, Chairman and CEO of Capitol Music Group in the US is on his way out
- Roger Ames, head of EMI North America and UK A&R man: no EMI restructuring news is complete without the obligatory “Roger Ames is under intense pressure and his head is still on the block”