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Plunge in CD sales shakes up big labels

May 29, 2007

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Terra Firma Capital Partners, a private equity investor whose diverse holdings include a European waste-conversion business, is paying more than £2.4 billion to buy EMI, in a deal that awaits shareholder approval.

EMI’s results, released on 21st May, show revenue down 15%. Operating margin collapsed from 9.7% to only 3.3%. Underlying profit before tax went into free-fall from £159 million to £63 million.

EMI cut its revenue and profit forecasts twice this year. The company, which released albums by Robbie Williams and Norah Jones in the second half, reported an “unprecedented level of market decline” and “an exceptionally high level of product returns” when it cut its forecasts in February.

Slumping revenue previously has driven EMI Chief Executive Officer Eric Nicoli to seek a combination with Warner Music as a way to reduce costs.

Warner and EMI dropped efforts to merge in 2000 after regulators opposed the plan. EMI’s attempt to buy Bertelsmann AG’s BMG unit in 2001 was also stymied by regulators. EMI again failed to combine with Warner in 2003, when a group led by Bronfman won the bidding for Time Warner Inc.’s music unit.

The need to diversify to survive so as not to rely directly on CD sales or downloads is increasing. The biggest one is music publishing, which represents songwriters (who may or may not also be performers) and earns money when their songs are used in TV commercials, video games or other media. Universal Music Group, already the biggest label, became the world’s biggest music publisher after closing its purchase of BMG Music, publisher of songs by artists like Keane, for more than £1 billion.

The owners of all four of the major record companies also recently have chewed over deals to diversify into merchandise sales, concert tickets, advertising and other fields that are not part of their traditional business.

Despite all efforts, CD sales have plunged more than 20 percent this year, far outweighing any gains made by digital sales at iTunes and similar services. Aram Sinnreich, a media industry consultant at Radar Research in Los Angeles, said the CD format, introduced in the United States 24 years ago, is in its death throes. “Everyone in the industry thinks of this Christmas as the last big holiday season for CD sales,” Mr. Sinnreich said, “and then everything goes kaput.”

It’s been four years since the last big shuffle in ownership of the major record labels. But now, the sales plunge is dimming hopes for a recovery any time soon and that’s when this new game of corporate musical chairs began. By the time it’s over, we can be facing a whole new industry hierarchy.

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