Barbarians through the Gate

Things at EMI, it seems, are not good.  In a profile on Guy Hands, head of Terra Firma, the private equity firm that currently owns the music group, the New York Times paints a grim picture of both Hands and his current endeavor.

First a recap: EMI is huge.  And it makes a lot of money.  The Beatles, Sinatra, Rolling Stones, Marvin Gaye, Pink Floyd, and David Bowie were all at one time on their roster.  They own the catalogues not just to these guys, but also to all of Capitol and Blue Note, and have been in perpetual courtship with Warner Music Group, as both acquirer and acquiree.

And in the land of music and EMI, things were beautiful until a few years ago.  Then in 2007 Guy Hands and his private equity group, Terra Firma, bought EMI with bank financing for $6.4 billion.

 That was about 10 months ago, and now Hands has got a problem.  In addition to moving slowly on his turn-around plan (which included cutting about 1500 jobs, and scared away both Radiohead and Paul McCartney), Hands had the good fortune to secure a $6.4 billion loan from Citigroup just as credit was drying up.  (Actually, that turns out to be bad for both Hands and Citigroup, which cannot find any reasonable way to offload the huge debt they’ve incurred, meaning that Hands has only one creditor breathing down his neck – but one that’s breathing really hard, and really close.)

Now a little about Hands: according to the article, Hands’ years at Oxford, Goldman Sachs, and Nomura groomed him well for the world of business.  He had his wife run a chain of hotels, and he’s led Terra Firma through the successful acquisition and turnaround of chains of pubs and gas stations.  He’s also an asshole.

With all this grooming and experience, though, he can’t seem to figure out the music industry.  First, he’s offended nearly everyone at EMI either directly:

“They hate him,” said Hugh Hendry, a British hedge fund manager and former EMI shareholder who had publicly criticized past management, of artists’ opinions about Mr. Hands. “He’s rude. He’s abrasive. He wants to make money. He’s the first to say to artists, ‘We are not going to pay you too much money. Now get out of my office.’ ”

Or indirectly:

“I said Terra Firma people get in very early in the morning, work through the day, and go home,” he said. “In contrast, people in the music industry get in to work later, work later and then go out late to the clubs and look for bands.”

This, according to Mr. Hands, is what set off a storm of protest from artists and managers in the British press.

“He had this disastrous publicity campaign,” Mr. Summers said. “I thought it was terrible for the staff. And he was saying artists were all lazy.”

Then, he finds out that what he’s actually bought: an audit by KMPG revealed that EMI has actually lost $1.5 billion from the sale of new music during the past five years.  (To his credit, Hands said nearly 80% of the $6.4 billion price was for the company catalogue.)

But the Times piece is about much more than Hands or EMI.  While the article tells us clearly that business acumen will not necessarily get you success in the music industry, the reasoning plays mostly into Hands’ line of thinking: managerial and accounting problems.  Hands’ emphasis on the boost EMI will get from Coldplay’s new album was much more telling.

In an era of quarterly earnings and corporate profit predictions, commoditizing art seems a dangerous game at best.  In addition to facing the competition of other industries and sectors, entertainment companies also face the difficulty of trying to wrangle both the artistic process and consumer preferences for such products into a neat fiscal schedule.  Good luck.

Last time Coldplay released an album it did turn out to be a windfall for EMI, but the delay of the album skewed profit predictions, and had a negative effect on share prices that did not completely rebound when the album was finally released.  While this type of thing does happen with other goods, you do have to enjoy the comparison of music to other goods (lawn mowers, computers, industrial goods, etc.) that are produced by the companies traded on stock exchanges.

But look around the landscape of entertainment and you’ll see this type of thing happening more frequently than you’d imagine (as an intern at DreamWorks Animation I heard repeatedly that the company had made a commitment to its shareholders to release two movies a year [not convinced: the studio releases a film each fall and memorial day]).  Surely it happens with other entertainment production companies, but goes mostly unnoticed because either 1) the company isn’t publicly traded, and can cover its ass when this happens, or 2) they’ve got enough material put together to tide them over (how many movies do Paramount and Universal put out a quarter?).

What you should know about art is this: it sometimes  takes time, and you’re never sure who’s going to buy it.  Guy Hands seems to have missed these points.  And you can’t really blame the guy, either.  After years of success turning around low-impact institutions of consumerism, he decided to take a bite of a very different,  and much larger beast, but seems to have been caught in too deep. 

If this was any other industry, I might sit back and laugh at him with a kind of sick satisfaction, enjoying the hubris of someone who, by all accounts, is impossible to deal with.  But when he’s blindly running EMI into the ground, I can only cringe.