Music sales hit by downloading - and dross 
Big firms fail to star in the talent contest

Thursday October 2, 2003
The Guardian

http://www.guardian.co.uk/business/story/0,3604,1053894,00.html

Global music sales, according to new figures released yesterday, remain in a
nosedive. Sales of albums and singles, in all formats, fell nearly 11% in
the first six months of this year. The second half, with the Christmas rush,
will pull back some of that decline, but the business will still be deep in
negative territory by the end of the year. 

In the first six months of last year, the decline was 9%, which was pulled
back to 7% by the year end. 

The IFPI, the industry federation which collects these figures, and the five
major global record companies, would have us believe that this is all the
fault of those who steal music via their PCs. 

This, however, is not the full story. The IFPI does not produce any
estimates of how much of the sales decline is due to downloading, but it
does not argue with independent estimates that the figure is about 40% -
which leaves 60% down to other factors. 

One of these is undoubtedly economic conditions. The worst fall in sales in
the first six months - down 18% - was in Germany. The other three countries
worst hit - America, France and Japan - have suffered similar problems. But
a large part of the blame for evaporating sales has to be laid at the door
of the five majors - EMI, BMG, Sony, Universal and Warner - and their
inability to break new bands. The big five account for 70% of world sales,
so if they are not performing well, the global industry will also appear to
be struggling. 

Independent labels do not seem to be suffering such a talent vacuum. Take
Zomba, which gave the world Britney and Justin; the Beggars Banquet group,
which discovered Mercury prize-winner Dizzee Rascal and the White Stripes;
and the UK-based Sanctuary group which, though famous for its roster of old
rockers, has also found new bands such as the Strokes and the Libertines. 

Industry experts say that when the majors do find a new band they press them
to put out an album - even when they do not have enough good material. In
the past, a record company might have put out the small collection of work
on an EP. Now they produce many poor albums with only a few good tracks. 

Little wonder, then, that music fans prefer to download the good tracks and
leave the dross in the shop. 

They can also be accused of failing to put enough effort into their back
catalogues. Sanctuary - sales up 31%; profits up 36% at its interims -
specialises in back catalogues and even licenses them from the majors,
turning a profit where otherwise there would have been none. As for
downloading, there are plenty of music industry operators who do not view it
as a massive problem. Indeed, many - such as Alan Giles of HMV- regard it as
no worse than the mass taping of albums that was commonplace 30 years ago.
They rationalise that downloading increases the appetite and market for
music, and when fans have the money, they will still buy. 

The majors' answer to their problems is consolidation to cut costs. The
stock market backs that solution. But isn't it just possible that, in this
case, the long-term solution is to do the reverse: split, compete and get
creative again? 

The price of light
British Energy, the country's largest power producer, responsible for a
fifth of Britain's electricity, was saved yesterday. That was hardly
surprising, given not only its pivotal role in ensuring the lights stay on,
but also that the alternatives were administration or effective
renationalisation. 

Certainly, bondholders had nowhere else to go, other than accept the
government-backed rescue plan. They, at least, emerge with £154m of new debt
(compared with £408m) and 52.3% of what amounts to a new company. But
shareholders, many of them private investors, will end up with only 2.5% of
the new equity, and the doleful consolation that at least that's more than
the 0.5% given over to their Marconi counterparts. 

However, even if they reluctantly give their approval, the rescue plan
remains clouded by uncertainties. The greatest of these is whether Mario
Monti, the European Union's competition commissioner, and his officials will
approve the level of state aid - amounting, in initial Brussels estimates,
to between £4bn and £5bn - as legal. 

The auguries are not as favourable as some commentators would believe. Mr
Monti and his cohorts are already exasperated by the French government's
plans to bail out "national champions" such as Bull and Alstom and, indeed,
he has indicated his wrath at the continued levels of state aid provided
throughout Europe. 

If the Alstom arrangement is finally approved, then the British Energy
rescue plan is home and dry. If not, and the secretive reprocessing
contracts between BE and state-owned British Nuclear Fuels merit the closest
of examinations, Patricia Hewitt or her successor will have to rethink. 

The choice, then, would be either administration, with the plants gradually
run down in an orderly fashion, or renationalisation, possibly via the new
nuclear liabilities fund which could convert its right to 65% of New BE's
net cash flow into equity (with 29.9% of voting rights). It's not an
attractive proposition either way, but the government's shillyshallying over
energy policy has left it with that potentially ugly choice. 

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