Taking Stock of Hubris

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This is Celia Hirschman with On the Beat for KCRW.

The economic problems surrounding the record industry have been devolving for the past eight years. In spite of this, none of the four major record-label conglomerates seemed willing to make significant changes in the way they ran their business. That is, until this week, when Terra Firma took the lead in a bold move that will separate EMI labels from the rest.

EMI is the smallest of the four label conglomerates and was bought by private equity firm, Terra Firma, last year. Guy Hands is in charge of Terra Firm and it would appear he's not about to follow in the footsteps of his predecessors. On Monday, he announced he was cutting a million dollars from the annual budget. The move will cut the staff by a third, leaving about 4200 employees in the worldwide company.

Cost cutting is one way to address massive losses in revenue. Mr. Hands also introduced new management that would effectively shift the direction of the company from marketing driven labels to talent driven ones. And, in a move that many find radical, it is reported that EMI is shifting the way they sign new bands.

Untested, unsigned bands work hard to gain the attention of major label talent scouts. If a band is perceived as "hot," a bidding war among competing talent scouts ensues. Traditionally, major labels use large advances to get the band to sign with that particular label, figuring the label would recoup the advance with future record sales. But the problem with the system is two fold: 1) the economics are based on a perceived demand, not a real one, and 2) rarely does the advance recoup.

EMI is shifting their signing strategy. The will reportedly be offering large retroactive payments based on record sales, instead of engaging in bidding wars to secure new talent.

Of course Hand's strategy does makes sense. Large advances for new groups may stroke the ego of band members, but they're just not good business.

Not all of the Terra Firma changes were well received. Some artists immediately rebelled, arguing that they'd hold back their next release until convinced their label will market their records effectively. But realistically, none of the other three conglomerates offer any greater guarantees of marketing focus.

Another point made is that the other three conglomerates talent scouts will now have a distinct advantage, given that EMI's won't be offering large signing advances. But I'm not sure EMI is interested in partnering with new bands who want large advances anyway. These cash advances usually underscores the band's lack of confidence in their ability to recoup the money with sales.

The record industry suffers terribly from a chronic condition of delusions of grandeur. I run a label that is distributed through EMI, and though no one likes to think about lost jobs and bigger work loads, for most bands and labels there's a economic reality about this business that should not be ignored.

It's about time someone in control got honest about it.

This is Celia Hirschman with On the Beat for KCRW.