EMI: the latest on Terra Firma and Warner Music

An update on Warner's other, ongoing story, its will-they-won't-they bid for rival music firm EMI: Terra Firma is only slowly drumming up acceptances for its £2.5bn offer for the EMI Group. Yesterday morning, the private equity firm said it would extend the offer period to 4 July after only 3.53% of EMI's shareholders accepted the bid (TF will need 90% to get control of the company).

One Numis Securities analyst speaking to AFX said he thought most shareholders would not vote on the Terra Firma offer of 265 pence a share until Warner Music either made a counter bid, or officially pulled out of the process.

But investors might not want to hold their breath for too long: A story in this morning's Daily Telegraph notes that Warner insiders think there is only a 50-50 chance of Warner Music Group finally coughing up an offer. Issues in the balance include WMG's assessment of EMI's balance sheets, which WMG has only recently started to examine; and of course whether the EU competition commission will the give the deal its regulatory blessing.

If EMI doesn't fly in the end, it will make Warner's new business move into the Russian market (see my post from earlier today) all the more poignant and worth watching.

Warner Music: with EMI bid still up in the air, next stop Russia

Is it possible to run a profitable, legit business in a market that's already established a thriving but illegal trade in the same item? If you look at the music industry, and how it's tried to make money out of Internet music distribution in the wake of successful sites predicated on piracy (and of course cheaper/free content), it's not entirely impossible. But it may take a very long time, if it ever happens at all.

In the latest attempt by Big Music to create a market in a thriving but illicit environment, yesterday Warner Music and Sony BMG announced they would team up with Russian firm Access Industries to start a wholesale digital music distribution business in Russia and former Soviet-bloc countries.

Digital Access, as the JV will be called, will aim to create a new distribution channel for legitimate digital music, including wholesale deals for full-track downloads, ringtones and video clips. It anticipates its customers will be online music portals, mobile operators, rights owners and other content providers; and it doesn't have plans to launch its own retail operation.

The news comes at a time when the Russian digital music industry is thriving, but at a controversial cost. Sites like Allofmp3.com, owned by Media Services, have been hugely popular for music downloads, not just in the region but worldwide—it sells music by the megabyte, which works out to a fraction of what a track would cost on a site like iTunes. This has meant the site usually ranks as number-two or number-one for music downloads in different markets.

MediaServices says allofMP3.com has a license to operate from the Russian government, but in recent months, it has come under a lot of pressure to close down its international operation. Major credit card companies will no longer allow payments to the site, and it appears to be blocked in many countries. (In London, where I live, I cannot access the site or its mirror domain, allofMP3.ru.)

But like many a black market Lazarus, MediaServices has launched several other sites to siphon new business. Among them are the punny allTunes and mp3Sparks. These do allow credit card purchases and seem to work on the same business model as allofMP3.com. And I can access them in London.

Big music's domestic partner, Access Industries, is an interesting company to watch. It may hold the key for Western labels to at least get a foothold in the market, rather than continue to be taken for a ride by the likes of MediaServices. Access Industries is controlled by the uber-influential Russian-American billionaire Leonid Blavatnik, who also has investments in oil, aluminum, coal and telecoms (ie the typical portfolio of Russian ex-state commodities held by most oligarchs). He is on the board of Warner Music and owns Russian music labels Soyuz and Nikikin Records, which will also join the venture.

The plan is to launch Digital Access in the 4th quarter of this year.

Mobile music: to boldly go where no one has gone before

This was published last Friday on Total Content + Media's web site....

This week saw the launch of a new mobile music service called MusicStation.

For those of you who think that mobile music—downloading tracks over a cellular network and listening to them on your phone—has been a non-starter so far, you are right. In the UK, for example, only 1.7 million people used their phones to listen to music downloaded from operators in the course of a month, says M-Metrics; another 5.4 million used their phones to listen to sideloaded music (taken off PCs). But compare both of those figures to the number of MP3 players in use in the UK: nearly 19 million; or the number of mobile phones in the UK: over 60 million.

Even Rob Lewis, the CEO of Omnifone (the company behind MusicStation) admitted to me that “Mobile music today is not a grown up experience.”

But put your scepticism aside! MusicStation is hoping its new approach will prove you wrong. It claims to have the most comprehensive catalogue—having signed global agreements with the four major labels of Sony BMG, Universal Music, Warner Music and EMI, and many of the minor ones—the most deals with mobile operators to run the service, and the most agreements with important vendors to preload the service onto handsets (although it admits that the number-two handset maker Motorola, is not pre-loading it on its music models just yet).

And instead of selling a la carte tracks, it is based around a subscription model, where a user pays one price per week for an unlimited amount of music. (The catch is that you don’t get to own any of the tracks you listen to.)

It’s no surprise that the labels have signed up—after all, they couldn’t possibly be doing any worse in mobile music than they are now. What’s interesting is that the operators and vendors, who have usually relied on exclusivity in their data offerings, have all agreed to try out a collaborative approach. (Compare this for example to AT&T, which has a five-year exclusive agreement to distribute the iPhone in the US, hoping this will migrate mobile users to its network.)

Still, MusicStation is not going all guns blazing from the start: the service launched first this week in the tech-happy but small market of Sweden, not with the incumbent but with Telenor’s network, charging users €2.99 per week for the service. Lewis tells me that the “lion’s share” of the revenues—well over 50%—will go to the music labels. Operators will get a cut in the billing and also a provision for letting the data pass over the network for no charge.

Lewis says Omnifone does not want to target the US market at this point because of the high penetration of MP3 players and the patchy availability of high-speed mobile data networks, which are necessary for the service to work.

“It’s really a landgrab right now in the digital music market, and we can’t catch up in the US,” Lewis told me when I met him earlier this week. Omnifone will instead aim for Europe and Asia, where they want the service to be on 100 million devices in the next 12 months. But the company would not give a target for subscriptions, or indeed how many would be needed to break even as a business.

There’s a lot to be pointed out in how MusicStation will differ from what is already available on the market today.

For one, because the tracks you hear will not be download-to-own, they will be quicker to get from the network than ordinary tracks.

And given that people have not been prepared cough up much money at the price points set for a la carte mobile music today (or any digital music, for that matter), it’s about time that the subscription model be tried out, even it’s unfamiliar to the music industry (and crucially to music consumers). It’s worth noting MusicStation isn’t the only one trying to push this: both Yahoo and Rhapsody are also trying out subscription models in their PC-based music services.

Plus it’s launching at what Paul Goode, an analyst at M-Metrics, told me was “the perfect time,” with “a raft” of music phones about to hit the market later this year. He said that of the 730 phones in the UK market today, only about 10 could really be classified as “true music phones.” An appallingly low number like that goes some way towards explaining why mobile music hasn’t worked so far.

Last.fm gets snapped up by CBS

When Google bought video sharing site YouTube for $1.65bn in 2006, it triggered a lot of media companies into action. Among them, the longtime U.S. broadcaster and television producer CBS set out to position itself as a forward-thinking member of the digital media vanguard.

“We don’t want to buy YouTube, we want to buy the next YouTube,” said Leslie Moonves, the chief executive of cross-media broadcaster CBS, not long after the deal.

Today CBS made a little move toward filling in Moonves' strategy when it announced it would pay $280m for online user-generated radio site Last.fm.

The London-based company has been quietly building up a loyal user base since 2002. When I recently spoke to one of the founders, Martin Stiksel, he told me that on average the site has 20 million active users every month and is 'generating substantial revenue' from several income streams, from amazon music retailing to ticket sales.

There's some interesting synergies between CBS and Last.fm. I'll be curious to see if the two companies them. For one, CBS has relaunched its own music label, CBS Records, which had originally been sold to Sony. And while Last.fm is in many ways a product of the web 2.0 juggernaut, it's also run a little like a broadcaster: it may have 20m active users, but it only has some 5.5 million registered visitors. That means that like CBS's TV channels, it banks on advertising to a critical mass for revenue generation.

I have to say, though, that as a long-time fan of Last.fm, one of the things I've always loved about it is its quirky, quiet approach to offering music: the exact opposite of many radio stations, and definitely the opposite of the 'big media' kind of experience offered by other online radio sites like Yahoo's.

It's also been frighteningly good at sussing out my tastes (if at times I seem to get into jags where all I get are songs by The Decemberists).

For now the management will remain in place and all they can talk about is how the deal will give them the money to do all the things they've always wanted to do. I'll look forward to seeing if CBS really lets Last.fm keep control of the jukebox.

The week in review: making mobile music

Hello. Two weeks ago I was holed up in the office putting to bed the launch issue of Total Content + Media magazine. Last week I was in Barcelona for the 3GSM mobile conference. Below is the Week in review that was published last Friday on the site:

This week, entertainment executives rode in to Barcelona to toot the horn of the convergence train at the annual 3GSM mobile conference and convention, which apparently drew some 55,000 visitors this year.

In amongst the various mobile operators and equipment vendors that normally dominate the conference schedule, there was a good dose of executives from the media and entertainment industries, including Edgar Bronfman, Jr, the CEO of the Warner Music Group; J.F. Cecillon, the new CEO of EMI Music International; Mika Salmi, head of global digital media for MTV Networks; and Lucy Hood, CEO of mobile content aggregator News Corp/Verisign JV Jamba.

The music contingent was particularly strong—Bronfman quoted uncited figures that mobile music will generate revenues of $9 billion in 2007, which would certainly make it the biggest mobile entertainment revenue generator this year if it comes to pass. There were lots of references to the Apple iPhone, which was the 800lb gorilla that didn’t actually show up to the party.

EMI’s J.F. Cecillon went great guns on the promise of mobile music and the future of EMI. On the subject of the company’s current problems, he summed those up in a simple enough statement: “EMI is doing great as long as our music is doing great.” Unfortunately for EMI, the currently skyrocketing sales of Norah Jones’ latest album haven’t been repeated enough in its other repertoire.

EMI issued its second profit warning, saying that in particular CD sales in the U.S. are still in a slump. The bad news prompted calls for CEO Eric Nicoli to resign. Nicoli has only been the CEO since January, although he’d been the company’s exec chairman prior to that. The news also hit other record labels hard, with shares of Warner Music tumbling. Aside from EMI, Warner Music is the only other of the four major record labels to trade as an independent company (Universal being a part of Vivendi Universal and SonyBMG being a joint venture between Sony and Bertelsmann). WMG had been eyeing up a merger with EMI, although European regulators seem to be looking on this idea unfavourably these days.

The presence of EMI, Warner Music, and other tunefully inclined companies at 3GSM underscores how labels are in a mad scramble to get a cut on the next generation of how music will be delivered.

And delivered, rather than sold, is the operative word in today’s world, it seems. At the end of January, EMI said that it had settled a long-standing dispute on copyright infringement with Chinese portal Baidu, with the result being that now all of EMI’s music is available on the site for free. The company hopes that it can instead now make money off of advertising that’s running alongside the tracks.

Cecillon told TC+M that he doesn’t think the free music model will be replicated elsewhere, at least for now. “We have put the system in place in China specifically because of the piracy issue. You have to do this to get into the Chinese market at some point. But we don’t have plans to extend the model outside of China,” he said. “Of course time will tell if that will change.”

Meanwhile, EMI is seeing small advances in its piracy battles. This week its Russian subsidiary Gala won a suit against a pair of Russian Internet sites, www.delit.ru and www.delit.net, who were selling EMI songs for 15 cents per track, without authorisation. As EMI only got the equivalent of about $2,300 as a settlement, the victory was perhaps more of a pyrrhic one.

“The music industry was worth $40 billion two years ago. Because of piracy, it’s now worth $30 billion,” said Cecillon. “That $30 billion is up for grabs.”

Indeed, back at 3GSM, Bronfman in his Wednesday keynote said that music execs weren’t there only to speak at the conference. Some of them were actually there doing business. He mentioned that one artist’s manager was walking around the stands. And if it really is true that the digital revolution is empowering artists to do more and more outside of the label’s reach, there may have been even more music managers walking around, unaccompanied by A&R men, in stealth mode.

(For a roundup of TC+M’s coverage of 3GSM and the iHollywood digital conference, type Barcelona in the search window at the top of http://www.totalcontentandmedia.com.)

The rest of the week…
In other news, the gaming industry got some attention, with Google apparently finally closing in on its purchase of in-gaming advertiser Adscape. The non-gaming media world is also taking a shine to the geek’s corner, it seems. This article from the WSJ says that publisher Hearst, among others, is incorporating gaming elements into web sites to grow traffic. Ladies mag Cosmopolitan is featuring a game called “Boy Toy.”

Baidu had a whopping fivefold increase in profits, but in what seems to be a theme at huge Internet portals, shares in the company traded down on the news. (Google too faced problems in its share price after reporting that profits had tripled.) In the case of Baidu, such is the boom in the Chinese market, that despite Baidu’s growth in profits, the company actually missed its ad revenue targets and didn’t take on as many new advertisers as expected. And analysts are very sceptical about its expansion into the Japanese market. Growing pains have never been so sweet.

Putting my convergence/telecoms helmet back on here to also note that Ericsson struck a deal with Turner Broadcasting last week to help reformat content for mobile phones, starting with CNN news—a very flashy interface for the service, I should add—and this week Huawei also got in on the vendor-as-content-aggregator act by signing a deal with the Orchard to develop a mobile music product. (Orchard represents smaller record labels.) Motorola was one of the first to move into this area in a deal in China several months ago where it effectively made itself into a label for non-pirated music.

Google faced a setback in Europe this week when a Belgian court ruled against it in the ongoing Copiepresse suit for copyright infringement when posting excerpts and links to plaintiffs’ news stories on its site without permission (the plaintiffs were French and German newspapers published in Belgium). The Internet giant is supposed to now pay a fine of E25,000 a day from when the suit was filed in September 2006, which amounts to E3.45 million. The sum is not huge for Google, but the implications of the suit are. Google is appealing the case.

Last but not least, this week a person at Yahoo told me that the company is getting ready to launch a new service that will combine the best of branded entertainment content with user-generated content and social networking. Given that Vaio Nation, a Sony-backed venture, seems to be promising the same sort of thing, this clearly will be the place that large media properties will hope to play in the year ahead.