The recent verdict in the Citi/Terra Firma lawsuit has been analyzed more than the federal budget in the media recently. Reporters I’ve spoken with who were present during the entire trial say that there was a black cloud hanging over the courtroom during Guy Hands’ testimony. He acquitted himself so poorly that a jury of average New Yorkers decided that a megabank was for once telling the truth. Of course the idea that Citi fooled Hands, a Master of the Universe touted to be Europe’s savviest dealmaker and turnaround artist, was hard to swallow at the outset.

The following week Queen yanked their catalog from EMI after 40 years. This is the latest artist defection the label has suffered, along with the Paul McCartney and Rolling Stones catalogs as well as Radiohead’s high profile exit. One could easily speculate that the flood is not over, as Pink Floyd has had its own legal battles with EMI and could very well bolt when their deal is up.

And many industry insiders have felt that the imminent departure of Robbie Williams is a foregone conclusion, thus putting an even bigger dent in EMI’s future revenues. Let’s face it, how many times can you recycle the Beach Boys catalog after its been ground into sausage?

I had the opportunity to speak with Robbie Williams’ manager, Tim Clark of i.e. music, the other day about the label. Tim has been very critical of EMI in the past, most notably a very public spat with Hands when he first took over the label. “We’ve been quite pleased with what EMI has done for Robbie’s Greatest Hits album. They’ve worked very hard and done everything that we’ve asked.” When asked what the future holds for Robbie at the label, Tim just said that they’re taking a wait and see approach.

Similarly Brian Message of ATC Management, Radiohead’s representatives, told me “”One of the artists we work with is Eliza Doolittle and she is signed to Parlophone/Capitol.  As such we’ve worked closely with their front line label staff and have found them to be an excellent, motivated and talented bunch. EMI, the corporate entity, has clearly suffered at the hands of aggressive financial engineering but the core competencies of the people working with Eliza has been nothing less than impressive.” Not bad.

Another former EMI senior exec said that he’d always been a Roger Faxson fan. “Hands should have gone with Roger at the very beginning. At least he has a clue about the music business.” But is it too little too late?

This all came as quite a surprise to me, as I’ve been very critical of the label in the past. Although I’m actually pleased to hear this, it unfortunately doesn’t change much in the scheme of things.

Let’s say that Faxson wants to re-sign Robbie Williams or Coldplay or any other major artist. He’ll have to come up with big numbers. The problem is that he’ll probably not only need Terra Firma’s approval but also Citi’s. Not exactly an optimal situation.

The latest news to break is that WMG is readying a $750 million bid for EMI’s recorded music division. This is very interesting in that all of Warner Music, including the publishing arm, has a market cap of around $870 million and $2 billion in debt.

So how could this possibly happen and where would Junior get the money? One insider laid out a possible scenario that has Citi loaning Junior the money to buy recorded music and folding it into WMG. EMI would shed freestanding labels Virgin and EMI/Manhattan with only Capitol Records in the US and EMI in the UK. Blue Note could be folded into Nonesuch with EMI Classics perhaps merged into EMI UK. According to this insider this would result in an instant 50% savings and what would be left would be a Warner Music Group consisting of Warner Bros. Records, Atlantic Records, Capitol Records and Nonesuch/Blue Note Records.

Faxson issued a memo last week debunking all of the rumors and speculation. I’m not really sure that it meant much other than a rally the troops, feel-good, everything’s going to be fine message. After all, what do you expect him to say? “Yes, the Huns are at the door and you’ll all lose your jobs and be homeless”. I don’t think so.

No matter what Faxson says, it really doesn’t mean anything. It’s all out of his hands anyway. But one thing we do know is that if EMI falls into foreign ownership under the aegis of a tax exiled British subject, there just may be baying mobs with torches and pitchforks at the gates of Guy Hands’ estate on Guernsey. If you think that the UK media has been tough on EMI thus far, just wait.

© 2010, Wayne Rosso. All rights reserved.

But something that I am definitely clear about is my assessment of the Virgin Media/Universal Music service and its potential. At first blush, one would be inclined to celebrate this as a great innovation and a huge step into the future. The media was all frothy about it. After all, the media usually likes to go out there and scratch the surface. But when I started to drill down a bit, I found some nagging, even troubling, details.

First of all, let’s do the math. According to Virgin Media, the 10-15 GBP per month will give you unlimited streaming and mp3 downloads from Universal’s catalog. Fine. But how much will the service be when the other 3 majors are signed on? They’ll certainly want the same amount of dough that Universal is getting. So this will effectively bring the price up to 25-40 GBP a month. That’s a significant price barrier. Many say that 10 GBP is too much. But let’s move on.

So let’s assume that you’ll have a service that is minimally 25 GBP per month, a tough sell by any means. What’s the value? How many itunes does the average user purchase every month? I would suggest certainly not more than 10-15, or the equivalent of 1 CD a month. So what’s to keep someone from subscribing to the service for a month, filling out their entire library with let’s say 3000 tracks, then dropping the subscription and and just purchasing the hit singles they want a la carte on itunes? Nothing. The truth is that the average consumer would actually be overpaying!

This service will only be valuable to extremely heavy music consumers. And when it comes to that type of customer, Spotify represents a much better value at 10 Euros a month (less than 8.5 GBP). In fact,  it is a better value for  casual consumers as well. Spotify offers what no record label sponsored service can: a lush user experience. The labels still don’t get it. It’s not just about their content. Users want a rich experience. It’s all about search and discovery. Spotify has that experience. The labels have consistently failed to deliver on that level. Look to the upcoming Vevo project and you’ll see. Who gives a shit about it. Vevo is just a music video channel on YouTube. So what? Doesn’t really show a lot of creativity on the part of Universal and Sony.  The Virgin Media/UMG service just smells way too corporate. And it will be. Third party services have to be extremely creative in order to compete and the arrogance of major labels makes them think that all they need to do is offer their content. Build it and they will come. Not necessarily. And I’m willing to bet that they’re incapable of building a compelling user experience with an organic, grass roots, music lover’s feel.

Virgin Busts Downloader

Now the troubling part. As part of the trade off, Virgin Media has agreed to use packet sniffing technology to police downloading. Now I ask you, do you want to give up your privacy in order to download all the overpriced music you want? It just doesn’t square. Another thing I’m not sure about is how would Virgin know if you’re illegally downloading something? Can they tell the difference between downloading a bit torrent of a Maria Callas recording that’s in the public domain and one that’s not? If any of you out there can bring some clarity to this, please do so in the comments section. I know that if I were a Virgin Media customer, I’d be on the phone to BT right now to switch my service. It’s a very slippery slope and if Virgin thinks that sucking up to UMG will get them anywhere they’re nuts. I’m sure that they’re also trying to brown-nose the government as well, but you don’t see the other UK ISP’s rushing to duplicate the model. If they did, that could then lead to every ISP snooping on their users and acting as a private police force for record labels. It just doesn’t sit well. The great Peter Kafka made an interesting comment in his ATD post today regarding  the US  music industry saying  ” [individual user] lawsuits are supposed to be relics of the past, replaced by a new strategy whereby music labels convince Internet service providers to help them police piracy. But while the industry floated the concept six months ago, it has yet to get a single cable company or telco to sign on. And even if they do, there’s not a whole lot of incentive for the likes of Comcast (CMCSA) or AT&T (T) to really crack down on music pirates, who don’t take up much bandwidth and don’t steal anything the pipe guys care about”.

And what about competition? Now that an ISP is doing direct deals with the majors, how does this effect the Spotify’s, iTunes, and Passionato’s of the world? Could Virgin make life difficult for these services? What would the EU say about that? I guarantee that the French and Spanish would bitch like crazy. And I don’t see that going over well in the US either. Consumer groups in the US like Public Interest would go ballistic.

What’s interesting is that the market has changed and this model will work, that is if it was 2004. Now, I don’t think so much. The industry, as usual, missed the window of opportunity and is again way behind the curve. The fact it that downloads matter less and less these days with the advent of inventive new streaming models, especially Spotify’s mobile app. In my opinion, the service will get a lukewarm reception at best. There will be an initial surge of interest and then it will die down substantially. Virgin will have done its best to actually lose customers, sending them into the arms of non-meddling competitors. They’ll learn that looking backward will have cost them more than they could ever make from some crappy major label sponsored subscription service. The only ones who win are the record companies. Don’t forget the major label mantra….”Heads, I win. Tails, you lose”.

© 2009, Wayne Rosso. All rights reserved.