THE BUSINESS OF MUSIC www.musicweek.com
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Operating profits on the up for EMI but net loss affects Citigroup debt
Operational boost for EMI as it acquires Digitalstores
Acquisitions By Charlotte Otter and Ben Carden
EMI HAS BOUGHT direct to consumer e-commerce service Digitalstores.co.uk as it looks to strengthen its Label Services division.
The company, which operates D2C stores for acts including The Beatles, Hot Chip, the Prodigy and Pet Shop Boys, will continue to be run by CEO Russel Coultart out of its Kensal Rise office, with Coultart taking on the additional role of vice president of direct to consumer for EMI Europe.
Coultart will report to Peter Palmer, EMI Music’s senior vice president of global merchandising and D2C. Of Digitalstores’ 20 employees, one is in consultation over his position, but the rest will continue to work as normal.
The acquisition, which follows EMI’s purchase of Loudclothing.com in 2009, is intended to bring additional experience of D2C to EMI, allowing the major to offer more services to its own artists, as well as independent artists, via its Label Services arm.
The news comes as EMI holding company Maltby Capital revealed its accounts for the financial year 2009– 2010. They show strong operational improvements at the major, with revenue up to £1.65bn from £1.57bn in the previous year driven by the re-release of The Beatles’ catalogue, which generated more than 13m sales, as well as hits from Katy Perry and Lady Antebellum.
EMI and Digitalstores declined to comment on the deal and financial terms were not disclosed.
EBITDA before restructuring increased 14% to £334m, while operating pre-tax profit reached £121m, up from £7m in 2009. EMI still reported a net loss of £512m after tax and the major says it will not be able to satisfy its banking covenants with Citigroup, which funded Terra Firma’s £4.2bn buyout of EMI in 2007.
Although EMI has a provisional commitment from Terra Firma to provide the £26.9m it predicts it will need to meet covenant repayments for the rest of the year, it expects a “further significant shortfall” when it is tested again in March 2011. If this happens, Terra Firma will need to ask investors for a further boost in equity to inject into EMI.
EMI Group CEO Roger Faxon is confident investors will come up with the necessary funds. “The logic is pretty clear. They would not have put £100m into the business [in 2010] if they thought that this year or any year in the future that they wouldn’t have a business, so it’s only logical that they put it in to make a return on the investment and they will continue to resolve the covenant issues,” he says, explaining it is also in EMI’s lenders’ interest to keep the business growing into the future.
Balancing act: Katy Perry, whose Teenage Dream album is out next week, continues to help drive EMI revenues
Profit and loss EMI results 2007–10
excludingrestructuring Operating profit/(loss) (£m) 121
beforeimpairmentofgoodwillandintangibleassets Loss from operations (£m) (481) (1,031)
Net loss (£m)
Operating cashflow (£m) 250
Source: EMI Group/Maltby Capital
Of course, EMI will not be able to rely on money generated by a high-profile Beatles’ reissue campaign every financial year, as it looks to pay off its debts, but Faxon is confident that the company’s release schedule over the next financial year is strong enough.
“We don’t only just represent The Beatles – this year sees the release of Robbie Williams’ Greatest Hits coming out, as well as UK artists such as KT Tunstall and newer artists who are stepping up like Tinie Tempah and Eliza Doolittle,” he says. “There’s a lot going on and we just have to hope that the music is as good as we think it will be.”
In addition, Faxon says there are important issues to consider within the company other than debt.
“We are not in a situation where the business is underperforming – it is meeting all its bills, including restructuring costs, capital costs and all of its debts services,” he explains. “EMI is a strong business and getting stronger. There are two issues which are more important here – the underlying value of EMI’s assets and the way the debt works within the covenant.”
The first issue, he says, boils down to the depreciation of the company’s assets from its purchase three years ago. “I don’t think it comes as any surprise for anybody that there has been a so-called fair value adjustment on the books,” he notes, adding he is confident in continuing EMI’s rise in revenue over the next year. charlotte;email@example.com
Will iTunes pour cold water on pre-releases?
ITUNES.CO.UK IS UNDERSTOOD to be offering increased support for tracks that go on sale at the same time as they are released to radio, in a move that could significantly impact record companies’ release plans.
While most tracks in the UK are typically released to radio some six weeks before they go on sale in a bid to create pre-release excitement and maximise initial chart positions, there have been calls from quarters of the industry – notably the MMF – for the two dates to coincide.
MMF CEO Jon Webster believes the long lead times between a record being played on the radio and its availability in stores create fertile ground for pirates, with many genuine fans having no alternative but to illegally download a new track they have heard on the radio.
Apple says there is no new editorial policy on iTunes and that all singles are considered for editorial coverage, which can include the free single of the week download, the free discovery download and the weekly new music email blast.
However, several industry sources tell Music Week that iTunes.co.uk is pushing for radio and release dates to coincide and, while it will continue to stock the same range of tracks, the store is increasingly supporting songs which go on sale at the same time as they are added to radio playlists.
“iTunes are just joining in and say it is a bit crazy to keep generating demand and not selling things to people,” says Webster.
Already, record companies and managers are considering how to deal with such a possible move at iTunes, weighing up the considerable benefit of support from iTunes versus the importance of building up a head of steam behind a track before it goes on sale.