Recording industry should brace for more bad news

Forget about Warner Music Group's plummeting stock price, or the shrinking retail floor space. Forget about EMI's announcement this week that it's cutting 1,500 to 2,000 jobs. At least the new owners of EMI are recognizing that they bought into a dead industry and are trying to confront it head-on with significant changes in business strategy. It remains to be seen if the suits who now own EMI can navigate the shark-infested waters of a business that feeds on schadenfreude.

The big problem that EMI, and by extension the rest of the industry, faces is the sudden stampede of brand-name artists away from the traditional recording companies. The Eagles are with Wal-Mart, Madonna left Warner for Live Nation, a concert promotion company. EMI has lost Paul McCartney and Radiohead, and Coldplay is said to be threatening to leave. Last week, the label's biggest seller, Robbie Williams, announced that he too would be leaving the label. All pretty devastating.

Record companies have always depended on the revenue and cash flow generated from platinum-selling artists to finance new talent. If that revenue stream disappears, how can they compete?

The case of Robbie Williams is very interesting and will probably be studied in business schools for years to come. Williams' managers, Tim Clark and David Enthoven of IE Music, are two of the most savvy, straight-shooting entrepreneurs in the business. They worked diligently to build Williams into a global superstar and then broke industry tradition by virtually creating a new music industry model, the 360 deal. They formed a joint venture between Robbie and EMI. For 80 million pounds ($157 million), EMI got a minority stake in the venture, which included all of the revenue that Williams generates--concerts, record sales, merchandising, sponsorships.

At the time, EMI was assailed for being a sucker, but the reality is that it made a great deal and it has more than paid off. This model has since been duplicated by Linkin Park, Madonna, and several other artists. It has become the rage du jour in record label business affairs departments and hailed as the model that will save the business.

But what Clark and Enthoven realize is that the point in time has come where major artists can do it themselves. First you had the Radiohead experiment. The band has been criticized by industry and media types for botching it and leaving a lot of money on the table. The important issue is that Radiohead made a bold first step, no matter how successful it was. Now artists like Williams can take full control of their assets, and enlightened managers like Clark and Enthoven can implement groundbreaking models that heretofore have been stymied by old-school thinking.

If you're a big enough star, you just don't need a record label anymore. In fact, even if you're an unknown, Clark and Enthoven have shown that you don't need a major record company behind you to be successful. Backed with money from London-based venture firm Ingenious, they just made a deal for a new singer named Sia with Starbucks. The Sia record will enter the charts in the Top 40 in its first week of release.

I don't know if Williams will sign with another record label or not. I really doubt it. The bottom line is that music has lost its economic value to consumers. But it still has emotional value. People will never stop listening to music. They've just stopped paying for it. So the challenge comes in figuring out how to capitalize on that emotional value. There are lots of ways to do that and guys like Williams, Clark, and Enthoven are sure to find them and transform the landscape.