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EMI Posts 61% Profit Slide Amid Weakening Market

Media: Economic slowdown, rising artist advances and effects of online piracy cripple music conglomerate.


British music conglomerate EMI Group, often viewed as a bellwether for the global record industry, on Monday posted a 61% drop in operating profit amid worsening market conditions.

EMI Chairman Eric Nicoli said a worldwide economic slowdown, rising artist advances and the ongoing effects of online piracy make it unclear when a rebound will happen.

"It's just incredibly difficult to predict where the market is headed in the short term and how we'll perform within it," Nicoli said in an interview from London.

EMI, whose talent roster includes Janet Jackson and Garth Brooks, reported a net loss of $77.6 million for the six months ended Sept. 30, compared with a loss of $44.3 million for the same period last year.

The profit slide was due to EMI's recorded-music division, which posted an operating loss of $11.5 million, compared with an operating profit of $84.6 million a year earlier. Operating profits at EMI's giant music-publishing division, which sells compositions by such acts as Sting and rap artist Jay-Z, grew slightly to $72.4 million.

Revenue for the six-month period was $1.5 billion, down 7% from $1.62 billion a year earlier.

Nicoli is under pressure from investors because EMI's stock is down 42% this year. And analysts say the conglomerate, which includes such record labels as Capitol and Virgin, may be forced to slash its annual dividend to avoid becoming overburdened with debt.

EMI shares, traded on the London Stock Exchange, rose 5% Monday.

The results come in a period when EMI is shifting tactics after a failed four-year effort to increase sales in the U.S., where the company ranks last in market share among the five major record conglomerates. The company claims 10.1% of sales of new releases so far this year, according to music research firm SoundScan.

Last month, Nicoli fired record chief Ken Berry, a 30-year EMI veteran, and replaced him with former PolyGram Music executive Alain Levy. Levy and EMI's new vice chairman, David Munns, have been given a mandate to improve the company's performance in the U.S.

Berry "did a good job outside the U.S. He found it much more difficult to make progress in the U.S.," Nicoli said. "Alain has an incredible track record. He's very tough and very good on the creative side and that was mix of skills I felt we needed going forward."

Nicoli blamed the dismal U.S. performance on the slowing economy and rising costs, including higher artist advances and continuing red ink at the conglomerate's key joint-venture labels.

EMI also is under-performing in some key international markets. In Latin America, EMI's market share fell to 11.4% this year from 15.5% a year ago, and in Japan where its share fell to 8.8% this year from 10.3%

This year, EMI has slashed about 500 jobs worldwide, or about 5% of its work force, and will decide by year's end whether to scale back or exit the compact disc production business.

The music industry is reeling from a collision of several factors that are quickly crippling growth. Record companies have been slow to respond to the boom in online music files. And consumers have largely finished replacing their cassette and album collections with compact discs and consumers are showing no appetite for new formats. Record executives say consolidation in the retail sector and in the radio industry is making it harder for labels to introduce new acts.

In the U.S., the world's biggest music market, the major labels have sold about 11 million fewer albums so far this year, raising the prospect that the industry will post a slight year-to-year decline for the first time since SoundScan began tracking the market a decade ago.

"Other record companies may have ways to hide it, but they're facing the same issues" as EMI, said Michael Nathanson, an analyst at Sanford C. Bernstein & Co. "I worry about the continued slowdown in music sales. This may be more than cyclical. This may be structural."

In September, EMI issued a profit warning on the heels of a lackluster sales debut from pop singer Mariah Carey, who suffered a breakdown months after signing an $80-million contract this year.

EMI executives began a series of cost-cutting moves in August, including a decision to fold Priority Records into Capitol just three years after paying $200 million for the once-booming rap label.

Nicoli said EMI is counting on recent holiday-season releases by Pink Floyd, Lenny Kravitz, and Brooks to bolster profits for the second half of its fiscal year.

Monday's results follow a series of financial setbacks for the London-based conglomerate, which was jilted twice in recent merger talks with rivals AOL Time Warner and Bertelsmann. EMI has been the subject of takeover speculation for a decade, but analysts doubted that another suitor would emerge anytime soon.

Moreover, analysts said, EMI is carrying a heavy debt load for a stand-alone music company. Each of its four major competitors is part of a larger media conglomerate.

"EMI's size is a hindrance," Nathanson said. "They need to invest in talent and they need to show improving earnings....They're in a tough industry at the wrong time."

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