On stage, EMI Group dominated this week's Grammy Awards with five big wins by its newest star, Norah Jones. Behind the scenes, however, the debt-ravaged British music giant is scrambling to stay afloat.
For the last several months, EMI executives have quietly pursued a seemingly schizophrenic survival strategy, courting Germany's Bertelsmann Music Group with a pledge to merge while approaching AOL Time Warner Inc. with a plan to buy the conglomerate's huge music operation.
Sources close to the meetings said the talks in both cases have been informal. No offers have been made, and no formal evaluations of assets have been conducted.
AOL Time Warner and Bertelsmann declined to comment. An EMI spokeswoman said, "We do not comment on speculation." The Wall Street Journal first reported the AOL talks, and London's Financial Times reported the Bertelsmann approach.
The EMI discussions are but the latest gambit in a troubled music industry. Warner Music Group, Bertelsmann Music Group and Vivendi Universal Inc.'s Universal Music Group are all said to be on the auction block, though none has found a buyer.
"Everybody is looking at everybody, and as well they should," said one person close to the talks involving EMI. "The music industry is in a massive state of flux. Consolidation is the only answer out of this."
Plagued by surging piracy, plunging profit and rebellion among its artist ranks, the record industry is battling to sustain a way of doing business that, insiders say, is on the verge of imploding. Studies show that CD burning and Internet downloading have decimated sales, shrinking international revenue by about 20% over the last three years.
EMI ranks last among the five major music companies in the crucial U.S. market, where sales in January were down 7% from the year-earlier period.
Precisely how the struggling company would fund the purchase of a competitor as large as Warner -- which might cost as much as $4 billion -- has puzzled industry observers. Those questions deepened Monday, when Moody's Investors Service said that it might downgrade about $1 billion of some $1.6-billion total EMI debt.
Still, EMI's weakness could put it at the center of any industry consolidation -- a scenario predicted in a recent Sanford C. Bernstein & Co. report, which saw 2003 as the "tipping point" for an industry in crisis.
Presumably, two weak companies once combined could slash costs and improve profitability in the short run. Few industry veterans, however, believe such a solution would provide a lasting fix. The Sanford Bernstein analysis noted that a combined EMI-Warner operation would have about $6 billion in sales. But even with anticipated cost savings, the company's overall financial health wouldn't improve for four years, the study predicted.
During a recent meeting with AOL executives, EMI representatives pitched the idea of buying all or some of the Warner music operation. Sources at AOL Time Warner, contacted Monday, discounted the seriousness of the proposal. In view of their own company's debt load, however, they said they couldn't dismiss the EMI overture without seeming irresponsible to shareholders.
Officials at both companies still have significant differences over expected company valuations, sources said. Nor is AOL Time Warner, which tried several years ago to merge with EMI, convinced that it is worth battling again with regulatory agencies that blocked the previous combination.
Management discord also might become an issue in any such combination: It is unlikely that Warner Music Group Chairman Roger Ames would take kindly reporting to EMI record head Alain Levy, who was once his competitor for Warner's top job. Ames worked for Levy when the latter ran PolyGram.
In November, EMI executives quietly contacted Bertelsmann, suggesting a round of informal talks, where they proposed a variety of plans. EMI ultimately pitched a merger, sources said, and conceded it might be willing to take a minority position in terms of control over the combined company.
Bertelsmann rejected the plans, but its chief financial officer, Siegfried Luther, last weekend told a German TV reporter that it is still reviewing a range of options, including possible mergers with EMI or other competitors.
"There is a lot of wild and off-beam speculation being reported in the press about what EMI is up to," said one person close to the talks. "Nothing will happen any time soon. But something is certain to go down within the next year."