Back on the right track? EMI should be so lucky

The apple of its eye split up in 1970. Can the music group keep the faith?

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One of the first moves made by Alain Levy when he took over as chief executive of the troubled music maker EMI five months ago was to appoint David Munns as head of the US business. Mr Munns, as all soft rockers will know, relaunched the career of Jon Bon Jovi.

Mr Levy's unveiling of the well-trailed restructuring of EMI last Wednesday showed him getting to grips with some of its problems. But despite 1,800 job cuts and plans to dump hundreds of artists from the company's record labels, it seems that Mr Levy, in the words of Bon Jovi, is only "halfway there".

EMI looks exposed and listless. It has suffered five years of stagnant profits and its most successful recent release came from hip new band The Beatles. EMI has also had strategic rethinks before. In the past 18 months it has tried to merge with Time Warner of the US and Germany's Bertelsmann, only to be foiled by the competition regulators.

The previous chief executive, Ken Berry, had a masterplan to boost EMI's presence in the US and flagged this by signing Mariah Carey for five years in an $80m (£56m) deal. But the star started to suffer from "extreme exhaustion" and her album Glitter flopped. After paying her to end the contract, the com-pany will have been left £38m worse off by the whole affair.

Two profits warnings added to last year's malaise. EMI's chairman, Eric Nicoli, summed it up when he said the company had experienced an "extremely challenging and eventful year".

Mr Levy's solution comes in two parts. The first is to sort out EMI's short-term financial position. Falling profits and around £1bn of debt have done nothing for the City's confidence. Mr Levy has cut the dividend to save cash and proposes to sell off non-core assets such as the company's stake in music retailer HMV Media.

The running costs have been slashed after a fifth of the workforce was sacked. The company will now focus on its record labels and sort the wheat from the chaff by getting rid of 400 underperforming artists to concentrate on big hitters like Kylie Minogue and Robbie Williams. This will mean money isn't lost on promoting and developing bands that haven't caught on. "It is also-ran artists that kill off music companies," says Patrick Wellington, an analyst at Citigroup.

The changes have improved EMI's financial position, prompting a rash of upgrades from analysts. Citigroup boosted its profits forecast for the next financial year by 42 per cent, to £255m. But for EMI's long-term future, the most important issue is how to create superstars who endure. Rather than strike more big-bucks deals of the Mariah Carey variety, and put millions into marketing and promotion, EMI is going back to basics.

Mr Levy will put more effort into artist development – he bemoans the fact that second albums often do worse than the debut – and talent spotting. The company will now concentrate on getting the most out of its artists, he says, and finding new "superstars".

This is the right approach, says Andy Taylor, executive chairman of Sanctuary Group, the company behind bands such as Iron Maiden and The Strokes.

"Instead of building short- term income at high costs, you should build long-term careers," he says. "In the Seventies and Eighties EMI did that, when it was much smaller. It got bigger and bigger and less and less creative. The biggest acts are the ones you spend three to four years and albums developing."

Mr Levy has not, though, said how he will tackle the biggest threat to the music industry: the internet. Songs and albums are available free of charge from illegal websites, and can either be heard by web surfers or downloaded by organised pirates and copied on to CDs. EMI launched a paid-for internet service, Musicnet, last year, but surfers are still reluctant to pay to download music. Mr Levy admits the strategy has not worked. "The answer is not in the subscription service we have right now," he says. "Our job is to try to find a model to make it work."

EMI's investors want more detail on the company's strategy to find out exactly how it is going to attract superstars, grow artists and stop internet surfers stealing its music.

"We believe they are heading in the right direction. But there's a lack of detail on things like piracy and digital distribution and on how many large artists they want to find," says Johnathan Barrett, an analyst at stockbroker Teather & Greenwood.

The devil, as so often with EMI, is in the detail. But in the absence of any suitors knocking on its door, investors will have to follow another lead set by Jon Bon Jovi and "keep the faith".