Sir Colin stays ahead of the common people

'This is an industry which historically has enjoyed phenomenal growth. According to all the predictions, it will continue to do so'
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There's not much new in the spectacle of Jarvis Cocker, the lead singer of Pulp, disrupting the Brit Awards with a show of (allegedly) loutish behaviour. British rock stars have been behaving badly ever since The Who trashed their first hotel room. One thing is changing in this exraordinary and not so little business, however, and that is the ability of top-selling artists to extract an ever-increasing share of the revenue cake.

Those who argue the bear case for Thorn EMI shares which, with demerger now formally confirmed, rise ever upwards into the stratosphere, constantly cite this trend. Once upon a time only a tiny proportion of the retail price of a record would go to the artist. Reliable figures are difficult to come by but the average today is probably in the region of 15 per cent. The likes of Michael Jackson will be on 25 per cent plus. Even "common people" like Mr Cocker will be doing very nicely out of the phenomenon, thank you very much.

To that extent what is going on in the music industry is similar to what happened in Hollywood. The movie studios made the stars but, once created, they started demanding their just desserts. Today it is they, as much as the studios, who call the shots. In music the process still has a way to go, but it's getting there. Add to that the widely held belief within the industry that EMI is not as well placed as it pretends and the sky- high value now put on its shares might seem hard to justify in the absence of a bid.

On this score, Sir Colin Southgate, the chairman, is sceptical; the "maxi, maxi" price bidders would have to pay is quite a deterrent, he contends. What a company is really worth and what someone else is prepared to pay for it are two entirely different things, however, and in this multi-media age, EMI may indeed be able to command a wholly unrealistic valuation. Furthermore, it might actually be possible to justify such valuations on fundamentals, notwithstanding the ever-encroaching power of the artists and any supposed management weaknesses at EMI.

This is an industry which historically has enjoyed phenomenal growth. According to all the predictions, it will continue to do so. Changing technology and patterns of distribution make the business fraught with risk but the big players would hardly be worth the name if they couldn't stay ahead of the game. EMI is going to remain everyone's favourite tip for a bid, despite maxi, maxi prices. Sir Colin has done a splendid job realising shareholder value, but by demerging the cumbersome boring bits - TV rental - he seems deliberately to be preparing his company for sacrifice.

Bonds put the jitters into equities

For the second trading day running, a morning fall of more than 50 points in the Dow Jones has triggered the circuit-breaker on Wall Street's computer trading. After the way US equities powered ahead in the first six weeks of the year, some correction was inevitable. But what is really spooking stock markets on either side of the Atlantic is the fall in bond markets, now at their lowest levels since November.

That has taken yields on 10-year gilts up to nearly 8 per cent at a time when underlying inflation is set to fall to little more than 2 per cent. The real rate of return thus comes out at 6 per cent, taking us into the realm of usury but for the familiar spectre of a return of inflation beyond the immediate horizon.

Despite reassurances from the Bank of England, concern about the re-emergence of inflation has been fanned by the big jump in broad money growth in January. While the Bank attributes this to the introduction of the new repo market, there is a long history of financial deregulation upsetting the monetary applecart. Real and well founded concern that the Government will over-egg the economic pudding in the run-up to the election persists.

Overshadowing these local worries is the global turn in bond markets. Dealers are worried about a possible repetition of the episode two years ago when huge losses were incurred after the US Fed tightened policy. This time, the prospective villain of the piece is cast as the Bank of Japan, which has been priming the world monetary pump since it lowered interest rates to 0.5 per cent last summer. Last week's remarks by the finance minister, Wataru Kubo, about the way pensioners were suffering from such low interest rates, were interpreted as a leading indicator of a change in policy.

Until more compelling evidence of economic weakness emerges in the US and Europe to allay fears about future inflation, bond markets seem set to remain gloomy. That in turn will continue to act as a brake on world stock markets. The trouble is that if such evidence does emerge, equities will then have to take the prospect of a recession a lot more seriously than they have done up till now. Either way, prospects for equities do not look good.

Challenge time for NatWest

NatWest Group's top brass were looking as pleased as punch yesterday as they announced the 1995 results. After having been through the "fire of the difficult years", as Lord Alexander, the chairman, is wont to describe what in truth was the result of hubris and profligacy as much as recession, management is enjoying the good news for all its worth. There was plenty of it yesterday, amidst strong underlying profits growth. But it should only take a glance elsewhere to furrow those happy brows. For NatWest is going to have to achieve something pretty spectacular in its core UK retail banking business if it wants to keep sight of the cost-cutting tail-lights of the market pacesetter, Lloyds.

NatWest has proudly set itself a target of reducing its key cost/income ratio to near 60 per cent by the end of the decade. Given that it was 74 per cent in 1994, that would be no small improvement in efficiency, as jobs are slashed and branches closed. But it may be nowhere near enough. Lloyds already has a cost/income ratio below 60 per cent and is aiming for 50. If it gets it right, and that is a big if, then the acquisition of TSB gives Lloyds an unparalleled ability to get costs well below that figure. If you believe that low-cost production in retail banking matters, and all the clearers today swear by it as the Holy Grail, then NatWest and Barclays have their work cut out to match this rapidly moving target.

NatWest has given part of its answer. The purchase of Gartmore should allow it to pump a lot more product through its retail distribution network. The same logic is driving its ambition to buy a life mutual. By getting a lot more revenue growth out of its expensive cost base, NatWest could get a long way to achieving its target. But given that the cost/income target itself is so far adrift of some of the competition, that will not be enough. Taking a leaf from the US, Lloyds is showing the cost-reduction potential that a merger offers. If it eschews that course, NatWest's happy management faces a daunting challenge.

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