EMI blames scourge of piracy for drop in music sales

Observers say copyright fears are overdone to cover up weak CD release schedule

EMI, the world's third-largest music business, yesterday blamed the illegal copying of songs for falling sales at its recorded music division and called on governments to crack down on piracy in order to preserve intellectual copyright.

Reporting a £194m interim pre-tax profit compared with the previous year's £56.6m loss, EMI also announced the sale of its remaining 14.5 per cent stake in HMV, the music retailer. The £70m proceeds will be used to buy out the remaining 50 per cent of Jobete, the Motown music publishing company whose catalogue includes Marvin Gaye and Stevie Wonder. The deal will be completed early next year for $140m (£88m).

EMI said it had shipped 2.2 million copies of the new Robbie Williams album, Escapolgy, in Europe following its release on Monday and that it was selling well. The company paid a reported £80m to re-sign the singer but claimed to be unruffled by the singer saying "after this tour and album it's all downhill ... so come and see me in a holiday camp like Butlins in around five years."

Alain Levy, the head of EMI's recorded music division, said: "Artists can make these kind of statements. That's what they're like. I've got used to it."

Piracy dominated the company's statements although EMI was accused by some analysts of raising fears over the issue in order to cover up a weak release schedule.

EMI, whose other artists include Kylie Minogue, the Rolling Stones and Coldplay, said sales at its recorded music division fell 10 cent in the six months to September compared with the same period last year. This was worse than the 6 per cent fall in the global music market but EMI blamed the underperformance on piracy and on its restructuring programme, which has seen the company cut 1,900 jobs, axe fringe artists and reduce its output. Profits at the division jumped to £35.5m compared with a £11.4m loss last year thanks to lower costs.

The shares fell 5 per cent when the company said full-year sales of recorded music would be 3 to 6 per cent below last year rather than flat as the company had said in March.

Mr Levy said the main reason for the setback was piracy, both of physical CDs and digital downloads of songs from the internet. "When we made that prediction we were expecting the market to be 2.5 per cent down," he said. "Now we are expecting a fall of 5 per cent. Piracy is a lot more powerful than we thought and the situation has been worsening month by month."

He added: "It is not funny that the Harry Potter film was available on the Net this weekend. This is an important issue for governments. Do we want to push broadband internet connections if it destroys all our intellectual property?"

EMI said 11 billion tracks are being illegally acquired every month. Piracy of physical CDs has risen from 13 to 28 per cent of the market between 1998-2001, the company said. The problem has now spread from the Far East and Eastern Europe to the more established markets of southern Europe.

Home CD burning is on the increase too while digital downloads have continued to rise despite the death of Napster. The user numbers of Kazaa, a Napster rival, have risen from 9 million in 2001 to 64 million this year. Morpheus, another music file-swapping service, has seen its user numbers rise from 10 million to 89 million in same period.

City analysts said the missed revenue target at EMI recorded music was not a surprise and that the company was belatedly paying more attention to piracy. Lorna Tilbian, a media analyst at Numis Securities, said: "It was quite refreshing. A year ago they were saying the piracy issue could look after itself. Now they are saying: 'we need to watch this problem.'"

Anthony de Larrinaga, at SG Securities, said: "It's good that they are trying to do something about it but they are battling against cultural trends. For years the music companies have been jacking the price up and they have been losing the consumer along the way. Young people now have so many other things to spend their money on, like mobile phones and computer games, that piracy gives them the chance to still acquire music, but without actually paying for it."

EMI is working on several anti-piracy measures. One is the insertion of a "watermark" into the pre-release version of music so that if it is uploaded on the internet for swapping, the record company can track it back to the source. A second measure is copy-control, which will allow a physical CD to be copied two or three times, such as for use in a car or on a portable CD player, but no more.

Together with HMV, EMI has also worked on a subscription system that enables buyers to pay a monthly fee to download a certain number of tracks. The files disintegrate if the subscription is cancelled.

Physical piracy of CDs, which is often linked to organised crime, is rife in countries such as Russia and the Ukraine where huge plants pump out millions of pirated CDs, which are then sold domestically for as little as £1.50 and also exported. A crackdown on piracy is likely to be made a condition of entry to the European Union for countries like Bulgaria, Poland and the Czech Republic. But so far the problem seems to be getting worse rather than better.

It is possible, of course, that piracy is being used as an excuse by the music industry to cover other failings. For one thing, pirated CDs sold in Eastern Europe do not necessarily represent "lost" sales as the formal market for music is minimal in these countries anyway.

Secondly the music majors have been guilty of failing to create sufficient new talent with staying power. Thesmash hit culture of Pop Idol, which has launched the careers of Gareth Gates and Will Young, is led by marketing rather than music and the idea of an act being nurtured over the course of three or four albums has faded.

EMI's Mr Levy has been more vocal than most on this issue and has pledged to end the high-salary, low productivity culture at the group and focus more on delivering artists that can generate the back catalogue of tomorrow rather than next week's bargain bin.

So while EMI's current release schedule does include archive raids such as another Rolling Stones greatest hits collection, the company is achieving success with newer artists such as Coldplay, The Vines and Norah Jones, whose Come Away with Me album has sold more than 3 million copies since the spring.

Mr Levy wants EMI to behave more like a "music group" and less like a mere record company, which means adopting a broader definition of product. For example EMI is packaging a Kylie Minogue DVD with her Fever album this Christmas while in the US a Paul McCartney double CD is being sold with a DVD too.

The extension means adopting more of the characteristics of EMI's more successful music publishing arm. This division has maintained profits in a difficult market thanks to spin-offs such as the We Will Rock You Queen musical and mobile phone ring tones.

The new ethos will also mean more Robbie Williams-style recording contracts that give EMI a slice of touring and merchandise sales as well as simply music. Whether it works or not is anybody's guess. But now that EMI is finally concentrating on selling music rather than trying to merge with one of its rivals, the chances of progress are improving.