Outlook: Better late than never, FSA finally halts the forced selling

Ryanair/Buzz; Internet piracy

It has taken the Financial Services Authority a lot longer than it should have to ease the rules that have been forcing life assurers to dump equities, but finally it has done the right thing.

No wonder Sir Howard Davies, the FSA chairman, was so reluctant to talk about the issue when I attempted to collar him at the World Economic Forum in Davos this week. He literally ran off down the corridor as soon as he saw me. I know I sometimes have that reaction on people, but I don't think that was the cause. With the stock market in meltdown, he didn't want to talk about something he knew every financial journalist wanted to ask him. What are you going to do about the forced selling of shares by life assurers?

He would already have known answer. The solvency rules governing life assurers were put in place for legitimate enough reasons, but for the past two years, their effect has only been to intensify an already serious bear market. With each successive downward lurch in the market, the life funds have been forced to sell more equities in order to safeguard the so called "regulatory minimum capital margin".

The downward spiral in markets this was producing is one thing. Perhaps as bad it will also deprive life funds of any upside once equity markets begin to recover again, impoverishing capital reserves for years to come. Waivers will be dealt with on a case by case basis, but there is no reason why the new system shouldn't work. New ways of assessing solvency were in any case due to be introduced next year. Yesterday's initiative should have been launched much earlier, but it's better late than never.

Ryanair/Buzz

As Michael O'Leary says, Ryanair needs the distraction of buying another airline like a hole in the head. What, then, is he doing? He's taking over Buzz, which is being swatted out of the sky before it's even out of short trousers. The deal flies in the face of Ryanair's stated strategy of going it alone and although Mr O'Leary is buying Buzz with his loose change, it promises to cost a whole lot more in management time.

Whereas Go was about half the size of easyJet when it was swallowed up by Stelios, Buzz could fit into Ryanair's hangar seven times over. That ought to make it a bolt-on acquisition but such things tend not to exist in the airline business. However small Buzz may be, Ryanair will still have to merge its booking and yield management systems, as well as the air operating licences. He also has to integrate a different type of aircraft to the ones he's used to.

Mr O'Leary plans to shrink Buzz before he can grow it again. The BAe 146s which make up half the fleet are going back to the parent company KLM. About a third of Buzz's routes, which take it to the kind of expensive primary airports Ryanair deliberately avoids, will also disappear from the schedule. If the deal proves one thing, it shows that even in the cut-throat world of no-frills air travel, economy of scale counts for something. It is a moot point how long Virgin Express can survive up against the two giants of the discount scene.

EasyJet claims to be unfazed by the Buzz deal. Indeed, it can see positive benefits for itself in the transaction. The effect will be to remove a low-fare competitor on several of easyJet's Stansted routes while providing a useful distraction for Mr O'Leary. Even so, the market seemed happy enough and Ryanair's shares rose. The aircraft manufacturers are doing their bit by giving jets away to the low-cost operators. Yesterday Boeing sold Mr O'Leary another batch of 737s at a price rumoured to be so low it would hardly pay for an offpeak return flight to Dublin.

The two big aircraft manufacturers are a major part of the overcapacity problem that plagues the world's airline industry. They just produce too many of the aircraft, and more and more, they are forced to sell them at a loss. But that's not Mr O'Leary's problem. In five years, he aims to be Europe's biggest carrier, and by the look of it, he might even succeed.

Internet piracy

Don't smoke, don't drink, don't have sex, don't do drugs, don't go on marches, don't pick your nose, don't stay up late, don't do this, don't do that, but above all, don't digitally download. Internet piracy may not be at the head of every parent's "don't do that" list, but the music industry wants to put it right up there surrounded by flashing amber lights.

The big music companies are fighting a losing battle against internet piracy and desperate straits call for desperate measures. Even so, for the music business of all businesses, the very voice of youth and lifestyle change, to be citing parental guidance as a possible solution to its problems really does take the biscuit.

I've got a great deal of sympathy for the plight the music majors. Piracy is theft, and however easy the new technologies have made it to acquire "free" music and film, it's still stealing. "Free" is not an option for any business in the long run, as the carnage among the dot.coms amply demonstrated. Indeed, there would be no business at all if there were not a reasonable expectation of a profit eventually being made.

I was never the less struck by comments made this week by Nobuyuk Idei, chairman of Sony, during the World Economic Forum annual meeting in Davos, Switzerland. In one of the starkest warnings yet about the future of the music industry, he said: "If we don't find a way of making the internet pay for us, the music industry will be dead within 10 years." In itself, the prediction is nonsense. Few forecasts can be made with certainty, but one of them is that so long as humans continue to thrive, there will always be music. Mr Idei confuses the future of the music industry, which is surely guaranteed, with the future of the music majors, which most certainly is not.

What is happening to the music majors is the same as what happens to all industrial oligopolies in the end; they are being disintermediated by new forms of distribution. It is not so much theft which is the problem as the failure of the old to embrace the new. When 50 million potential customers start actively to steal from your industry, it is powerfully indicative that there is something seriously wrong. In no particular order, what's wrong with the music majors is the following.

They charge too much, they pay themselves too much, they pay their artists too much and they cling, luddite like, to a monopolistic distribution format, the CD, which is already way past its sell by date. What's more, they no longer produce anything very much that the customer really wants to buy. It's hard to recall the last great burst of creativity among the music majors it seems so long ago, unless you count rap. Personally I don't, but even those who do are increasingly unprepared to pay for it, and who can blame them?

To be fair on Mr Idei and other industry leaders, everyone is beginning reluctantly to move in the right direction. The big five are as aware as anyone that they have to adapt to survive, but somehow they still don't quite get it. The internet strategy of all the music majors can roughly be summarised as an attempt to make it hard to copy and easy to pay.

The approach is essentially defensive whereas what they really need to do is turn their businesses upside down, invent new compensation models, and learn to mix free and commercial music, in the same way as the computer software industry already does for software products. Piracy used to account for some 70 per cent of software sales. Today it is less than 30 per cent.

AOL Time Warner is said to be considering the sale of Time Warner Music as part of restructuring proposals to reduce debt. A natural buyer would be EMI. Alain Levy, EMI's head of recorded music, is hot to trot, but to persuade the City to back him, he needs first to demonstrate some radical thinking on the problem of internet piracy. The music industry isn't going to die, but it is in the grips of profound change, and for those who can find solutions, the rewards will be high.

jeremy.warner@independent.co.uk