An industry poleaxed by power of the Net

More job cuts are looming at EMI Group, the music business that is home to the likes of Norah Jones, Robbie Williams and Coldplay.

More job cuts are looming at EMI Group, the music business that is home to the likes of Norah Jones, Robbie Williams and Coldplay.

As part of an ongoing cost cutting exercise at the company, EMI's management is understood to be eyeing a further round of job cuts, which could be announced at the group's annual results expected on 24 May.

Further reductions in staffing levels would simply be the latest in a round of redundancies that has swept the music majors, as the global record industry restructures itself to meet the challenges of online distribution, increased piracy, and a more demanding and discerning customer base.

A spokeswoman for EMI said yesterday: "I think [restructuring] is ongoing. If there is anything major to say it would have to be said market-wide. Everything that can be said, has been said."

The International Federation of the Phonographic Industry announced plans yesterday to follow the American example and prosecute individuals in Europe and Canada involved in the illegal downloading of digital music files over the internet.

But analysts believe piracy, while a problem, is not the real threat to the way the big music companies do business. That threat comes from within; from the way the companies are organised and the business models they adopt.

This is why thousands of workers across EMI and the other major players in the music industry are, at present, probably worrying more about how long their jobs might last than about trade bodies prosecuting a few hundred people in Germany and Denmark.

EMI has culled 1,900 people from its workforce during the past two years in a bid to save £100m and has now got its headcount down to just over 9,000. But there are more to come. Warner Music is axing 1,000 workers as part of a restructuring programme, following its $2.6bn (£1.4bn) acquisition by Edgar Bronfman and a private equity consortium earlier this month. Universal Music, the world's biggest music company, has said it intends to slash its headcount by 1,350 employees, bringing its staff numbers down to 10,800 worldwide and saving the corporation about $200m.

With plans announced for a merger between Sony Music and Bertelsmann Music Group - again part of the industry-wide restructuring process - there are bound to be more job losses in the industry.

All this activity is aimed at slashing costs but even this is only picking at the problem, experts said. Legitimate online distribution does offer an opportunity for the music labels but, before they can really get to grips with exploiting online sales, they need to sort out bloated management structures and learn how to compete more effectively.

Ominously for EMI, this sort of long-term, fundamental shift may be hard to achieve as a public company under pressure to deliver short-term results for shareholders.

Certainly, the global music industry has been under tremendous pressure to restructure to try to stop the decline in music sales revealed in the adjoining graphics. The UK industry has displayed a similar trend to global sales in recent years, reflecting, in part, the problem of piracy.But, Sarah Simon, the media analyst at Morgan Stanley, said: "We calculate that nearly half the decline in the global music market is related to problems other than downloading and physical piracy.

"While physical and online piracy clearly account for a large percentage of the decline in world music sales, we also see a fundamental decline with consumers less prepared to spend money on music."

Morgan Stanley believed that, while legitimate online sales are useful, they are not the panacea to the industry's problems. Ms Simon said: "The online model may create a mirage. If all of the online unit sales are incremental to the offline volume, then an enhanced distribution strategy holds promise. However, lower prices for online music may cannibalise offline sales."

The most successful online service has been Apple Computers' iTunes, which downloads music tracks onto its iPod personal music player. A week after its launch in May, one million songs had been purchased.

That number has now soared past 30 million. These are legitimate sales, with revenues flowing to the music companies. Morgan Stanley estimated that these are worth about $28m, which is useful but, in relation to the total of the big five music companies' revenues, it is tiny. And even though iTunes is spreading fast, the industry believes that later adopters of the platform will download less tracks than early adopters.

There is a further problem with online sales such as iTunes. Ms Simon said: "Greater flexibility of online may cause consumers to move away from buying albums and towards purchasing individual tracks. In our view, the industry is not structured to deal with such a shift."

But what about other problems facing the music industry apart from grappling with a world keen to consume music over the internet, be it legally or otherwise?

Nick Bertolotti, the media analyst at CSFB, said: "You are seeing a concerted effort to cut costs across the industry."

But will that be enough? One criticism that has been levelled at the music majors has been their short-term approach to talent, a way of making music, and money, typified by manufactured bands such as the Spice Girls in the late 1990s.

EMI, the music company responsible for "girl power", has now adopted what it promises will be a longer term approach to its talent, creating artists with a longer shelf life. Examples of these acts include Norah Jones, whose debut album, Come Away With Me, has sold more than 12 million copies. Another newer talent is Joss Stone, the teenage English soul singer that EMI has high hopes for, while it believes bands like Coldplay and Air will be selling albums well into the future.

Shunning the short-term chart toppers should mean music companies not only generating decent sales from new albums issued by artists with genuine, long-term fans, but will create a future revenue stream from albums which can occupy a valuable position in a company's back catalogue.

Certainly, EMI has led the way with this sort of change announced by Alain Levy, the head of its recorded music division, in March 2000. That said, smaller players, such as Sanctuary Group, claim to have been doing this for years.

Andy Taylor, the chief executive of Sanctuary, issued a trading statement yesterday, saying the business was in line with expectations and that his business model of signing acts slightly long in the tooth, such Kiss, Lynyrd Skynrd and Alison Moyet continued to pay dividends.

Sanctuary adopts the view that record companies should also try to take a share of touring and merchandising sales to make their revenue streams more diversified and less risky. They also include the management of talent in their business.

EMI seems to be trying to take at least some of this on board. When it re-signed Robbie Williams, it was as partners in a joint venture company where they would share revenues from various sources, not simply the star's recordings.

But things have to change further, according to Ms Simon at Morgan Stanley. Overheads remain too high with too many executives slowing the pace of change. The implication is clear. The music majors need to slim down a lot further before their businesses recover.

She said: "EMI may be viewed as the exception to the rule, but the fixed cost savings are now largely behind it. The pressure on all companies now is to make more radical changes. Thus far, the surface has only been scratched."