Help! They Need Somebody With Garth Brooks and the Spice Girls, music giant EMI seemed to have everything going for it. But a series of management missteps has left it in disarray. CEO Sir Colin Southgate is leaving. And a new CEO, dubbed the "biscuit bungler" by the British tabloids, must sort things out.
(FORTUNE Magazine) – Not quite three years ago, Sir Colin Southgate was the toast of British industry. As chairman of EMI, the $5.4 billion music giant behind the Beatles and the Spice Girls, he'd saved a national institution, transforming the sickly, grab-bag conglomerate that was Thorn EMI into a global music powerhouse. Today his company is in free fall. EMI's stock has dropped from a high of about $13 a share to a recent price of below $8. Little wonder that in a poll of London fund managers, Sir Colin was named Britain's most disappointing CEO, with 40% of the vote. Or that a Financial Times columnist described EMI as "grimly awaiting the executioner's ax."
EMI's fate is still up in the air, but Sir Colin won't have to wait much longer. This month, Eric Nicoli, 48-year-old CEO of United Biscuits, becomes interim chairman, beginning a transition that will end with Southgate's retirement July 31. What's a snack-food guy doing running a music company? You're not the first to wonder.
Nicoli has marketing expertise, but nobody is claiming his experience with Linda McCartney packaged veggie meals will help sell Beastie Boys CDs. In fact, his record running United Biscuits is less than sterling--under his tenure the stock performed dismally. His real qualification is the six years he's put in on EMI's board, a clubby institution that's thoroughly British, clanking with knighthoods, and for the most part clueless about the music business. A burly ex-farm lad of Italian parentage, Nicoli maintains that EMI's twin operations--recorded music and music publishing--are in good hands already. Certainly they're in other hands: "I've been in the record business for over 26 years," says Ken Berry, the longtime Virgin chief who now runs EMI Recorded Music. "To have someone else from the music business as CEO would have been"--long pause--"interesting."
So Berry will continue his turnaround efforts in the record division, which has given EMI miserable results even as the publishing side pumped out profits. Nicoli faces an even bigger issue: Should he try to keep EMI independent, or sell out to Disney or Bertelsmann or Rupert Murdoch's News Corp.? Until that's settled, he'll spend most of his time deflecting takeover rumors. Just last February, London tabloids had Murdoch readying a $6.7 billion bid after a secret rendezvous with EMI representatives aboard a yacht at Cannes, France. EMI promptly denied it.
As the No. 3 player in the $39 billion global music market behind Universal and Sony, EMI should be a prize. Its Virgin label has Janet Jackson and the Rolling Stones; Capitol is synonymous with Garth Brooks and the Beach Boys; Priority boasts some of the hottest rap acts around; EMI Music Publishing is the biggest and best-managed song catalog in the business, aggressively pursuing deals for soundtracks and commercials where many other publishers merely act like collection agencies. Yet revenues have been on the slide for three straight years. Operating profit dropped 9% for fiscal 1998 and, according to estimates from Sanford C. Bernstein, another 22% for fiscal '99, which just ended.
Meanwhile, the company has lurched from crisis to crisis: Southgate's designated heir, Jim Fifield, making his exit after a sudden boardroom putsch; press reports about Ken Berry's wife cavorting with rock stars; the stock showing a pulse mainly when a new takeover rumor surfaces. "It reads like a crappy novel," says one high-level victim. "Intrigue, jealousy--all that stuff."
Unlike most such novels, however, this one contains an object lesson in how not to run a music company or any other enterprise that depends on the creative process. When Southgate took command in 1987, Thorn EMI was a hodgepodge. He focused on shedding extraneous businesses--movie theaters, defense contracting, semiconductors, TV sets, you name it--and building what remained into one of the world's great music companies. By acquiring such hot labels as Virgin and Chrysalis and bringing its antiquated operations up to snuff, EMI for a while seemed headed to the top. But Sir Colin also pressured his executives to maintain double-digit growth, first in good times, then in the face of a rapidly deteriorating market. They responded by pumping out quick-buck anthologies and slashing costs willy-nilly when they could have been building talent for the long haul. Managed for short-term results, EMI has literally consumed itself in pursuit of its numbers.
Southgate, a hearty, white-maned figure who, but for the suit, could be a caricature by Hogarth, seems to be in denial. "We delivered fantastic results on the back of the Spice Girls," he booms. "Maybe people find the fact that we like to earn money offensive; I don't know. I think that's how the Western world kicks over."
Son of a Covent Garden greengrocer, Sir Colin at 60 has transformed himself into a figure of Britain's Establishment, chairman of the Royal Opera House, trustee of the National Gallery, member of the court of the Bank of England. At his home in the Berkshire countryside, there are clarets in the cellar and a Mercedes in the drive. "I'm passionate about this business," he declares. "I love it." So how did he go wrong? "You do know what EMI stands for, don't you?" retorts one embittered refugee. "Every Mistake Imaginable."
Southgate's first mistake was to try to run music as if it were a predictable business. Though CDs may look like widgets, the performers behind them are anything but. Widgets don't expose themselves in a Beverly Hills toilet or tear up a picture of the Pope. From Mozart to Kurt Cobain, music has come from a place that's dark and unpredictable.
Yet the real problem, people in the business will tell you, is the addiction to earnings per share. "It makes you do things you shouldn't do," says one exec who has left EMI. "Coming up with bizarre compilations, shipping records before they're ready... When you start pressuring artists to deliver that way, you're lost." Take the case of the pompadoured white rapper known as Vanilla Ice. EMI's SBK Records got a phenomenal start when his first CD, To the Extreme, went multiplatinum--but his follow-up album, rushed out to ride the hype, fizzled badly.
Soon after he became CEO in 1987, Southgate recruited Jim Fifield, a tough, in-your-face American who'd spent 20 years at General Mills, to run the music business. While Southgate was busy selling off assets, Fifield ran music from New York. That made Southgate, in effect, an absentee CEO. Mistake No. 2. Feeling pressure to get fast results in his new job, Fifield and his lieutenant Charles Koppelman, who ran the North American division, made some poor decisions. Rather than cut back on corporate perks like Concorde flights or suites at the Lanesborough, Koppelman closed the black music department at Capitol to save money, at a time when hip-hop ruled the charts. Then he merged EMI's SBK label with Chrysalis and a third label to save on overhead--never mind that Chrysalis was an alternative rock outfit (Billy Idol, Sinead O'Connor) and SBK a pop factory (Vanilla Ice, Wilson Phillips). But performers and their managers know records are sold by true believers, not by corporate automatons. Oasis, a British rock sensation, fled; Idol and O'Connor fizzled. In two years, annual sales for the combined labels dropped from $240 million to about $100 million. Eventually the entire operation was shuttered. "They thought one plus one plus one would equal more than three," says Daniel Glass, who headed it for a while. "Now, it's zero."
Southgate didn't fuss over the details as long as Fifield delivered. But in the summer of 1996, the U.S. music business was headed off a cliff. Within months, Fifield saw the abyss: inventory coming back at them, growth dropping to a paltry 6%. They'd have to slash costs if they were to have any hope of meeting their targets. The mistakes were piling up.
In May 1997, Southgate brought in Ken Berry, the soft-spoken head of Virgin and EMI International, to run North America as well. His mandate: to start cutting--fast. As tension built between Southgate and Fifield, Southgate announced in Billboard that he expected Berry to succeed him as CEO. But that September, Berry promoted his wife, Nancy, to vice chairman of Virgin without consulting Fifield until shortly before the press release went out. (Berry claims to have cleared it.) Then newspaper stories appeared describing Nancy Berry's rock & roll management style: nights on the town at the Opium Den in L.A. and the Vault in New York, backstage visits with the likes of Mick Jagger and Lenny Kravitz. Of course, male music-business executives would never be subjected to this kind of attention--but Nancy Berry is a woman. "I'll tell you one thing," says Southgate, "if I ever come back in the next life, I don't want to come back as a female in the record industry."
"Nancy Berry is a well-respected, hard-working executive with 20 years experience handling some of the key artists and most important projects for Virgin," declares EMI spokesperson Dawn Bridges. "Going to nightclubs and rock concerts is simply part of her job." Nonetheless, the uproar over her promotion created a crisis at EMI headquarters--was Ken Berry the man for the top job?--just as it was becoming clear that cutbacks in America weren't enough. Asia was collapsing, Europe was weakening, and profits were plummeting--21 million Spice Girls albums notwithstanding. The government chose this moment to name Southgate chairman of the Royal Opera House, which had been consumed for years by bureaucratic infighting, tabloid horror stories, government inquest, and ever-worsening financial crises, leavened by the odd charge of adultery. Sir Colin was expected to clean house. So in January 1998 he told his staff that he'd step down as EMI's CEO but stay on as EMI's chairman, and Fifield, not Berry, would become CEO within weeks. Then came mistake No. 3.
Southgate failed to clearly define his new role as chairman. Whatever Southgate's intentions, Fifield didn't want him meddling in the business. With the board scheduled to bestow its approval in a February 1998 meeting, Fifield complained to an outside director--a risky move, since the board was entirely Southgate's creature. EMI executives were poised to announce Fifield's ascension when the board voted instead to keep both Southgate and Fifield in their current jobs, thus thrusting the company into chaos. Southgate maintains blandly that he had nothing to do with the decision. "If Colin doesn't want to do something," counters a former executive, "the board agrees."
As Fifield negotiated a $25 million severance package, and Berry and others began jockeying for position, Southgate dithered with Seagram CEO Edgar Bronfman, who had his eye on EMI. Here was the final error: fatal indecision. Seagram was the perfect buyer: Its Universal subsidiary owned a music business that was weak where EMI was strong--outside the U.S. Southgate, though, wasn't ready to sell. "He argued that this was not a fire sale," says Sharon Christians, a former EMI spokesperson. "I think he was holding out for what he believed was in the best interests of the company." But Bronfman bought PolyGram instead.
Then, last summer, Bronfman put PolyGram's film division on the block. Sentiment and national pride argued strongly that EMI should buy, but a music company going into the movie business? "It's like saying we have this music business that throws off a lot of cash," quips Gordon Crawford, whose Capital Group holds 12% of the company. "So let's marry it with a steel mill because it consumes a lot of cash, and it'll be a great fit." Nonetheless, EMI was the lead buyer until two days before the Friday deadline, when it suddenly pulled out. On Monday the company issued a profits warning. "Anybody in his right mind," concludes Tom Ross, former music chief at Creative Artists Agency, "would have to be terribly concerned about who's driving the bus."
Now it's up to the new CEO, Nicoli, to come up with a solution to this mess. EMI still has tremendous assets: The success of Priority Records helped lift U.S. market share last year to 12.7%, while music publishing, according to Sanford C. Bernstein estimates, enjoyed 28% margins and provided more than a quarter of the company's operating profit on less than a sixth of its revenues. (EMI does not break out publishing figures.) And though the Spice Girls may not be much longer for the charts, Garth Brooks is still huge, and pop singer Robbie Williams, Britain's top-selling star last year, looks ready to break big in the States.
Yet most observers feel the time for hard work is past. "They're on a life-support machine," says a former EMI executive. "They've got two options: A, turn this thing around with the current players--but that's going to be very, very tough. Or sell it." Adds Crawford: "This company, long term, should be vertically integrated with a global entertainment company."
Is that Eric Nicoli's mission? He's not saying, at least until he's had a chance to negotiate the transition. But even if it is, he has problems. Seagram is out of the picture. Bertelsmann's music division is so strong in Europe that a merger would raise antitrust issues. EMI's cost cutting has gone so deep that any company that's not already big in music--Disney, News Corp.--would be hard put to squeeze out enough savings to make a deal work. And whoever does buy it will get a work force that has spent the past two years embroiled in a corporate soap opera. As one U.S. media executive says, "This place is a real fixer-upper."