When Billboard arrived at EMI's famed Capitol Tower in Hollywood to interview new recorded music CEO Elio Leoni-Sceti, we got a surprise: joining Leoni-Sceti were president of A&R for North America, the United Kingdom and Ireland Nick Gatfield and EMI's worldwide president of digital Douglas Merrill. As the three lounged on couches in Leoni-Sceti's U.S. office, they spoke with candor about the changes taking place at EMI.

And why not? For the first time in years, EMI appears to have some meaningfully good news to celebrate. During the six months ending Sept. 30, EMI Music posted earnings before interest, taxes, depreciation and amortization of £59 million ($88 million), swinging from a loss of £14 million ($21 million) during the same period last year, helped by stringent cost management and a 37% rise in digital revenue to £102 million ($152 million).

On Nov. 7, Leoni-Sceti announced the company would be reorganized into three new business units: catalog; music services, which will focus on sales, licensing and brand partnerships; and new music. This last unit includes Gatfield and Merrill, but its president will be Leoni-Sceti himself.

This last bit of news raised eyebrows, considering that the veteran marketing and branding executive had no prior music experience when he assumed the helm of EMI in September. Leoni-Sceti says the move is aimed at highlighting the importance of new music to the label, but adds he'll leave artist signings to other executives.

"I will definitely not be out in the clubs until four in the morning," he quips.


What's driving all the changes at EMI?

Elio Leoni-Sceti: I think that EMI is leading the industry in a significant rethinking about the way we're adding value to music.

And a couple of elements in there probably are important pillars. The first is that there is a completely new and very important role that the company has in a market that is changing because of the depth of the individual relationships that we have with the music fan, who is our consumer. We are in every country of the world. We are communicating with hundreds of millions of people and each of these relationships is actually very deep.

So it's a very complex matrix in which you go very wide, very fast and very deep in each of the individual bits. It's a much more complex relationship to manage than the relatively simple one, that 20 or 30 years ago was about getting a consumer in front of a physical shelf, the product was there, we made the music, we put a disc on the shelf, the consumer went to the shelf. The relationship was very linear, it was very simple.

But when there are questions in the market -- "Is the role of the music label company still there?" -- my answer is, "Undeniably, much more today than before," because the relationship between the artist and the fans is much more complex today than it used to be. So our role is indeed to manage that relationship. We have the scale, the competencies, the global reach in order to do that. So that's probably one important message that I think is helpful to contextualize what we are here to do.

How we're reinventing or changing the paradigm is by looking at where this value-added can be created. And the value-added can be created by a substantially stepping-up of the knowledge that we would bring in between the artist and their fans, so that we can help the artist to know much more about their fans globally -- not just where they are, not just what they buy, but what else should they buy, what else could they buy, what other music do they look for?

That knowledge that we have, because we have a wider picture of what Tristan in France is doing, will help us to tell our bands that he acts this way, but he could also do these other things, because we observe him doing these other things different. So that value we bring is significant.

Vice versa, we can bring to Tristan knowledge about the band that he knows today. That exchange and depth of knowledge is a whole new level, if you want, of value creation that we can bring. We want to be the number one consumer-led global music company. And we believe that this is a very fundamental new way of looking at how we can create this value, because that knowledge is part of our core competencies and is now peripheral to what we do. But it's going to be very central to what we're doing.

There are a couple of other things that I'd just like to point out. One is how this is a company that has been about music, is about music, will be about music. But we want to ensure that the music we have will be empowered by a much more supportive, competent, organized and wider-reach machine that will help this music to reach more fans in a more efficient way and effective way for everybody. The role of music has not changed. It's absolutely essential to what we do. We just want to make sure that we empower it in a new way. That's one thing.

The other one is in the areas of innovation. This industry has always relied on somebody else to innovate in the way that this content is delivered to music fans. Somebody has to invent the iPod, somebody has to invent the music experience and the various incarnations of this music experience. So we have been great at providing the content but somebody else had to take this content and deliver it in your way. We want to regain ownership of the innovation that goes with our product delivery.

Nick Gatfield: This is not about dictating a creative path. It's about giving artists the information to make informed decisions about the music they've made to improve their touring business, to develop their merchandise business. If you have that level of understanding, it's a huge incremental value.

Give me a scenario in which an artist you're working with benefits from that approach.

Douglas Merrill: We have a Capitol Nashville artist who is currently doing great, but we looked across at their sales data and what we found was that there is a hot spot for this band in Chicago. Country acts don't usually travel to Chicago. So what we've been doing is working with that band's management to figure out what those fans are doing. So we can say, 'oh, this fan likes you and is spending X on you and spending Y on that band over there,' so we can use that to help our Cap Nash bands focus on merch points, going on tour, etc. We took that consumer insight and turned it into action.

Gatfield: It's how much you're able to drill down, extract that information and then use it in a much more focused way.

When Guy Hands first came in, there was a lot of concern in the artist and management communities, that if you wanted to be an artist for EMI, you were going to have to work hard. It alienated a few people and left you with a perception problem. Have you had talks with artist managers like Tim Clark or Jazz Summers?

Gatfield: Only daily.

Are those relationships improving? Are their concerns being addressed?

Gatfield: The relationships weren't bad in the first place.

Leoni-Sceti: The media has put a disproportionate amount of light into artists leaving the company. We had the Rolling Stones. We had Radiohead. How many other companies in this industry have two artists that at a point in time decided to leave? I can count pretty much at least the other three majors. So it's the disproportionate attention that I think it's probably worth putting in context. That's one thing. The other one is, we're not cash-constrained in signing artists, we are value-restrained in signing artists. We want to sign the artists that we can build.

There's been a lot of speculation about EMI Group and plans to sell off various assets. We've heard talk about parts of the recorded music business being on the block, such as classical and Christian. Are there discussions going on about these right now?

Leoni-Sceti: Rather than answering that specific question, let me step back. We have an investor that is fully committed to grow this business and to achieve the vision that we have set for ourselves. That is Terra Firma and Guy Hands. They have stated on more than one occasion how determined and committed they are to our growth and to turn around this business and put us on the right track. We see continuous commitment from the investors and we see a strong and long relationship with the bank behind the investors.

Billboard did some number crunching and talked to a few financial experts and the consensus seemed to be that EMI Group may face challenges in satisfying its financial covenant with Citigroup.

Leoni-Sceti: You will not hear me saying this is 100%, I think it would be silly for any company. But I'm telling you I'm very comfortable with meeting the covenant.

You feel it's all realistic -- your goals are all realistic?

Leoni-Sceti: I think more than realistic. I'm very comfortable.

Your first-half numbers are showing some growth, yes?

Leoni-Sceti: They show growth in total sales. They show significant turnaround growth in profit. We've actually strengthened our financial situation, I would say in a pretty visible way through three things, really. One is a higher quality of our roster and releases. By higher quality I mean we have reshaped the roster to be more solid.

We have reduced our costs, both cost of overhead, as well as cost of processes, if you want, manufacturing and supply. We've been very, very careful not reduce the cost that was associated with successful music. So we've not cut in successful music at all. We have reshaped the roster, which is a different message.

So your A&R budget has remained constant?

Leoni-Sceti: On the artists that we are acting with, yes.

Gatfield: This is something EMI never practiced in the past -- looking where the market appetite happened to be and trying to build a roster which is actually going to suit the market demographic of where the appetite was. We were tripping over a ton of alternative rock acts which frankly time had passed by. It just didn't make any sense.

We were light in pop music, we were light in music which we believe had an opportunity to be global. I'm talking about North America primarily and not so much the rest of the world.

Leoni-Sceti: And the other important part in the exercise of cost reduction is the elimination of a big chunk of the returns. And there is a reduction in returns in the last six months versus the same six months of the previous year. There is a reduction of 37% equaling £50 million ($74 million).

Is that primarily just better management of what you're shipping and who you're shipping it to?

Leoni-Sceti: The short answer is, yes. We have looked at our assortment of titles and we've eliminated the ones that were just cluttering the shelves and taking space away from the ones that actually should have been there. It's better management of the assortment as well, just a more realistic view of market demand, of consumer demand.

What are the metrics you're looking at? You're talking about artists sort of being given global priority status, artists marketed on a global basis. How are those decisions made about who's a priority? Is it a simple sort of who's seeing traction and building on that success?

Leoni-Sceti: Well, the traction is already after the fact, so I think the before and after is the potential and the traction. The potential is what we will learn through a number of things that Douglas and Nick have referred to about better understanding the market opportunity. The traction is after you actually are there and then you see how it [performs] and be responsive to it and be ready to go global in a short amount of time and with big means. I mean, look at Katy Perry. In like three weeks, she was all over the place, at number one, big success and so on and so forth.

Merrill: I think it's a pretty important strategic advantage that we have that we are organized as a global entity, not as a conglomeration of local entities. So we inherently have the ability to flow content, both massive breakout content -- Katy Perry, etc. -- but also other content that maybe doesn't breakout as much, but yields really interesting sales.

We've got a Colombian artist that's selling very well in Alaska. It's true. It's weird, but that's great. And because of the structure of our company and because of the way Nick leads A&R and the way that our financial books are structured, that's very easy for us to do. Which I think is a big competitive advantage for us.

Gatfield: I think the flow of communication in this company, because of the structure, is so vastly superior to what it used to be. I mean certainly between the UK and North America, there was absolutely no communication, or minimal communication between those two territories, which was crazy. That was common knowledge in the business, the two primary repertoire territories actually didn't communicate, which is quite extraordinary and cost this company deals, significant deals. [Now] there is a flow of information through this company which I think is better than any company I've previously experienced.

One small point which is a very A&R centric point, I think a lot of the reporting about EMI, possibly with the exception of Billboard, has been more focused on meaningless headlines as opposed to what really is happening in this company in a positive sense. EMI -- I'm talking about North America now primarily -- delivered Coldplay flawlessly, with a number one single. Flipped the number one single with a Katy Perry record. In fact, I'll tell you the last time that happened here was 1967.

What happened in 1967?

Gatfield: The last time that Capitol had back-to-back number one singles. So Coldplay flipping into Katy Perry, breaking Saving Abel, which will be gold by the end of the year, breaking Darius Rucker -- who knew that Darius Rucker could have a completely renewed career in the country music world?

I'd be lying if I said I always suspected it.

Gatfield: I'd have to say as an A&R, I knew he had it in him.

Well, that's why you're in your job and I'm in mine.

Gatfield: I think if we look at it, the repertoire that we're working at the moment, the actual success rate we're having with it is actually phenomenal and the focus is actually phenomenal. Yes, we need to increase our repertoire flow. The great thing is the capacity we have in this organization and I think the great repertoire is amazing.

Douglas, what sort of experiences did you have at Google or perhaps prior to Google that you're really applying now at EMI?

Merrill: One of the things that I've been good at for a long time is identifying and hiring great talent and getting out of their way. So if you look around here at the people who are really doing the digital work, you get true luminaries like [EMI Music SVP, digital strategy] Cory Ondrejka, the founder of Second Life. Cory built a company getting people to pay for fake real estate. I mean, that's remarkable. And they paid real money for it. It's insane.

I joined Google when we were a couple of hundred people, took us public, oversaw expansion from two countries to 49 countries, ran the billing system. I'm pretty good at finding ways to make systems support business. So I trail around behind Nick, and Nick finds artists -- Nick figured out what to do, like where are we going to go, and I try to feed him data. And I've done that my whole career.

Who are your key data providers? Do you use a combination of third party and proprietary?

Merrill: Yes. Our goal is to say that each individual data feed, if you will, may be interesting, may not be interesting, but all the magic is in how you correlate and cross-relate those data feeds. So, it's questions like what is cannibalization for physical versus digital? We all assert we know the answer and actually it turned out that maybe we don't know the answer.

What do you mean by that?

Merrill: It's often the case that things that are commonly assumed to be true aren't necessarily true when you apply the data to it. And I can give you 20 Google examples as well as hundreds of other examples from my lifetime.

Let me ask you one question that might tie into that. EMI was the first major record label to sell digital rights management-free music on iTunes. How has that worked out?

Merrill: It's been great. DRM certainly doesn't provide value to the fan.

Does it provide value to the label?

Merrill: I'm the wrong one to ask, because I'm on record thinking it doesn't. But smart people disagree with me and when smart people disagree, there's probably a more complicated story.

When you put DRM-free music on iTunes, did you see an increase in piracy?

Merrill: The pirates are doing a busy business regardless. The best way to get a pirated copy probably isn't to buy it from iTunes and then push it.

We didn't see the needle move at all on [piracy]. But what we did see is consumers loved the product. It was good for consumers, it's good for artists. It gets people engaged with the art in a whole new way by getting rid of artificial rules-like we don't trust you, so I'm not going to give you this content. It just sort of set the wrong tone with our customers.

What's on the horizon in terms of your overall digital strategy?

Merrill: What you'll see is less of a focus on sales of individual tracks or the conceptual equivalent of little round shiny disks and more about helping artists learn things about their fan group that they can't directly see. Obviously, Iron Maiden knows who comes to their gigs, they know how much they buy, etc. But we see those same fans in other contexts. So the value of a label going forward is to be the platform to connect artists and fans and teach each more about the other.

What new artists are you particularly excited about right now?

Gatfield: A new signing today, a girl called Priscilla Renea, we're very excited about. A few artists coming out of Cap Nashville, obviously Lady Antebellum, who's been around for a while but is starting to grow. We've just concluded a deal with Willie Nelson. Those are sort of the headline ones. Red Jumpsuit Apparatus' second album is coming, which we're excited about. We're working on a new Massive Attack album, a new Joss Stone record.

Merrill: We have Depeche Mode, we have the Beastie Boys. There's actually a pretty good release schedule going forward.

There's a Beastie Boys album coming this coming year?

Merrill: This coming year, yes.

How confident are you that you're going to deliver superstars from America, which EMI has struggled with?

Gatfield: I'm very confident. I'm confident that I think we have the right people in place who can identify them at an early stage.

Who are those people?

Gatfield: Rob Stevenson, who we recently hired, who I think is an exceptional A&R talent. Steven Melrose, who's based as Capitol's VP of A&R here. Interesting enough, both of those guys came from not a pure A&R background. Steven Melrose came out from the artist management world. Rob obviously had a lot of success as an A&R guy, but also he actually had an advertising background.

Who are the American bands to watch?

Gatfield: Hockey, which actually was a co-sign between the U.K. and North America. The Postelles, a new New York-based band we're very excited about. Adalita's Way-the initial market they made inroads in was very similar to Saving Abel. Trevor Andrew or Trouble Andrew, as he's actually known. This guy is a world-class snowboarder, sponsored by Burton, a snowboard manufacturer. They're deeply involved in the marketing of him with us as a recording artist. He's already had a degree of success on the snowboard circuit as a performing artist.

And these days, that's what you're looking for too, a new artist that has some sort of a base to build from.

Gatfield: Correct, absolutely right.

If everything works as well as you could hope it to, how big is your business? Because you still have all these huge challenges in terms of monetizing music. You could know every bit of data there is to know about the music fan anywhere and at the end of the day, as all of you noted, piracy is just this enormous problem. Does the music business remain a viable business for making a lot of money?

Leoni-Sceti: Is your question about EMI or about the industry?

It's kind of about the industry at large, because that's something that holds true for everyone.

Leoni-Sceti: The answer for EMI is absolutely, yes. And the answer for the industry is equally absolutely, yes. And I would say that between the two, the opportunities for EMI are bigger than the opportunities for the industry itself, because you're coming from a lower position.

I started with this, let me end up with this. I think that the complexity of the relationship with the music fan, which is the consumer today, is exponentially higher than the way that it's ever been.

But part of the reason it's so much higher is because there's no more need for a middle man, so there's this great close relationship between artists and fans that emerges sometimes.

Leoni-Sceti: Impossible. Absolutely impossible. I think that "middleman" is a bad description of what our company and our industry should be. If you're a middleman and you're just shuffling the paper from one side to the other one, there's no role whatsoever to being there.

If you are actually adding knowledge and enabling that relationship to occur, fans and artists need the industry more than any other time before. Because the complexity of that relationship requires organizational, structure and global reach, requires capabilities and investment into that knowledge and understanding for the depth of the relationship that I described before and requires a mission that somebody needs to have that is single-mindedly the mission to create the knowledge and the value.

Neither consumers nor artists have that as their mission. The artist's mission is to create great music. The consumer's mission is to find great music. Neither of the two have their mission to actually create the knowledge in the middle that will enable for that relationship to be strengthened. And that's why I think that this is actually a significant growth business to be in for the next number of years.

Merrill: A few years ago, we had a small company that talked about how it was going to help people find information on the Web. Some of us were in a meeting in which someone said, "Well, clearly this is not a market, right? Because why does anyone need you? They can simply go to the Web site directly."

That company obviously was Google and it turns out we were right. And I don't mean to put words in these guys' mouths, but we're making the same bet today. There's more and more great art being produced. It's still hard for fans to find great art. Artists need to understand more about the world they live in. We're going to be a platform to connect that and we're going to create incredible value. Obviously the three of us wouldn't be here if we didn't believe in EMI's capabilities and the industry's capabilities.

Gatfield: I'm an optimist about the business. It's not a cliché, it just happens to be true. The appetite for music is probably as great, if not greater, than it's ever been. And so, I think taking what these guys have just said, the ability to be able to drill down to really understand where that appetite is and then be able to monetize that point of contact -- I think that adds enormous value.

And I think the great thing where we sit at the moment is by absolute necessity that this company's been completely refocused in those kind of terms. It's quite interesting for a guy who's been in the business for 20-plus years, actually coming from a completely different way of thinking. The art component doesn't change. I actually think this is better for artists, because I think if we have the ability to take a brand new act doing something which may be operating in a niche and we know where that niche is and we can market to it very effectively and profitably, that's a good business to be in. We're actually not in that business and in fact, none of the majors are in that business right now. The majors in the business, you've got to hit it out the park or fail. And that's just not sustaining.

Questions? Comments? Let us know: @billboardbiz

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