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Q&A: EMI's Digital-Music Maven

As senior vice-president in charge of new media at Big Five record label EMI Group (EMIPY), Jay Samit thinks, sleeps, and breathes digital music. He has overseen dozens of deals with digital-music startups and is a key planner of EMI's digital strategy. On June 14, Samit spoke with BusinessWeek Online Technology Editor Alex Salkever on the future of music and technology. Following are edited excerpts from their conversation:

Q: A lot has happened in the last six months in online and digital music. Taking the long view, where do you see the industry going?

A: I think a number of things are important to look at here. A few years back, analysts were saying that people would never download music. Rampant piracy -- a billion songs a month are being downloaded by consumers -- blew away that myth. When you look at the proliferation of CD burners, consumers have the technical expertise and the desire to receive content in a new way. Whereas for our first 100 years as a company we sold a round thing with music on it, the next 100 years will offer a wide range of choices.

The real excitement here isn't so much the business model. What's more interesting is the way you can marry digital delivery to new consumer-electronic devices and experiences. So wireless is very exciting, set-top boxes to broadband cable are very exciting. And obviously, the PC desktop, from a North American perspective, is huge.

There are tremendous numbers of new ways to reach consumers, and we've partnered with dozens of different entrepreneurial organizations to try to explore these new ways. The hitch is, none of us knows exactly what the value proposition is that consumers are thirsting for. And so it's going to be a lot of trial and error, and some businesses and models will make it, and some won't.

Q: Where do you see music retailers and e-tailers fitting into the equation down the road?

A: They will have a huge role. At EMI, our goal was always to go to the aggregators, those that have already figured out how to build a relationship with consumers. But in this New Economy, the retailers and the e-tailers also have to rise to the occasion, in that they need to use this technology to differentiate themselves.

So there are many ways they can do it. Subscriptions could be the ultimate continuity program. Buy x amount of product this month at Best Buy, and you get your month's download-subscription service for free. There are many ways to drive people from online into the store and vice-versa. There's also just-in-time manufacturing of retail recordings. You put a broadband connection into the store and make the CD there. We've done this on several continents at this point. It means the smallest mom-and-pop shop can have the same inventory as an Amazon.

One of five consumers who walk into a record store do not buy the CD that they went in to buy. Imagine if we can suddenly capture those sales -- and grow the market by 20%.

The bigger issue, both for our artists and ourselves, is that more intelligent, one-to-one marketing will allow us to make more albums profitable. Today, less than 5% of all the albums are profitable. If we could change that to 15%, which seems very reasonable, you're talking about the same number of sales, but triple the EBITDA [earnings before interest, taxes, depreciation, and amortization]. If you're also talking about having subscriptions and taking more music consumers and turning them into customers, then the upside is huge.

In 2000, Sound Scan logged 288,000 different CDs sold in the U.S. That's different [titles]. Eight-five percent sold less than a thousand copies. Now, is that saying that 85% of the music only appealed to a teeny, teeny fraction of people? No. [Right now,] the cost of finding out who likes something is too high. Under the current system, you have to market to everybody, and that's why most people are focusing on the top of the charts at retail. And a lot of artists don't make it there.

Now, imagine that a person downloads or makes a choice through an interactive radio or a subscription for music in the Arabic repertoire. They're in Cleveland, Ohio. I suddenly know an awful lot about them. Wouldn't they like to hear other releases from that artist or that genre?

We did a program that proved this last year with Pizza Hut. If you ordered a certain pizza to your home, you got a code, you went online, and you could pick six tracks and get a free CD. So we know each person's physical and e-mail address and what their tastes are. We were able to, with their permission, go back and suggest other artists and other releases. And this has been very, very successful.

Everybody loves to hear new music. So when we can introduce people to new artists, new music videos, and stuff that they have shown a predisposition for -- people love that. They don't consider that intrusive marketing. It's like a smart friend, who you hang with and who knows your taste, shows you a new album or new artist. That's where we get our picks. Now this can be done with a little bit more technology.

Most human beings are not CD buyers. Yet virtually all human beings are music consumers. You hear music on the radio, you hear it in the restaurant, you hear it when you're shopping. What if we can now turn more of those people on to being consumers, not just of CDs, but in buying other types of goods and services?

Q: Most people are not CD buyers, but they're music consumers, you say. Wouldn't that lead to the conclusion that we're going to get rid of the CD entirely?

A: That's the 1948 conversation that TV will be the death of movie theaters. And then cable will be the death of broadcast. And home video will be death of cable, and pay-per-view will be the death of video-cassettes. In fact, pay-per-view and home video took a $400 million movie industry and turned it into a $20 billion-plus multifaceted business.

Q: I was really surprised by the deal EMI signed with CD-burning software maker Roxio -- a company that inadvertently powers so much piracy.

A: Consumers have spoken loudly that they know how to use that technology and would like to use that technology. But there are many value propositions that we can offer with CD burning.

Imagine that you go into a retailer and buy a new single, you take it home, you put it in your computer, which has Roxio software, and it allows you to listen to the entire album, even though you just bought the single. If you then decide to buy it, you can unlock that content and burn your own copy. You don't need the high-speed connection, because the data is already encrypted on the disk. It's not just a piracy tool.

Most people are using CD burners, I believe, for legitimate purposes. They are not mass-producing music copies and selling them. The main goal of adding DRM [digital rights management - ways to prevent piracy and rampant copying] and working with Roxio is to stop the pirate and the cottage-pirate industries, where one kid on a campus buys an album and sells [copies] to all his friends.

Q: What do you see as the biggest barriers right now to this all coming together?

A: One of the big challenges is that the Internet is borderless. The laws on how we license music are all tethered to geographical boundaries. Many artists are not signed globally to the same company. The Backstreet Boys are handled by different companies in different countries all over the world. So you suddenly do something on the Internet, which has no borders, and it's more complicated.

Because it's so early and the technology is moving so quickly, the concept of consistent standards or formats is elusive. MP3, which seems popular, is such an old compression standard. Today, there are many, many ways to have a smaller file that sounds infinitely better. For computer-electronics manufacturers, coming up with a standard takes time.

Q: What is the universe going to look like for the artists?

A: I think this has already proven to be great for the artists. We have 1,600 artists globally. Many of them have day jobs. Now, those artists can reach fans all over the place, and [we] have a way to stock [their] music, whereas in the past they never got the shelf space. That could mean big sales and new markets for them.

I'll give you an example. The expats of India have a GDP that exceeds the nation of India. Yet, for all those people that were born in India, that love the culture and the music -- name a shop in your town where they can buy the latest CD releases from the subcontinent. Now, no matter where you live, you can get content that you love. And that, to the artist, means incremental income.

In the same way, now the artists and the labels have the ability to help more things to take off. Just look at [the British band] Radiohead. They had two albums this year. Unusual for a band to do that. Neither have what you would call commercial, top-of the-pops singles on radio. Neither of the albums had music videos made. And neither had extensive touring. Yet the first one opened at No. 1 on the charts, and this week, their second album of the year opened at No. 2.

Why was that? Tremendously loyal fans that you're able to reach through the Internet and who are able to reach each other. That's huge. And guess what? That costs less.

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