How Music Companies Lose Billions. . .

How Not to Run a Big Music Company: A Tutorial Brought to You by a Big Music Company [MediaMemo]

via All Things Digital by Peter Kafka on 10/27/08

Even people who don't know anything about the music business know what's wrong with music business: No one wants to buy music anymore.

Right?

Well, sort of.

While people are buying a lot less music than they used to, they're still spending a couple billion dollars a year on iTunes from Apple (AAPL) and the like, and many billions more on actual, hold-in-your-hand compact discs.

So in theory, at least, a well-run company should be able to do something with a market that big.

That company, at least for the last several years, has not been EMI Music Group. That's not just in MediaMemo's judgment, by the way. That's the judgment of EMI Music's owners: The United Kingdom's Terra Firma private equity group, which bought the company for some $5 billion in the summer of 2007.

Terra Firma's assessment of the company, delivered via a 101-page annual report, makes for amazing reading. We've embedded it below (you'll need to click on "Full Screen" to make it legible).

But in case you're time-pressed here's the executive summary:

• EMI has a relatively valuable publishing company, which administers the copyrights to the underlying compositions to songs. That unit makes money.
• EMI also owns a valuable catalog of song recordings. That unit could make money, but it's all being eaten up by the group that burns money by signing and recording artists who make new recordings that no one wants to buy.
• Terra Firma knew EMI was badly run when it bought it, but it didn't really know how badly run it was until it owned it. It figured, for instance, that there was a lot of waste at the company. But it had no idea the U.K. division was spending $1.1 million a year on a London taxi service. And it had literally no idea how much money some of EMI's executives were making, because EMI wouldn't disclose that during due diligence.

This last part is crucial for EMI's future because the people who funded the deal last year–Terra Firma's investors, as well as Citigroup (C), which provided the debt financing–need to be convinced that the people who didn't understand what they'd bought last year are the people who should be trusted to turn it around.

But that's a question for later. For now, if you want to see how a music company managed to lose $1.17 billion in 12 months, this is the document for you:

EMI report - Get more Business Documents

[Image Credit: Lorelei]