Inside A Makeover; One Company's Story Illustrates How Music-Industry Giants Are Retooling in an Attempt to Survive the Digital Future

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Byline: Karen Lowry Miller

The battle for digital control is still raging in the movie business, but it's virtually over in music. The giants are winning. Court rulings have forced free music upstarts like Grokster and Napster out of business, and earlier this month required Kazaa, the producer of file-sharing technology, to introduce filters to prevent piracy. The idea that free music would gut the big record companies seems a distant memory, even though it was still the conventional wisdom just a year ago. "We're finally seeing a raft of new initiatives from really big players," says Eric Nicoli, chairman of one of the big four music companies, the EMI Group. "This stuff is happening all day, every day now."

Just consider the last month: Apple and Motorola unveiled a phone that can play music from iTunes, and announced partnerships with big U.S. and British phone companies to develop the mobile music market. In London, two giant retailers, HMV and Virgin, announced digital music ventures, a sign that the online sector is reaching mass-market size. The big labels have arrested a four-year, 25 percent plunge in sales and can now concentrate on exploring new business models to navigate the digital landscape. Nicoli has the buoyant air of a man who has just survived a close scrape with death. In a recent series of interviews, he and other top execs at EMI offered a detailed glimpse at the recent tumult, and where EMI--and their industry--is likely to go from here.

The third largest of the major labels after Universal and Sony BMG, EMI offers an unusual window on the music business. By 2001 the company--despite a roster that includes artists like the Rolling Stones--faced the same precipitous revenue declines that roiled the entire industry. But as the only listed record company (Warner Music went public only this year), its books and management were open to investor scrutiny. EMI thus moved earlier than most peers to grapple with the digital threat by, for example, shrinking its labor force and culling its roster of artists.

All of the labels share similar visions of providing music to the consumer wherever, whenever and however he or she wants it. The path to get there, however, remains murky. EMI Music CEO Alain Levy, the industry veteran who built Polygram into a success before selling it to Universal, sees five digital business models emerging so far: downloads to PCs, downloads to mobile, subscriptions, ring tones, tunes (original songs), ringbacks (which the caller hears) and peer-to-peer. He says it is impossible at this point to honestly predict ("unless you are an analyst who gets paid for it") which ones will triumph. He expects a two- to three-year period of turmoil before the winners emerge.

All the labels are experimenting. One of Levy's secret weapons is Ted Cohen, head of digital development and distribution, a gadget freak known for carrying around at least a dozen of the latest devices at all times, often trial models. He lives on the road, attending conferences and trade shows, hugging the back wall to find new ideas in the small booths. Levy, who earned a Wharton M.B.A., will always listen, says Cohen, but he had to change his pitch from "this is really cool" to explaining how the new technology can make money.

One such discovery is WideRay, a Bluetooth technology that can "ping" (message) people as they go past and offer a product. EMI tried it in London, beaming a Coldplay screensaver to passersby. The company is now testing a prototype in the United States that would allow a customer entering a store the option of opening his or her cell phone to "pings" including click-on songs, ring tunes or artist biographies, all catering to the tastes of repeat customers. Cohen is also working with Microsoft on a service for airports that allows passengers to upload five hours of music to rent, with an option to mark certain songs to buy. "Music is all about emotions, impulses and experiences, and you shouldn't have to hold that thought until you get back home," says Cohen. …