Ravaged by dwindling music sales and rampant piracy, major music companies are bulking up expertise in an area of the business they used to ignore: T-shirts, baseball caps and other artist merchandise.
EMI Music said this week it is buying Loudclothing.com, a music merchandise distributor, for an undisclosed sum. The move comes after larger rival Vivendi's Universal Music Group spent the last year expanding its Bravado merchandising unit globally.
Merchandising is a no-brainer because the labels have been supporting it for decades, said Bishop Cheen, an analyst at Wachovia.
Beyond merchandise, music labels have been seeking revenue in sectors like concerts, management and brand licensing rights.
It's called a 360-degree approach. Warner Music Group Chief Executive Edgar Bronfman has complained that labels spend millions of dollars to develop and market artists, but then when the artists become successful, the labels do not share in the ancillary revenue beyond music and publishing.
Warner Music now has half of its active artist roster signed up to 360-degree deals sharing in royalties and licensing rights with acts like Paramore.
Royalties and licensing rights are really the future of today's music company because investors like sustainable, long-term and predictable revenue streams, said Cheen.
It can be profitable too. Wachovia points out that 8 percent of Warner Music's recorded music revenue came from licensing last quarter but it accounted for an impressive 43 percent of earnings before interest, taxes, depreciation and amortization (EBITDA).
I think these 360 deals are a necessity, said Terry Dry, a former label executive who now runs Fanscape, a social media agency that works with music and film companies.
Music sales are down 8.5 percent in 2008, the seventh year of decline since peaking in 2001, so labels will try all options. Nearly a billion digital music files a year are shared for free on illegal file sharing sites.
It's about protecting the investment they've made in the artists, but the jury is still out about whether these large companies can successfully pull it off, said Dry.
All music companies are struggling. Warner Music has seen operating cash flow shrink by more than 10 percent every quarter on a year-on-year basis in the last year. EMI is in a precarious situation, as its private equity owner Terra Firma tries to restructure a 2.5 billion-pound debt owed to Citigroup.
At Universal, the world's largest music company, earnings before interest, taxes and amortization were down some 34 percent in the first nine months of the year. Sony Corp's Sony Music Entertainment benefited from a Michael Jackson bounce last quarter helping Sony's overall music operations return to a profit as fans rushed out to buy the pop star's catalog following his sudden death.
How many headlines have we seen saying Michael Jackson was worth more dead than when was alive? That's the hidden value of licensing rights, said Cheen.