By John Ioannidis from the Berklee College of Music's Music Business Journal.
Roger Faxon has had a distinguished career in the entertainment industry. He was executive vice president/COO at LucasFilm, a founding partner of the film and television production unit Mount Company, and a senior executive vice president at Columbia Pictures. He joined EMI in 1994 after serving as CEO of London-based Sotheby’s Europe. Until a year ago, he was CEO of EMI Group. Faxon orchestrated the sale of EMI’s Recorded Music and Publishing Assets, respectively, to Universal Music Group and Sony/ATV Publishing.
MBJ: You have extensive knowledge of music, TV, and film. Where is it all going?
Roger Faxon: You have to think about “digital” as a modality. It doesn’t create revenue, it’s the content that does. Digital is a way to reach consumers. We’ve seen a plethora of ways in which that happens, but we’re only at the very beginning. Right now, in the TV and cable world, programming is reaching consumers outside of the normal network of schedules and cable systems. This changes the structure of how entertainment reaches consumers. It also changes very fundamentally the economics of how entertainment products are financed. We’re going to see huge changes here. People are less likely to subscribe to a cable system today because they have so many alternatives. With an appropriate modem, like Apple TV or Google Box, you can watch Netflix, Hulu, YouTube, or other services.
MBJ: What about the streaming of live events, like concerts, on YouTube, VEVO, or other providers?
RF: Live compels people to gather in a broadcast environment, to use an old fashioned term. They want the immediacy of the experience. That tends to be the most powerful way for channels to maintain their positioning. People have loyalties to programs. They want to see their programs when they first come out because they want to chat about them. However, as we’ve seen quite consistently, Tivo has revealed a huge viewership, which has time-shifted the television world.
MBJ: Do you forecast any radical changes with respect to the financing of music or the entertainment industry?
RF: Yes, and Tivo is a great example of these changes. Tivo reports that if 60% of the shows are time-shifted, advertising is bypassed. And then of course, there is “the hopper”, which is a mechanism TV is using to tie in its subscribers by essentially giving them the ability to completely jump over all ads. So, that fundamentally shifts the economics of linear television. With 40% of the audience time-shifting and 60% skipping ads, the entire economic system of network television is turned on its head.
MBJ: What about music and the do-it-yourself approach? Is it really a paradigm shift?
RF: Perhaps it will be in the future. Right now, there are no effective, naturally available means artists can use to become broadly and widely known without spending substantial sums of money. Let me explain. Record companies do not discover completely unknown artists. It’s very rare for somebody with no audience or records to break through. Major companies go out and find those people who already have an audience. The size of the fan base varies, but that’s what they’re looking for—and artists today, it is true, are much more effective at developing their own fan base than they were at any other time in our history.
But there is a ceiling. The reality is that the old world still exists, and it is the biggest part of the music market. 45% of the market is sold in stores. 80% of the awareness of music is from radio. The things that made the record companies important as intermediaries in the past still exist. Bargaining power, on the other hand, is very different than it was.
Today, you have mini bands with established brands coming into the record companies with support from the marketplace. So that has changed, but the reality is that record companies still need to be in the mix. If the major labels become more and more effective at marketing –and that means reaching consumers and exciting them about the music – they will preserve their position in the chain. But they won’t maintain, over the long term, the power they’ve had by virtue of distribution.
MBJ: How do you see the recorded music divisions of the major record labels evolving?
I think there are two ways for them to go. They could stay pretty much as they are, in which case their relevancy will slowly erode as others who are more willing to experiment with new forms of distribution find effective ways of exciting consumers: they will weaken, but likely not go away. Alternatively, the major record companies will understand that their central role is to create demand for music and market it. They have to be absolutely focused on deriving value wherever anybody in a commercial setting listens to music or experiences music. They will have to develop different skills than they had in the past and reach out to new kinds of businesses. If they do those things, they will grow the market substantially.
MBJ: You led EMI through a turbulent era under Terra Firma. EMI was forced to turn the company over to Citigroup, and eventually sold its publishing to Sony and its recorded music division to Universal. Do you think that the executives at Sony and Universal should themselves be worried about the future?
RF: The circumstances are different.
At EMI, a private equity company created leverage and borrowed huge sums to buy the business on the basis that the market and the business would turn around in an extraordinarily short period of time. Then, the financial market crashed and they couldn’t refinance. This forced the sale. But even in debt we made a lot of money and both the record and publishing sides of the business were operating extremely well. Many people would say that we were the most profitable business in the industry.
Universal, on the other hand, is part of Vivendi. Vivendi has some issues – and some debt – but they’re taking care of that by selling some of their telecommunication businesses.
Sony’s entire business operation is facing some financial challenges, but I don’t think anybody expects they won’t be resolved. Besides, the consortium that, led by Sony, bought EMI publishing, had other parties holding a majority of the ownership. The Abu Dhabi fund, Mubadala, is actually in control. So the entity that contains EMI Music Publishing should have no financial difficulties.
By the way, I’m well known for arguing that merging the recorded music and the publishing divisions of a major is a good thing, particularly as we move forward in a digital world where licensing is key. As the two businesses become intertwined they become more compatible and complementary, and there is a lot of value in that. Naturally, it can be difficult organizationally: the larger a business is, the slower it responds to change, making the merger harder at the start; in successful businesses, it could even reinforce entrenched ways of doing things.
Do you think much about success, and if so what would you say is the root of your success?
I believe it is curiosity and my absolute admiration for creativity: you have to love it, enjoy the way it operates, and the people who make it possible. There is a third element too, I think, which is being completely honest and open with others; if my colleagues feel that they have benefited from my actions, and I from theirs, together we have been successful.
Beyond that, in a big organization like EMI, with more than five thousand employees, it is important to project a vision and trust others. That is what really made EMI so successful.