The current financial crisis is proving to make credit markets very scarce throughout the United States. It is becoming increasingly difficult to find loans to use for any purpose let alone the music business. This current crunch spells rocky roads for both the current record label giants as well as anyone looking to start a business. If you take a look at the current financial crisis, it is becoming much, much harder to not only secure lines of credit, but also pay back existing debts with interest. The major record labels may encounter some issues repaying the debt that they have accumulated over the years of the business. This is really a second hit to the record labels as it is because they have already lost a significant amount of money to online digital piracy. Many entrepreneurs are also affected and are finding it very difficult to find investor’s for new business ventures.
If you look at the stock prices of some of the biggest record labels in the industry, the financial crisis has caused a significant decrease to projected share price in as little as a week.3Some companies share prices have dropped 50%-60% in the last month. For example, EMI hit a fifty-two week low of six dollars a share.3Before the crisis, the stock was nearly fourteen dollars a share.3This is a significant drop in their share price. Share price probably reflects investor’s views of the companies, and not necessarily their level of success in recent times. It is simply a fact however that the major labels are fighting an uphill battle. They have accumulated debt throughout the last year and now are going to have significant trouble paying it back.
The question is if this debt will be enough to bankrupt some of the largest record labels in the world. At its foundations, the industry is changing. Record labels that took out large amounts of money in order to build their company, are really hurting right now. It is almost impossible to secure more money from creditors, and record labels are having trouble making profits. The majority of people that listen to music either download it illegally or buy it from online music vendors. The traditional record label model is falling out of practice, and it is falling fast. However, if you survey the numbers there is no apparent disaster that has struck or influenced labels directly. According to quarterly reports from the Securities and Exchange Commission1, all three giants are just barely scraping buy and paying their debts. EMI, Warner Music Group and Sony Music all have been weathering the storm thus far and hopefully are not going to have to suffer any consequences of the credit freeze.
Since all three companies are publicly traded corporations, they are required to release information about their company’s financial status. The United States Securities and Exchange Commission manages these reports and enables public access.1The main consensus across the board is that the companies are fine in paying back outstanding debts, but they are barely scraping by. The entertainment industry has shown its ability to endure financial turmoil in the past, and continues to do so. During the great depression, entertainment thrived and many new forms were developed.2It seems as if the true problem lies not in paying back debt, but in raising profits.
How is the newly dubbed crisis going to affect entrepreneurs in the current music business? The only companies that are going to be able to secure business loans are those with solid business models and, frankly, great ideas. Recently, the music subscription models have been the focus of venture capital investors. Overall, there just isn’t much faith in extended credit because the financial crisis was essentially caused by loans that could not be paid back. You can imagine how this would create a huge problem for companies that extended the loans in the first place and were relying on their repayment, plus the interest. In some cases, those companies are not going to be receiving their money back, and this is the basis of the problem. The lenient policies have changed. In order for a venture capital business to invest in a new business model they have to have much more faith that they will see a return to their investment.
Some examples that are in the forefront of investor’s minds are the all too common subscription model idea, but also a few obscure businesses that are developing. For example, Lala4, which allows users to build a music collection for free and listen to each song one time. If they want to listen to the song again, they must pay ten cents and then can listen to the song as many times as they want. They don’t own the song, however they are free to bring up their Lala page and listen to the music all they want. When investors feel very strongly about a business model, they are more likely to invest. The credit crunch created fear in the hearts of many and has raised the standards of all investors. Especially those geared towards the music industry and all of its turmoil in the past five years.
The economy had reached a point this month where it was virtually in shambles. The market prices for the Dow and NASDAQ were at a ten-year low.3Fortunately the music industry is not directly affected, just influenced and changed. History tells us however that entertainment is the safest boat in the turbulent economic seas and shall endure the test of time. Hopefully this is just the spark the business needs to redefine itself for the future.
By C. Adam Sawan
United States Securities and Exchange Commission, http://www.sec.gov/
Library of Congress, HYPERLINK “http://lcweb2.loc.gov/learn/features/timeline/depwwii/art/art.html” http://lcweb2.loc.gov/learn/features/timeline/depwwii/art/art.html
MSN Money, HYPERLINK “http://moneycentral.msn.com/home.asp” http://moneycentral.msn.com/home.asp