Sing When You're Winning

When Seagram bought Polygram in 1998 for $10.6 billion, the French-born ceo Alain Levy found himself out of a job. Not for bad performance: Levy had turned PolyGram into the world's largest music company by a combination of organic growth and strategic acquisitions at a time when CD sales were booming. After the company was sold, Levy, then aged 51, spent several years consulting and pondering the state of a changing industry, and quickly concluded that old models for growth were gone. CD sales peaked in 2000, damaging companies bedeviled by piracy and the online trading of free music. Levy realized that the industry had to figure out how to make money from digital music. If he could run another company, he told colleagues, he'd do things differently.

That opportunity came in the autumn of 2001, when Eric Nicoli, chairman of EMI Group — the iconic British company whose superstars have ranged from the Beatles to Coldplay — offered him the top job at EMI Music. EMI was then a listing ship that had jettisoned more than 40% of its market value in one year, and had just issued an entirely unexpected warning, admitting that profits would slide 20%. One of Levy's first hires was a McKinsey & Co. consultant, John Rose, in January 2002, whose remit was to figure out how to make digital pay. "He knew digital wasn't going to go away," Rose recalls. "That was a large part of his hiring me." But Levy's decision to embrace digital bucked industry notions. "The prevailing feeling was, 'This isn't going to work because people are going to steal and not buy.'"

Four years on, people are still stealing music online. But they're also buying it — and at a fast-growing rate. The International Federation of the Phonographic Industry (ifpi) says that global sales of digital music zoomed to $1.1 billion last year, up from $380 million in 2004. Digital music now provides around 6% of most companies' revenues, up from almost nil two years ago, and that growth shows no signs of peaking.

And more than any other major label, EMI's comeback mirrors the changing fortunes of the music world. In its half-year results for the period ending Sept. 30, 2005, EMI's revenues returned to growth for the first time since 2000, rising 5.8% to $1.64 billion. Its global digital sales soared 142% to $79.3 million; that's 5% of total revenues, and growing fast. And EMI's global market share rose from 12.5% to 13.1%. "EMI is one of the leaders" of the digital era, says Mike McGuire, research director at Gartner. "They're innovative."

Yes, EMI benefited from big-selling albums by artists like the freestyle cartoon band Gorillaz and Coldplay (who nabbed the best album award for X&Y and best single for Speed of Sound at the Brit Awards in London last week). But the digital tide has hit — not only in the form of Apple Computer's iPod, but also through mobile-phone features, including ringtones, ringtunes (the actual songs) and ringbacks. Everyone from mobile-phone operators to supermarket chains like Tesco to coffee purveyors like Starbucks is offering online music services. In a recent report titled Digital Rocks!, Bryan, Garnier & Co. analyst Alexander Ivanovitch wrote: "We believe this amounts to a second digital revolution for the music industry, akin to the 1980s transition to CD."

Such optimism was unthinkable just a few gloomy years ago, when it seemed like the music industry had fallen off a cliff. "It was a frustrating time," says John Kennedy, head of ifpi. "We knew it wasn't going to be just a few bad years." Even Levy was shocked by what he found when he took over at EMI Music in October 2001. "The company was in much worse shape than any of us had realized," says Rose, now a director at Boston Consulting Group.