Iain Titterington, a 36-year-old pop video director, pays for about one in four songs he listens to. He downloads the rest from Kazaa, an Internet service that enables users to share their music.
Since November, "I made five purchases because I couldn't find what I was looking for on Kazaa," Titterington said.
AOL Time Warner Inc, Vivendi Universal SA, EMI Group Plc and other record companies are losing the battle against piracy. The illegal manufacturing of compact discs is costing them more than US$4 billion in lost revenue annually, according to industry estimates. And the unauthorized copying of songs from 500 million files on Web services, such as Kazaa, is further eroding sales.
"The pirates will always beat the music companies," said Patrick Wollenberg, who helps manage securities worth US$13.8 billion at Robeco Groep, and refuses to invest in music companies. "People are increasingly unwilling to pay for music because they feel ripped off." The shares of EMI, the world's third-largest record company, this month dropped below UK Pound 1 for the first time, from a peak of UK Pound 8 three years ago, reflecting investors' pessimism about music sales. Global CD sales this year will probably fall below US$30 billion, the lowest since 1992, analysts said.
There's more to the slump than piracy. Consumer spending is waning in the US and Europe, fourth-quarter gross domestic product figures show. And a growing number of singers, from Natalie Merchant to Prince, are selling music direct to fans on the Internet, cutting out the middle men: the record companies.
EMI is one of the best gauges of the music industry because, unlike larger rivals Vivendi Universal and Sony Corp, it hasn't diversified into other areas of entertainment, such as films. EMI shares have plunged more than 85 percent in three years, wiping about US$8.6 billion from the company's value.
The London-based company will probably be at the center of industry consolidation that analysts say may be essential to reduce costs. Bertelsmann AG Chief Financial Officer Siegfried Luther said last month that he is "thinking" about combining the German company's BMG unit, the world's fifth-largest record company, with EMI or another partner. BMG and EMI called off a merger plan in 2001.
Alain Levy, who heads EMI's recorded music unit, may attempt to combine EMI with AOL's Warner Music unit, analysts said. The two companies dropped a merger plan in 2000, after EU regulators said they were concerned the combined business would dominate the rights to such songs as Frank Sinatra's "New York, New York" and the soundtrack to the "Wizard of Oz." EMI spokeswoman Amanda Conroy and AOL spokeswoman Mia Carbonell declined to comment on any merger talks.
With CD sales at the lowest in more than a decade, EU regulators may now be more sympathetic to an EMI-Warner merger.
Such a combination would save about US$250 million in costs by cutting manufacturing and Internet-investment expenses, according to Michael Nathanson, an analyst at Sanford C. Bernstein & Co.
Consolidation in the industry will be driven by the lack of further internal cost-cutting options, Nathanson said. Levy has eliminated 1,900 jobs since he joined EMI 1 1/2 years ago. Sony Music has also cut jobs and closed factories.
"Ownership change is likely," said Jeff Currington, who helps manage UK Pound 3 billion of securities, including EMI shares, at Pictet Asset Management in London.
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