Problems of UMG and the music industry will not be solved by a change of structure

The dispute between the activist fund manager Peter Schoenfeld and Vivendi is not just a row about money and whether it should be spent by corporate managers or returned to shareholders.

The US investor is also unhappy about the French media group’s structure, and particularly its involvement in the music industry. Vivendi owns Universal Music, one of the world’s largest recorded music group.

It is a business that Mr Schoenfeld thinks would be more valuable were it spun out and forced to stand on its own two feet.

It is tempting to agree with the activist’s diagnosis. There is no obvious reason for Vivendi to own UMG alongside its other business: the domestic pay-TV platform Canal Plus. Customers subscribe to Canal Plus to watch sport or drama; not to get their fix of the latest from Taylor Swift.

But it takes a leap of faith to subscribe to the second part of Mr Schoenfeld’s prescription. Granted, separation may allow investors to align incentives for UMG’s bosses more closely with the performance of the record label.

But the problems of UMG and the music industry will not be solved by a change of structure. They reflect a wider management culture of risk aversion. Until this is changed, it is likely that both the business and the industry will continue to underperform.

It is not hard to see why the music business has become cautious. Fortune has scarcely favoured record companies over the past 15 years. Executives have struggled to deal with changing technology and the impact of digital piracy. Sales have all but halved, while a series of defensive mergers has reduced what was a big six to just three giant global labels today.

Shrinkage has in turn taken its toll on companies’ willingness to invest. The record business likes to see itself as a bit like venture capital. Through their “artists and repertoire” — or A&R — departments, companies invest in new bands, some of which bomb, but a few go on to pay for the rest and (hopefully) generate an overall return.

One problem is that the declining top line has translated into lower A&R budgets. In the five years since 2009, these fell by nearly 20 per cent across the industry to $4.3bn, falling steadily as a proportion of sales (from 30 per cent to 27 per cent according to IFPI, a record industry trade body).

But just as critically, companies have focused increasingly on the mainstream when seeking new talent. Pop has become the dominant genre in recorded music, eclipsing rock and other more niche styles. The result is a succession of “cookie-cutter” acts designed to tickle existing tastes, not stimulate new ones.

Perhaps the biggest sign of the record companies’ short-termism can be seen in their reluctance to invest in distribution. In recent years, the industry has sought a business model to replace that of physical sales, which have declined since 2008 from $20bn globally to an estimated $9.5bn last year, according to Enders Analysis.

First the industry effectively handed its inventory to Apple, cannibalising its own sales by allowing the iTunes store to sell individual album tracks as the price of getting some quick income from digital.

Now, far from seeking to invest in new music streaming services that are emerging to replace a download model that is ebbing partly because of Apple’s reluctance to extend iTunes to the rival Android platform, the record labels are again seeking to maximise short-term income at the expense of longer term growth.

Many new music-streaming businesses are throttled at birth by demands for minimum revenues designed to minimise labels’ risk. In recent months, the industry has been demanding that “freemium” services such as Spotify reduce what they give away to customers as a marketing hook. Again the focus is on cash today, not future growth.

Keeping a weather eye on cash and limiting its ambitions largely to collecting rents has helped the industry preserve profitability. Despite a falling top line, UMG and Warner Music, two of the largest players, kept operating margins at 12.4 per cent and 11.2 per cent last year.

But it cannot disguise the reality that the industry seems stuck in the past, dreaming of somehow resurrecting a physical model, in which customers discovered music by radio and then bought the record in a shop. This cannot be a substitute for innovation.

But changing it requires more than the demerger or takeover Mr Schoenfeld craves. It requires the sort of change of heart and expectation that can come only from the very top. [Financial Times]