Sony Music UK CEO Nick Gatfield: X-Factor made us complacent
The music giant relied too much on talent from TV shows, says its chairman and CEO - but he is hoping a change of approach will mean improved results in 2013 and beyond, writes Peter Curtis
This article appeared in the December edition of Business Voice, the CBI magazine
'We have a phenomenal pipeline of talent coming through the TV formats and we’re incredibly lucky to have that. But I think we relied on it too much and took our eye off the ball. We got complacent.'- Nick Gatfield
As excuses go, Nick Gatfield’s is rock solid. The chairman and chief executive of Sony Music UK had been forced to postpone our planned interview after being called away at short notice to New York. When we finally meet ten days later, he explains why: “I’d been summoned by David Bowie.” There’s no competing with that.
The wave of publicity surrounding Bowie’s new single had got 2013 off to a good start for Sony. Gatfield had been in the US to talk about the March release, on the company’s Columbia label, of the singer’s first album for ten years. While there, he also heard Justin Timberlake’s “phenomenal” first LP since 2006. “They’re both icons in their own way,” he says.
Yet January also brought a low for the British music industry, with HMV’s collapse into administration – something that Gatfield thinks was “sadly inevitable”. Sony is working with the administrators and he is hopeful that there’s a future for a “more nimble, leaner” HMV, whether that’s under the control of restructuring specialist Hilco, which has acquired the retailer’s debt, or someone else (see panel, opposite page).
“I still think there’s room for a specialist retailer on the high street,” he says. “I find it fascinating that, since HMV went into administration, its trading has gone up. People don’t want to see it go.”
The main problem for HMV was its failure to adapt to the rapid shift to digital music – a significant challenge for record companies themselves. But Gatfield insists that, however music is distributed, Sony’s success hinges on its ability to continue identifying and nurturing talent through A&R (artists and repertoire) activity.
“The bedrock of this business is new music. As long as you’ve got credible new music coming through, there are always ways of finding the music-loving public, whether it’s online or through stores,” he says. “The fundamentals are great talent.”
That view is unsurprising when you consider Gatfield’s background. The piano in his Kensington office is a clue to his past career as a musician. He played saxophone for Dexys Midnight Runners on number-one single Come On Eileen and LP Too-Rye-Ay. In 1985 he switched to the other side of the business, working as an A&R manager for EMI before becoming head of A&R and its youngest ever director two years later.
His focus has been on A&R ever since he took his current job in August 2011. “My mandate from my boss was: ‘We’ve got to turn the UK back into a domestic repertoire powerhouse,’” he explains. “It had lost its way in terms of domestic A&R. We also needed to become a strong exporter of talent and fuel the Sony machine globally with British talent.”
That seems odd when you consider that British artists account for 13 per cent of global album sales – and that the year to March 2012 saw Sony Music UK’s pre-tax profit soar by 128 per cent to £15.2m (although its turnover fell by 2.4 per cent to £191m). The meteoric rise of homegrown boy band One Direction, whose first album went straight to number one in the US in March 2012, played a big role in that, while Gatfield says that Sony also successfully exported more established acts such as Olly Murs and Calvin Harris.
But he admits that Sony had become overreliant on its Syco joint venture. Owned 50:50 with Simon Cowell, this label manages acts such as One Direction and Murs, who were discovered on The X Factor. “Every one of our competitors would want the platform that The X Factor delivers,” Gatfield says. “We have a phenomenal pipeline of talent coming through the TV formats and we’re incredibly lucky to have that. But I think we relied on it too much and took our eye off the ball. We got complacent.”
For that reason, 2012 was a “year of restructuring and consolidation”. Gatfield bolstered the A&R teams and appointed new creative leaders in the Columbia, RCA and Epic labels, focusing on new acts. He also created a central marketing division in order to “maximise the sales potential” of international stars such as Beyoncé, Alicia Keys and Kings of Leon.
He acknowledges that it’s too early to say whether this strategy has paid off, but he’s optimistic about the coming year. “We have a whole range of new artists coming to market between now and March 2014. We have the most nominated artists in the critics’ end-of-year polls for breakthrough success, while Tom Odell won the Brits critics’ choice award. You can’t take any of that to the bank yet, but experience tells me that a good number of our artists are on their way to significant sales.”
Gatfield is particularly animated when talking about the new Sony artists that excite him – he name-checks Laura Mvula, Kodaline and X Factor acts James Arthur and Ella Henderson, among others. And he admits that he still likes to get involved in A&R. “I probably do too much. I’m sure people think: ‘Oh, God – the chairman wants to weigh in on a record.’ To be honest, I can’t help myself sometimes.”
While Gatfield is adamant that the industry will remain centred on talent, he acknowledges that the internet has created a massive change. “I think this will largely be positive,” he adds.
'So far there have been some moderate successes without the majors’ support, financial backing and expertise – but very few.'- Nick Gatfield
Music companies have had to face up to the negotiation power of the big digital distributors, such as Apple through its iTunes platform. Increasing their leverage in these negotiations is one of the reasons behind the consolidation that saw Universal Music buy EMI’s recorded music business last year. Recent reports have suggested that Sony is joining forces with BMG to bid for the prestigious Parlophone label (which regulators forced Universal to sell as a condition of the EMI deal), although Gatfield can’t comment on this.
Piracy has also been a big problem. But at the same time the advent of social media has created new marketing possibilities. So is the industry coming to terms with the challenge?
“It has to – it’s inevitable,” he says. “We’re getting smarter at marketing digitally and using the power of social media, ensuring that digital content is good and rich, and that there’s value for money. The singles business is incredibly healthy and the growth of album sales through iTunes over the past 12 months has been really encouraging.”
And the album as a format is not dead “by any stretch of the imagination”, he believes – noting that 60 to 70 per cent of Sony’s sales of any new album over the first two to three weeks of release are of the higher-priced “digital deluxe” version. This year digital sales are forecast to grow sufficiently to offset the decline in physical sales for the first time.
“We get asked a lot about how relevant a major music company can be in the internet era,” Gatfield says. “So far there have been some moderate successes without the majors’ support, financial backing and expertise – but very few.”
One example is Radiohead’s album In Rainbows, which the band self-published online in 2007. But, as Gatfield – who signed the “genius band” for EMI – points out: “They were a huge brand before they were allowed to experiment in this way. That’s the interesting question for us. We create and build these brands, then at a certain point a contractual term ends. So how do you stay relevant to brands that you have created beyond that and renew your relationship with those artists?”
The answer, he suggests, lies in providing much more of a holistic service to artists, putting them at the centre of the company’s strategy and involving them in the planning and execution of campaigns. This is leading to dramatic changes in rights deals between labels and artists.
“The way I like to characterise it is that the music industry used to be into rights ownership; now it’s rights partnership and management,” Gatfield explains. “It is quite rare now for us to have rights in perpetuity.” Instead, Sony takes a share of “ancillary” revenues from concerts and merchandising in return for its investment in creating a brand.
So what’s a music company’s unique selling point in the digital age? “We have an extremely good understanding of music consumers and a huge amount of data about their buying habits – Sony has invested heavily in consumer insight and CRM,” Gatfield says. It’s something that has accelerated significantly over the past five years as social media and the internet have enabled greater engagement with fans (see panel, page 34). And the international nature of Sony’s business means that it can share best practice across big markets.
“That’s very powerful for artists, because it can help to inform their touring and release cycles,” he adds. “We can internationalise you much quicker than you could do yourself. One Direction is a fantastic example of that. We’ve grown this brand by 25 to 30 per cent over what we believed possible.”
Gatfield also believes that Sony – and the music industry more generally – can help to improve the way music is distributed digitally. The company will support any legitimate streaming service, “but that’s not to say we’re going to roll over and submit to a world of Spotify or Deezer. Other viable services will emerge.”
He’s particularly optimistic about the potential for new streaming services on mobile phones. “The key thing will be 4G. There’s a very high use of smartphones for streaming music, while music apps are still the second-most downloaded applications. We strongly believe that a lot of the music services set up by the carriers have not been well managed or marketed,” he says. “We want to be much more proactive in supporting those services and making sure that their content is up to date and good, because we’re experts at that.”
Gatfield is also encouraged by the growth of subscription-based streaming services – which he believes will constitute the bulk of the market in five or six years’ time – in countries such as Sweden and Norway. In particular, he’s interested in the way consumers there have been prepared to discover artists’ back catalogues online.
“We can help here by providing a curation element,” he says. “Catalogue that has been largely dormant in the physical world will suddenly be revitalised because people have no barriers to exploring it – and that’s a positive.” Increasing the size of a company’s catalogue is another factor behind the music industry’s consolidation, he notes.
Less positive has been the legislative effort to tackle piracy – something that Gatfield says continues to be a significant problem. “We’ve tried various legislative measures and, arguably, punishing consumers,” he says. “These simply haven’t worked. We haven’t changed people’s behaviour.”
He’s particularly critical of the fact that it took five years to pass the Digital Economy Act 2010. While he does support this law, he fears that it will be redundant. “It focuses on peer-to-peer file-sharing, which isn’t really where the pressure points are any more.” Instead, Sony is now focusing on commercial solutions.
Is the government doing enough to support the music industry and the creative industries more broadly?
“The true answer is no,” Gatfield says. “It continues to be comparatively unsupportive when you look at the value the creative industries bring to the economy, the power of British music and heritage of our popular culture and how these are used by the government when it wants to talk about Britishness.
While he acknowledges that there “have been some very supportive people in government”, he adds: “It’s always great for a photocall or a government position statement. But it’s undervalued. I still feel the government is in thrall to major technology at the expense of the creative arts and industries.”
Tax incentives for investing in A&R activity would be helpful, he adds. “We spend 20 per cent of our revenue on research and development – we call it A&R. So give us a tax break on our investment in new talent, like most other industries. It’s not only about signing some kid on the street with a guitar. We’re investing in new business models, encouraging technology start-ups and trying to find different platforms to serve music to the consumer.”
Despite this backdrop and the impact of the sluggish UK economy on sales, Gatfield is bullish about the prospects for the British music industry. “The interesting thing is that music has a proportionately higher degree of importance in people’s lives here. We still sell more music per head in the UK than pretty much any other music market.” (Sixty per cent more than in the US, in fact.)
He adds: “From a creative point of view, 2012 was not a stellar year for British talent, with the exception of Emeli Sandé’s breakthrough. But you have good and bad years. I think this year will be very good. I’m an optimist because of the high level of creativity I’ve encountered. British music is the most inspiring and influential music outside hip hop and it’s still at the cutting edge. That’s why it’s an incredibly exciting place to work. I worked for nine years in the US, which is the world’s biggest music market, but it doesn’t have the vibrancy or energy that this market has.”
The Gatfield CV
» 1960 Born in Surrey; takes piano lessons at the Royal Academy of Music.
» 1982 Joins Dexys Midnight Runners; plays sax on number-one single and album.
» 1985 Joins EMI as A&R manager and in-house producer.
» 1987 Promoted to head of A&R.
» 1992 Heads a new LA-based label for Polygram.
» 1993 President, Polydor; takes profits from $4m to $15m.
» 1998 Leaves the music business to invest in internet start-ups.
» 2001 Recruited to run Island Records group for Universal.
» 2008 President of new music for North America and UK, EMI (then under ownership of Terra Firma).
» May 2011 Becomes president of music, Sony Music UK.
» August 2011 Appointed chairman and CEO, Sony Music UK.