Struggle to get EMI rocking again starts with a few smart recruits

Guy Hands, the boss of private equity firm Terra Firmawhich paid £3.2 billion to take EMI off the stock market and turn it private last August, must be crossing fingers the first seeds of recovery are in place.

There has been plenty of bad news. EMI's market share has been under pressure and artists have been in revolt. Radiohead quit the label last year. Other stars such as Robbie Williams and Kylie Minogue have made unhappy noises too. And the Rolling Stones are releasing their next album with rival Universal rather than EMI.

Hands knew it was going to be tough. He made clear when he bought EMI that he wanted to shake up the label, and by implication the whole industry, which he felt had grown bloated and lazy. But a City financier who had shadow Foreign Secretary William Hague as his best man at his wedding has not been the most plausible candidate to persuade EMI to buck up. Hiring Chris Rolling, a former executive at chemicals firm ICI, as chief operating officer and ex-BBC director-general Lord Birt as an adviser wasn't very rock 'n' roll either.

Music industry insiders also criticise Hands for being arrogant, undermining staff morale. And they say he didn't realise the extent to which being boss of EMI would thrust him into the public eye - witness his rabbit-in-the-headlights appearance before the cameras at a meeting with investors and staff at the Odeon Cinema in Kensington in January.

Eight months on from his original purchase, the pain at EMI is far from over. The new management is in the throes of a massive jobs cull. Up to 2000 of its 4500 staff are set to leave by June. Insiders admit the process of turning around the label will take many more months. Plainly it makes sense for Hands to cut costs. He had a point when he said a roster of more than 12,000 artists was too big. And he memorably complained about hundreds of thousands of pounds being spent on "flowers and candles" - which some thought was a euphemism for alcohol and drugs.

But for EMI to flourish as a creative company, Hands needs more than bean-counters. The appointment of Gatfield is seen as a sign that Hands recognises EMI urgently needs to nurture and recruit talent. "He has got credibility both in the UK and the US," says Mark Sutherland, London bureau chief of US music bible Billboard. "I think he will certainly get EMI's A&R back on track. What EMI really needs is hits in America." EMI already has some young British artists that have broken the US market such as Corrine Bailey Rae and KT Tunstall. A key task for Gatfield is to find US artists who can sell well there and internationally.

The big problem for EMI is that facing the entire recorded music industry: Falling CD sales; illegal and cheap inter-net downloads; and people preferring live concerts to buying music. Sales globally are down around 7% in the last year. No wonder rival music label Warner Music - the only major record company still quoted on the stock market and once a putative partner for EMI - has seen its share price fall 70% since April 2006. Claire Enders of media consultancy Enders Analysis says: "In that context, EMI is continuing to struggle with its top line and its income."

Worse, EMI's market share is being squeezed. According to Nielsen Soundscan, EMI had an 8.7% share of the US albums market in the first quarter of 2008, down from 11.6% in the same quarter in 2007. EMI has traditionally been weaker in America, where the big three are Universal, Sony BMG and Warner Brothers. However, even in Britain EMI is currently only in third place.

There is some good news. First, EMI is privately owned. Hands doesn't have to update the market with details of sales every quarter, as EMI had to when it was a listed company. That means he can focus on long-term planning rather than the share price. And while the attention of the media is focused on EMI's recording business, the publishing side is a steady and lucrative earner. It's not sexy and exciting but owning the rights to some one millions songs delivers handsome margins of around 25%. Some call it EMI's "jewel in the crown".

Whether it helps make EMI worth £3.2 billion, including its debts, is a moot point. Hands paid at the top of the market - just as the credit crunch was about to bite. Citigroup, which arranged the loans for Terra Firma's purchase, has reportedly been unable to sell on the debt. "The whole situtation is, I would say, perilous," says Enders. "But nobody is marking that debt down yet. And Terra Firma is doing absolutely the best it can. They are in there fighting to realise value for its investors."

EMI is upbeat. It says the appointments of Gatfield and Merrill, both of whom will sit on EMI's operations board, show the company is moving forward. The doomsayers are not so sure. One person who has helped Terra Firma at EMI describes the record label as "unfixable". No-one doubts Guy Hands has got his work cut out.