EMI in talks to outsource U.S. operations

NEW YORK (Fortune) -- EMI, one of the world's largest record companies, is considering turning over its distribution, sales and marketing operations in the United States to a rival in an attempt to cut its extensive losses, music industry sources said Friday.

Three industry sources told Fortune that the storied British company - whose catalog includes the Beatles, the Beach Boys and Coldplay - is talking to Warner Music (WMG), SonyBMG (SME) and Universal Music Group about assuming these functions in the U.S. Those companies declined to comment.

EMI also declined to comment on its reported talks with rivals about outsourcing. However, a source familiar with the industry said all EMI wanted to do in the United States was outsource its CD distribution to retailers like Wal-Mart and Best Buy.

Sources close to the talks say EMI could save as much as $300 million a year if it completely outsourced its American marketing and distribution operation.

The sources said EMI is also considering licensing its jazz and classical division, whose labels include Blue Note and Angel. That would mean another company would not only manufacture and sell EMI records by jazz greats like Art Blakey and the Jazz Messengers and opera legends like Maria Callas. It would also take over the release schedule and packaging of these albums.

EMI spokeswoman Jeanne Meyer strongly denied that the company is in talks to license jazz and classical: "EMI has no plans at this time to license its jazz and classical businesses."

EMI was purchased in August 2007 for $6.4 billion by Guy Hands' Terra Firma, a British private equity firm. Since then, it has gone through layoffs and management turnover as the new owners struggle with upheaval in the music industry.

The news of EMI's talks comes on the heels of the disclosure of hefty financial losses in a report released on Oct. 24 by Maltby Capital, the entity through which Terra Firma controls the music company. The report said EMI suffered a loss of 258 million pounds ($415 million) in its fiscal year ending in March 2008.

According to Nielsen SoundScan, EMI's year-to-date market share of current U.S. album sales is 8.2% compared to 9.1% during the same time period last year.

In September, EMI turned over the distribution and marketing of its physical and digital releases in Hong Kong, Indonesia, Malaysia, Singapore, Korea and Thailand to Warner Music.

EMI has handled the marketing and distribution of Warner compact discs in India, the Middle East and North Africa since 2005.

George Van Horn, a senior analyst at IBISWorld, said the idea that EMI might outsource its sales and marketing in this country wasn't as surprising as it might sound.

"It's fairly drastic from a historical standpoint," he says. "Looking out at the future, it probably isn't that drastic. That's an indication of how severe the cutbacks have to be [at EMI] to get into the position of being profitable on the business activities you do keep."

Update: A spokewoman for EMI now says, ""EMI is exploring outsourcing its US pick, pack and ship function. However, sales, marketing and digital are not part of these discussions."