KKR's European music rights giant is taking shape

The British music giant EMI has rarely been far from the headlines, with well publicised cut-backs and power struggles between its private equity owner, Terra Firma, and the artists signed to the label. Now, though, the speculation surrounding the business is reaching fever pitch, with the news of a potential joint bid for EMI's back catalogue assets by Terra Firma's rival, Kohlberg Kravis Roberts and its recent creation BMG Rights Management.

KKR founded BMG Right Management as a joint venture with media group Bertelsmann AG just a few months ago. The premise was to create a global player to which Bertelsmann contributed its BMG Rights Management music rights unit in return for a 49% stake. KKR's plans involve an initial investment of €50m, with a further €200m to be committed over the next five years from the group’s third European fund.

This plan has been brewing for some time: KKR crossed paths with Bertelsmann a decade ago when it was divesting one of its non-core assets. At the time the private equity backer lost out on the asset, coming second in the auction. But ever since then the group has been closely tracking Bertelsmann for another opportunity to invest.

In the plan to build the future global music rights leader, BMG Rights Management has provided essential skills and assets, from its licensing and music rights administration expertise, its music catalogues and artists, to the BMG brand and its management team. KKR, in turn, leveraged its financial firepower and global network.

BMG Rights Management has also acquired music publishing assets of certain affiliates of music publisher Crosstown Songs America, and the rights to more than 8,000 songs; several more acquisitions are in the pipeline.

According to the investor, the firm will seek to capitalise on the trend that distribution is no longer limited and that content can now be served and commercialised via more channels; as a result the ownership and intellectual copyright of content are becoming much more important. The classic commercial strategy of simply selling CDs is now being augmented by new channels such as video games (games such as 'Guitar Hero' not only keep classics in people's minds but also provide steady licensing fees), advertising, TV, and radio, which all contribute smaller but steady amounts of revenue.

This is an intelligent response to the key challenges facing the music industry today. For many years, the music industry has been facing a slow extinction, hard-hit by its failure to adapt to new distribution channels. After benefiting from substantial investments to underwrite the shift from vinyl to CD, the music industry was caught out by the emergence of the internet. Its response to the burgeoning threat posed by the new media was simply to close down illegal file-sharing sites such as Napster and pursue the 'music pirates' that downloaded music illegally, raking up enormous legal costs and alienating many legitimate customers in the process. Consequently, the music industry has all but lost the bid to establish digital music distribution channels to the likes of Apple's online store iTunes, which arguably has only served to accelerate its demise. Could this possibly be one of the much-vaunted examples of where private equity takes a tired industry model and facilitates long-overdue change?

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• Topics
• Media
• Investments
• Terra Firma
• KKR