Why did HMV fail?

http://www.guardian.co.uk/commentisfree/2013/jan/15/why-did-hmv-fail

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I first started work on the HMV advertising account in 1982, little knowing that I would go on to handle this piece of business for over 25 years and in that time work with six marketing directors and four managing directors. What I also didn't know is that my path was crossing HMV's at the dawn of a golden period for the record retailer; I say record retailer because that's what it was back in 1982, a retailer of records made of vinyl.

What was to make HMV a hugely profitable company lay just around the corner, namely CDs and video. The invention of CDs meant we all wanted to replace our record collections with wonderful new shiny, "indestructible" CDs and we were all happy to fork out £16 or £17 for each one; it also became de rigeur to have a library of videos prominently displayed in the corner of your living room. In fact CDs were to deliver such an incredible profit margin for HMV that the House of Commons set up a select committee to investigate these bumper profits and the then CEO, Brian McLaughlin, got a serious grilling but ultimately nothing was done to the pricing structure.

The advertising strapline we created which sat alongside the iconic image of "Nipper" listening to the gramophone was "Top Dog for Music" and that's exactly what HMV was with record companies kowtowing to this all-powerful retailer, offering up millions of their own money to contribute to HMV's "co-operative" advertising. What choice did they have? This was the only way they had of getting their products in to the hands of the consumer. This "co-op money" was to become a drug which would always prevent HMV from spending its own marketing money and undertaking any genuine brand advertising.

HMV expanded around the world – the US, France, Germany, Canada, Japan – and in 1986 opened the world's largest record store in Oxford Street. I remember the opening ceremony well, it was being jointly performed by Bob Geldof and Michael Hutchence; there were literally tens of thousands of people in attendance and Oxford Street was closed. (Liaising with the police for all new store openings in the 80s and through most of the 90s was essential, such was the pull of HMV and the music stars it could attract for a new store opening or personal appearance.)

We all stood expectantly by the red carpet at the front of the store as Geldof's limousine pulled up but when he discovered he was the first to arrive he told his driver to circle the block, as he didn't want to be upstaged by Hutchence. Five minutes later Hutchence's limo arrived and when he learned he was now the first to arrive he told his driver to circle the block as he didn't want to arrive before Geldof. We stood there not knowing what to do as their cars went round a second and then a third time before we negotiated a peace accord with their management and they pulled up and got out at the same time. This was also to be the store that when Michael Jackson was in town, would be closed down for him to go shopping privately and I remember glimpsing him wandering through the empty aisles of a ghost-like store.

It just kept on getting better and better for HMV as computer games arrived along with DVDs and the stores and profits went from strength to strength. Such was the heady feeling of success that HMV would get together all of its store managers and head office staff for a three-day "conference" every year, which was two and half days of fun and partying and a half day of presentations by the board. Now we're not talking Bournemouth or Bognor here, it was usually somewhere exotic like Turkey or Spain – I remember a five star hotel in Marbella when Billy Connolly was the surprise cabaret act and everything was free for everyone, from watersports to the watering hole of the beach bar.

This engendered amazing loyalty from the music-fanatical store managers and a feeling that they really were "Top Dog" against the bitter rivalry of Richard Branson and Virgin Megastores (remember them) – his record label and the Megastores were really Branson's only businesses at that time. The rivalry is probably a book in itself, with Branson turning up with suitcases of cash to try and gazump HMV for prime city centre shop locations.

If they had looked out from that luxury beach hotel in Marbella they might just have seen a few dark clouds forming on the horizon. But no one was looking, as the sun was simply shining too brightly for HMV.

HMV continued to expand throughout the 90s. It bought the book chain Dillons and later Waterstones, a further 195 stores (who we also started to do the advertising for) and in 2002 floated on the stock market for a £1bn valuation and a share price of £1.92 (today it's a fraction above £0.3p and it is valued at £15m).

Not long after HMV's 2002 stock market listing, Beechwood (the agency I founded and ran with my business partner, John Wood) was asked to re-pitch for the business as a new marketing director and managing director had come in to the company and they felt other agencies should cast fresh eyes on the business. As I had worked on the account for so long and felt it was in my blood, I really wanted to give it my all, so we pulled out all the stops in this five-way pitch.

The day of the presentation came and we stood in the boardroom in front of the new MD, Steve Knott, and his directors. For some time we had felt the tides of change coming for HMV and here was our perfect opportunity to unambiguously say what we felt. The relevant chart went up and I said: "The three greatest threats to HMV are, online retailers, downloadable music and supermarkets discounting loss leader product."

Suddenly I realised the MD had stopped the meeting and was visibly angry. "I have never heard such rubbish", he said, "I accept that supermarkets are a thorn in our side but not for the serious music, games or film buyer and as for the other two, I don't ever see them being a real threat, downloadable music is just a fad and people will always want the atmosphere and experience of a music store rather than online shopping."

It's important to remember that the dotcom bubble had just burst and many people were mistaking this stock market meltdown for an internet meltdown. As we sat reflecting in the pub afterwards we felt decidedly winded by his onslaught but a few weeks later we were to discover, somewhat to our surprise, we had held on to the business. Virtually none of what we recommended ever saw the light of day but sometimes during difficult times clients simply want the comfort blanket of what's familiar.

Regrettably for HMV our three predictions came true to an extent we could never have envisaged and by 2006, a new MD Simon Fox was brought in to try and sort out the ailing company.

Throughout the late 90s, HMV's single biggest mistake was a lack of investment in its online offering. Unfortunately it's a mistake Fox continued to make. He chose to try and diversify into electronics (a business that was already failing on the high street) and entertainment through venues such as the HMV Apollo, which are now being sold off to pay down debt.

When Fox left the company last year, I was surprised that the press let him off relatively lightly. But in truth the damage was done in that late 90s period, well before he arrived, when we could clearly see what was developing with the internet (we started one of the first digital agencies in London which we later sold to a US group), yet HMV's efforts were at best a token gesture. This lack of online investment and risk aversion may well stem from a disastrous and expensive foray into conventional mail order in the early 90s when HMV Direct was set up and later folded.

I got to know two young entrepreneurs from Jersey, Richard Goulding and Simon Perrée who started the highly successful online games, music and video retailer Play.com in 1998, and I remember them saying to me: "We were just waiting for HMV to turn their big guns on us but we just kept on going and getting bigger and bigger, and thinking they must be going to get their act together soon and come after us but they never did." I think this comment says it all.

Who was better placed to exploit the internet than HMV? The power of the brand, its heritage in music, its unrivalled access to content from film, game and music companies. Who would now have been better placed to take advantage of social media?

Hubris, arrogance, a feeling of invincibility. Companies fail for many reasons and there was probably a bit of all three involved with HMV but when I read about Kodak selling off its valuable patents to stave off bankruptcy, I saw many parallels with HMV. A company which was overtaken by the march of technology faster than it could ever imagine and which by the time it started reinventing itself and diversifying into other areas, it was too late.

• This article originally appeared on philipbeeching.com and is republished with permission