Case Premise• BMG Entertainment, one of the world’s leading record companies• Was a subsidiary of Betelsmann AG, a German media conglomerate• Changing industry ― In late 1990s, two of the six companies that dominated the industry merged on more was rumoured to be looking for a buyer ― Because of internet, there were concerns that consumers would buy much of their music online rather than purchase it from storefront retailers; they might download music rather than buy pre-recorded compact discs or cassette tapes• Among major companies, BMG had been one of the most eager to embrace the new technology ― First to use downloading technology to promote the sale of conventional, pre-recorded CDs and cassettes ― Innovative agreement with America Online, consumer who played the CDs of certain BMG artists on their computers were linked automatically to relevant websites 2
Question in-front of CEO• How to organize BMG to serve its digital customers? ― Option 1: Give the existing distribution organization responsibility for the new class of customers ― Option 2: Set-up a separate division to handle distribution• How loyal would BMG remain to its traditional customers, storefront retailers?• How early would it pursue other retailers or consumers themselves?• Should BMG continue to forge nonexclusive partnerships with a wide range of technology vendors? 3
Consolidated industryWhy have few companies dominated the music industry throughout most ofthe last century? Figure 1: Framework for understanding the industryIn order to answer this, we will haveto understand the industry using thefollowing framework 6
Regularly impacted bydisruptive technologies Figure 2: Progress in music industry• Have been witnessing the advent of disruptive Printed Sheet Music technologies leading to change in industry structure Phonograph• Companies need to keep on changing • For instance, when Radio Disruptive broadcast radio was Technologies prevalent, old fashioned music record firms had to adopt the new Music Digitalization technology. 7
Record companies were themost crucial element Figure : Value Chain of the music industry 8
Market dominated by few (UStaken as proxy for World) Table : Music industry market share (US) Table : Classification by Bain• High concentration oligopoly industry• Industry concentration witnessing an increase 9
High cost to consumer and lowmargins for record company• Making a recording was a risky Table : Average cost and revenue of the venture; less than 20% of the compact disc sold recordings recouped their costs• A typical Recoding Company spent $ 300,000 in Production and Marketing• Of this $ 200,000 was classified as Recoupable cost• Artists were paid $2 per unit sold after selling 100,000 units; Hence a failed album put the burden on primarily on artist• Low operating profit for record company 10
Advent of internet• Internet was penetrating Figure : Number of internet users per 1000 households in late 1990s inhabitants• Music was one of the categories of merchandise most affected by skyrocketing use of the internet• Internet accounted for 0.3% of all music sales in 1997 to 1.1% in 1998 and was expected to account for 10% by 2005 11
How did advent of internet changed the industry? 12
Still highly concentratedindustry Table : Revenue of top 4 companies • Decrease in 17,339 17,579 3,706 16,960 revenues of BMG 13,782 3,913 3,177 10,372 3,914 3,807 3,933 3,903 10,406 BMG • Substantial increase 9,847 4,148 3,290 3,437 3,502 2,840 6,799 EMI Warner in revenues of 4,036 3,376 4,050 3,414 Universal Warner group, EMI 6,224 5,811 6,578 6,243 6,503 6,378 3,516 3,385 • Increase in revenues 2000 2001 2002 2003 2004 2005 2006 2007 of Universal group Table : Music industry market share • Still remained highly concentrated however, the top companies have 13 changed
Changing roles Figure : Structure of music industry as of 1999 14Value chain now focuses on involvement of internet
Post-internet industry roles •Physical product •Music download Product •Multiple ways of consumption •Convenience Customer •Proximity to the artist •Impact on sales •Option to open an e-commerce arm Retailer •Product category expansion •Sales of other forms of music •Question mark on survival •complete transition towards music download will take time Distributer •Option of moving downstream or upstream
Post-internet industry roles •Ease of storing/transmitting music to make entry easy in this industry Record Company •To develop customer interface •Focus on increasing consumption •Develop new ways of earning revenues •Content being the key driver, it will have an important role Music publishers •Blurring of roles (Music publishers and record company) •Can collaborate with artist directlyComposer/Lyricist •More options & opportunities to reach audience Performing artist •Closer to audience-better feedback •Transition period •Development of complex structure- to evolve in consolidation of roles 16 Overall •Ease of consumption – may increase consumption •Removal of layers-less cost of the final product •Development of new revenue streams
Economic impact• MP3.com gave artists the flexibility to choose setting their prices within a range of $5.99 to $ 14.99• Emusic.com set the price of downloading a song for $ 0.99 and an album for $ 8.99• It lost $ 18 million on revenues of $ 92,300• Singles downloads have reached $363 million• Album downloads $135.7 million; Annual growth rate of above 160% 17
Steps taken by major musiccompaniesBMG• BMG took the opportunity to use the internet as a marketing tool promoting its newest artists such as Britney Spears.• By placing the website on its CD covers, it created a large base for the success of its numerous websites promoting its artists.• By providing a service that updated customers on their favourite artists, the customers also knew when to expect new products.• Used the internet as a means to maintain market share without actually taking the operations online• The company has also established relationships with all the major companies involved in digital music downloading technology such as AT&T, IBM, etc.• Set up many websites for specific genre of music 18
Steps taken by major musiccompaniesSony Music• Harbinger of cutting-edge technology• Pursued digital downloads• Installed “Digital Kiosks”Universal Music Group• Launched Getmusic with BMG• Went for digital downloads 19
Positives• Ease of music distribution by artists`• Music downloading is the only way for most people to access the “dead” songs• Music Piracy allows down loaders to experiment with unknown artists, thereby increasing the sales in long run when they buy songs of these artists`• As shown by the 2005 RIAA Consumer Profile, CD sales at concerts have risen, implying that there are more people attending concerts
Negatives• The record labels have experienced falling sales and attribute this to the increase in piracy‘• Retailers of all sizes are feeling the effects of falling CD sales on their business. Smaller retailers complain that the disadvantages they face in competition with the larger stores is being exacerbated by the availability of downloaded music• HMV, Virgin and Tower Records, the three major retailers, have had to face renewed competition from on-line retailers such as Amazon.• Intellectual property theft (IPT)
TECHNOLOGICAL EVOLUTION IN MUSICINDUSTRY---CASE OF DISRUPTIONTECHNOLOGYSheet Music Phonograph Electrical Recording Broadcast Radio(1923) 22 LP Vinyl Discs
TECHNOLOGICAL EVOLUTION…CONTD.Pre-recorded CassetteTechnology by Philips( 1963) MTV Debut in 1981 and Introduction of CD in 1983 Digital distribution and Internet Downloads Download Entrepreneurship 23 Rights Management
OPERATIONAL ANALYSIS- SYSTEMAPPROACH INPUTS PROCESS OUTPUT CONTROL 24
INPUTS ( 1999 SCENARIO)• Composers and lyricists-----They created the music score and words of the composition and shared the copyright.• Performing artists---performed their own compositions or used repertoire created by others• Music Publishers—Purchased partial or total rights to pieces of music from Composers and lyricists. 25
PROCESS, OUTPUT AND CONTROL• Record Companies---5 major companies and independents • Contracting performing artists • Purchasing musical rights from Music Publishers • Product distribution to distribution channels and promotion • Managing the recording • Manufacturing CDs , DVDs• Distribution Channels-----for Marketing • Independent Distributors • Retail Channels• Individual Customers having tastes across diverse genres• Rights Agencies----Responsible for monitoring the distribution of royalties as per the actual use of music to the inputs. 26
RECORD COMPANY : TYPICALORGANIZATIONAL STRUCTURE 27
ORGANIZATIONAL STRUCTURE:SALIENT FEATURES• Each of the “Big Five” companies except EMI was part of a larger diversified corporation.• Transition from diversified localized manufacturing to the eventual consolidation of production plants around 1999 on account of free trade zones.• Centralized manufacturing , distribution and music publishing divisions.• Each company had numerous labels operating in domestic and international markets. They were autonomous and had primarily 4 functions: • Artist and Repertoire • Marketing • Business Affairs • Accounting. 28
Initial Marketing Strategy• Basic Marketing Strategy:BMGs labels have been used for marketing day-to-day marketing activites andpromotion of individual artists.Till now internet was mostly used as a promotiontool.• Distribution:Linking BMGs labels were to brick & mortar stores. Distribution personnel calledmajor retailors, promoted BMGs latest products negociated price & terms andtook orders. Overshow shipments and visited various retail sited with productplacements and handed credit and collection.This service was not only servingBMGs own lables but also number of independent labels ie. Logic & Milan etc.• Promotion:Consumers were likely to buy the music which they listened on radio or musictelevision. Also involved in “co-operative advertising” with retailers.• Industry Economics:A system of “recoupable cost” was was introduced.• Sales:Music club membership, direct sales from retali stores and mail orders. 29
Drivers of Change• Consumers:The customer taste was changing time to time ie. Rock decreased from 36.1% in 1990to 25.7 in 1998. Hence it is a dynamic Industry.• Role of Right Agencies:Right agencies ensured that that the reveues earned by a particular music album isdistributed legitmately among all stake holders hence the profit margin was very lessfor BMG.• Online sale of physical products:CDs werebeing sold throiugh websites without requirement of brick & mortar shopsanfd even without the constrains of locations, time and heavy inventory investment.• Downloaded Music:Internet helped customers to directly go and download music from websites and paythen and there.• Napster:It helped in sharing personel music collections among Internet users. With this blowthe music industry is still not able to recover. 30• Piracy:Internet facilitated piracy and this caused the launch if SDMI (Secure Digital MusicInitiative) taken by Music Industry.
Change in Market Strategy &Issues• Change in Basic Marketing Strategy:Mr.Zelnick & Mr.Conroy focused the new marketing strategy in developingonline channel of sales and promotion.• Distribution:Internet was added as an channel for sales of Music. BMG had taken first stepfrom music industry followed by Sony, Universal & EMI.• Promotion:Intenet is being actively used for promotion along with various opportunitiesfor promoting new artists.• Industry Economics:The rising un-happiness among the retailers and threat to become Labelsthemselves and signing bands if traditional retailors are not protected.• Sales:Digital distribution will be the channel of future from where maximum sales 31will come. ie. Itunes store. Hence this has to be developed.
Strength• First major record label to create websites branded towards different music genres.• First major record label to use downloading technology to promote sales of CDs and cassettes.• Merged with AOL--AOL has the largest internet service provider in the industry.• BMG was the largest music club in the world, and arguably the leader of the five major labels.• BMG set up a series of websites dedicated to specific genres of music. These sites linked fans to the artists websites, where they could download or purchase CDs.
Weakness• Through sites like CDNow and Amazon.com customers had the option of having CDs or cassettes mailed to them. Consumers may not want to "deal" with downloading music from the net. They may just stick with what they have. Many sites had illegal downloads, so the conventional consumer may not want to bother with this new type of technology.• Although BMG was the first company to create branded websites for specific music genres, they only focused on promotional aspects here, rather than focusing on selling music and in turn making money.
Opportunity• The innovativeness and newness of the digital era could spark a surge of consumer interest in the music industry. For instance, the CD had a big impact on industry revenue; owners of tapes simply replaced their collections with CDs.• BMG is arguably the leader in the music industry, and consequently has the influence to take its existing customers with them into the digital mp3 era.• BMG had close relationships with all the players involved in setting tech standards for downloadable music. This could give BMG the heads up on newest technology, and an advantage for market entry.
Threat• Electronic entertainment is expected to overtake the music market• The Internet and being able to download music directly from a website opened up the door for all the independent labels and artists to more easily be able to get in the music game and succeed without needing the major labels to do so• Threat of piracy with all the illegal download activity by consumers
2004: BMG-Sony JV• In strategic terms, Bertelsmann and Sony Corporation of America merged their recorded- music businesses in a JV Each partner owns half of the new company Thrive creatively and financially in a highly challenging worldwide music market Excellent position in the market and superb management team Creative, operational and strategic assets of two very accomplished music businesses To provide consumers with the best in music entertainment Vast catalog that comprises some of the most important recordings in history Broad array of both local artists and international superstars Synergies among the different media divisions (cross-advertising, cross- collaboration, and cross-production) JV meant less risk than a M&A, more diversification, increased flexibility and 37 volume, cost-cuts “BMG’s music publishing business was not included in the joint venture”
2006: BMG Music Publishing Group DivisionSale• Third largest music publisher worldwide• Sold BMG Music Publishing to Vivendi for $2.1 billion• To help repay the debt it took on to buy back Groupe Bruxelles Lamberts (GBL) stake in the entire company • GBL had threatened to exercise an option that would force Bertelsmann to consider going public • Tax concerns also played an issue in the Mohn familys decision• Deal will enhance the value of Vivendis Universal Music Group• Fully committed to its recorded music business through its partnership with Sony in Sony BMG Music Entertainment• Separately, Bertelsmann agreed to pay Vivendis Universal Music $60 million to settle Napster litigation 38
Sony-BMG Venture: A Deal That Was No Deal• JV was due to expire in Aug’09, but ended a year in advance• Full integration of the two companies was never achieved• Bertelsmann received approximately $900 million for its 50% share, tax benefits• Reason for ending the merger was that illegal downloading was hurting the overall music industry and therefore the two companies• Global music market is also constantly evolving and consumer behaviors are changing• No one-size-fits-all strategy• Companies; Should build their strategy upon the political, cultural and financial environment of the markets they represent Integrate consumer friendly technology in their products 39 Explore new markets such as India and China Focus more on the digital music market
Future: BMG Rights Management• As part of the deal to exit the Sony BMG joint venture, Bertelsmann acquired a subset of the Sony BMG master rights catalogue• In October 2008, Bertelsmann founded BMG Rights Management• A new kind of company, rooted in music, but born of the digital age• In Oct’09, the private equity firm Kohlberg, Kravis Roberts & Co (KKR) acquired a majority shareholding• To build scale and establish an international presencePRESENT• World’s fourth biggest company in music publishing• Focused on the management of music rights• Covers the entire range of rights administration and exploitation worldwide• Represents the rights to more than a million songs and tens of thousands of master 40 recordings
CONCLUSION• Disruptive Technologies led to paradigm shifts in music industry.• As internet comes to center-stage, focus has shifted to digital distribution and rights management from earlier “ Brick and Mortar” approach.• The music industry has always seen the trends of consolidation; from “ Big Five” in 90s to “ Big Four” in late 2000s to the “ Big Three” ---Sony, Universal and Warner Music of the current times.• Record companies need to innovate and leverage the rise of new platforms i.e. social media (youtube, vevo) and cloud (spotify). 41