BMG entertainment


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From its start, in the last decades of nineteenth century, music industryhas proved to be an extremely dynamic context: an intricate system ofroles evolved as a result of technologic and consumer changes.

The majors, mainstream and highly diversified record companies, havebeen for seventy years undisputed protagonists in music industry,

going through several market revolutions and consolidating theirpower.

In late 1990s Internet gave the consumers the possibility to separate forthe first time music from its material brace, and potentially from thepower of Majors.

In 1999 BMG Entertainment, as all the other majors, had to rethink itsrole as an intermediary between music and consumers in order to finda new, up-to-date way to deliver value in a radically changed context.

Introduction


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Global Music Industry Major Players in Music

Industry Music Industry in Internet

Age

Technology Adoption InMusic Industry Decisions

Choice of Channels Managing Internet

Business: Separate Division Managing Technology

Partners

Agenda


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Initial Oligopoly due to patents By 1920s focus increased on records and recording royalties main sourceof revenue

Industry leaders continued to experiment with new formats fordistributing music

The Early Oligopoly (1920s-1940s)

Hundreds of record companies were founded within years Low overhead and production cost resulted in easy profits Radio and DJs became paramount tool for promotion payola bribery Distribution system evolved layer of sub-distributors developed

The Impact of Rock and Roll (1950s-1960s)

Music corporations operated multiple labels Introduction of CD sparked surge in consumer demand Due to M&As by 1999, 85% of global music industry rested in hands of 5

Majors BMG Entertainment, EMI, Sony, Music Entertainment andUniversal Music Group

Reconsolidation(1970s-1999)

Development of Global Music Industry


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Organization of Music Industry (1999)


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Composers and Lyricists

Shared the copyright

Were compensated through advances or one time fee from music publishers or royalty

Performing Artists

Tended to stay with a single company

Earned primarily through royalty fees, concerts and merchandise

Music Publishers

Purchased rights and promoted vigorously through variety of channels

Key to success balance between selling the same piece through multiple channels andregulate content tightly

Record Companies

Central player in Music Industry

Managed performing artist contracts and bringing them to commercial success

Carried out manufacturing locally (now consolidating)

Marketing largest function split between US and International Operations


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Independent Distributors

Were mainly regional, but some had national reach, supported mainly through alliances andmergers

Retail Channels

Largest 8 chains accounted for 17.5% of all retail sales in 1982 and 57.8% sales in 1992

Cooperative advertising agreements

Retail price wars were common

Consumers and promotions

Consumers had wide variety of taste which broadened over time

Record companies aggressively lobbied radio and music stations to get their new releasesaired

Industry Economics

Very difficult to predict which album would be hit

Less than 20% of recordings recouped their costs

recoupable cost costs incurred by recording companies recouped from artists royalties


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Organization Structure of a Major Record Company

ParentCorporation

RecordCompany

Otherbusinesses

Manufacturing DistributionMusic

Publishing

Retail

Interests

Label 1 Label 2 Label 3

Domestic International

Artist &Repertoire

MarketingBusinessAffair

Accounting


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Analysis of Major players

Subsidiary of Bertelsmann AG, a German media conglomerate Built on Bertelsmanns 1986 purchase of RCA Presence in North America, Europe, Latin America and Asia Pacific Contributed about 30.1% of total revenue of Bertelsmann Group

BMG Entertainment

Result of acquisitions of Universal Studios, Polygram by Seagram in 1995, 1998 respectively Worlds largest music company

Universal Music Group

Part of Japanese Entertainment and Electronics giant, Sony Built on Sonys purchase of CBS Records in 1988

Sony Music Entertainment

Member of Time Warner, a U.S. Media Conglomerate Formed primarily from independent labels acquired in 1960s and 1970s

Warner Music Group

U.K. based company involved only in music industry Formed from Depression-era merger of Columbia, Parlophone , and the Gramophone Company Had the largest music publisher division in the world

Strong history of association with bands like the Beatles

EMI


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Analysis of Major players

Common Threads All of them were organized in same structure Operated around the globe representing diverse artists and labels Label managers were responsible for the respective artists Were part of major conglomerate except EMI

13%

11%

16%

24%

21%

15%

Music Industry AverageMarket Share from 1991-99

(% US only)

BMG

EMISony

Universal

Warner

Others

0

2

4

6

8

Revenue of Major Players FY 1999 ($ bn)


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Music Industry in the Internet Age

Internet accounted for .3% for all music sales in 97 and slated togrow to 10% by 2005

Power equation between artists, record companies,distributors/retailers and end customer is changing

More choice to consumers, role of record companies anddistributors diminishing. Artists are getting higher royalties

Piracy and Sharing pose serious threat to the onlinedistribution model

New business models are emerging with unconventionaldistribution channels


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Emerging Business Models in the Internet Age

Online Sale ofPhysical Products

Customers can browseand check sample audioin the website and thenorder CDs

Websites such asCDNow posts albumsfrom composers andlooks after all themarketing activities

Third party distributorssuch as Valley Mediahandles the logistics ofsupplying CDs to theend customer

Downloaded Music

New ecosystemcomprisingdownloadable MP3songs, memory device,portable player andmedia software

New start ups such asMP3.com andEmusic.com provides aplatform for consumersand artists

Apart from revenuesharing on downloadedmusic, the websites areexploring other sourcesof revenue such asadvertising

Piracy and Sharing

Napster provides usersa platform to share theirdownloaded music withother registered users

Many of the MP3 songsare pirated anddownloadable for free

Organizations such asSDMI along withsoftware firms such asLiquid Audio arecoming up withprotocols to eliminatepiracy of songs


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Reaction of Retailers

Music download over Internet perceived to be threat by

traditional brick-and-mortar retailers Forced to establish web presence

Sold prerecorded CDs and cassettes through sites Offered ability to download music Option to return unwanted CDs to traditional storefronts

Major retail chains started websites Virgin HMV Tower Records

But still retailers needed assurances from record

companies to support storefront retailing Some retailers even ready to pull out of music if not

supported


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Adoption of Technology: BMG Entertainment

Launched its first online efforts in 1995 Series of websites to particular genres

Peeps.com Hip-hop, Rhythm, Blues Bugjuice.com Alternative TwangThis.com Country

Connect2music.com Contemporary Rockuniverse.com Rock

Sites also linked to the music world like BMG artists,interviews, downloads and more

No advertising campaign needed to increase the popularity ofwebsites

Later introduced Getmusic.com, an online store for all thegenres and linked to the genre sites

Took active role in industries initiatives like SDMI Stayed in touch with all the key players for setting technological

standards for downloadable music Arrangements and partnerships with companies like Microsoft,

Liquid Audio, Real Networks, AT&T and IBM


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Sony Music Entertainment

Columbia House subsidiary launched Total E, an online store for selling CDs

Decided to acquire CDNowand merge it with Columbia House

Planned to sell singles directly using compression and copyright-protection technology Download prices comparable to other retail stores

Planned installation of digital kiosks in retail stores

Leverage its memory stickas leading portable device for downloaded music

But fear of piracy among some created a serious rift in the company

Universal Music Group

Getmusic, a venture with BMG

Also took part in SDMI

Warner Music Group

Stake in Columbia House

Took part in SDMI and San Diego downloading trial

Migration to the Internet comparatively slower

EMI

Last among the majors in online activity

Agreement of five years with musicmaker.com

Liquid Audios technology for encoding

Adoption of Technology: Competitors


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CHOOSING THE CHANNEL

BMG

Retail

Online

Multi-Channel


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Traditional Retail

For high cost and riskyproducts, customersprefer to touch and trythe product beforepurchase

Immediacy Can takehome purchaseimmediately

Personalized customer

service Possibility for social

interaction

SOD>SOS Advent of online,

downloadable music Assortment and variety

SOS>SOD Oversupply of personalized

service

Crowded shops Long billinglines

Added Cost of travel and time Free-Riding of online stores:

People may visit stores to tryproduct and then buy online toattain cost advantage


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Online Retail

Lower prices for products

Large assortment andvariety

Bulk breaking possible Stress free shopping

Saves time

Brings within reach Storesfrom around the world

Lesser chances of stock out Can visit multiple siteswithout extra effort

Impossible to touch and tryproduct before buying

Time to receive order Possibility of damaged

product Does not attract

conservative people Lossof possible target market

Inconvenience in deliveryof product


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Taxonomy of channel types

Channeltype

Marginorturnover

Bulkbreaking

Spatialconve-nience

Waitinganddeliverytime

Variety Assortment

Retailer Both No Moderate Moderate Moderate Low

Online Turnover Yes High Low High high


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Multi channel Retailing

Retailers extending store bases business to internet- can run online

presence separate from physical operations or integrate with existingchannels.

Multi channel commerce- bricks and clicks or clicks and mortar

Suitable if realized benefits outweigh problems of integration

Need for consistency across different channels


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Need for multi channel

Increasing customer needs Customer expectations

Channel diversity

Expanding capabilities for addressability and capability

Shift in balance of power Enhanced bargaining power

More knowledgeable buyers

Credible threats of backward integration

Changing strategic priorities

Delivering superior value Decisions at the individual channel function level

Perform activities where they make more sense


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Phase I : Short Term


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Structure for BMG

BMG

DownloadableMusic

Through BMGwebsite

CDs

RetailersWebsite

Retailer Linkedthrough BMG

Website


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Advantages of Multi-Channel Model

Savings in Advertising Leveraging on existing brand of retailers

Benefits from Infrastructure and Experience Can leverage on their expertise in inventory

management and existing infrastructure Transaction related risk-reduction

Payment at the retailers shop reduces fear Return of faulty CDs possible

Partner related risk Customers trust on genuine offerings through online

will be enhanced due to presence of physical stores


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CHOOSING THE CHANNEL:

THE WAY AHEAD

I M k P i l F d


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Internet: Market Potential Forecasted

PHASE II: Long Term


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PHASE II: Long Term


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MANAGING INTERNET BUSINESS

M i I t t B i S t Di i i


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Managing Internet Business: Separate Division

Need

Requirement of expertise

Different line of business

Currently internet used forpromotion only

Limited experience with technology

Management of channel partners

Different model

Managing entities such as technologyproviders, service providers

Future trends

Can span different geographies at

minimal cost Massive shift of customers towards

online retail expected

Developing skill set to meet growth

Sales innovation

Digital kiosks set up by Sony

Challenges Faced

Sidelining of traditional retail

Inequity in distribution ofresources

New technology might beprioritized

Internal competition

Cannibalization of thechannel sales

Extra costs incurred

Duplication of resources

Technology costs,administrative costs, etc.

Relations with current channelmembers

Key aspect of the industry



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Equitable distribution of resources between brick andmortar and online channels

Equal emphasis on both channels

Place both channels under a joint head

Set fixed target for each channel

Monitor cannibalization

Online model can be used to estimate consumer trends andcan be converted to increased traditional sales

Promote cross channel initiatives

Increase integration between the channels



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LEVERAGING EXTERNALRELATIONSHIPS

T h l P Th W Ah d


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Technology Partners The Way Ahead

Two

optionsavailable

Relationships withall major players

Contracts with one ortwo partners

Long term

contractsenhance one-to-onerelationship

Availability ofexclusivesoftware andtechnologies

for musicencoding,billing etc.

Industry still

in nascentstage whomto align with?

Exclusive long-term dealscouldbackfire

Insider

knowledgedecreases

Help s BMG

stay industryinsiderwithinvolvement ininitiatives

Facilitatesknowledgetransfer on anemerging

industry Less risk w.r.t.

licensing

Possibility of

spoilingindustryrelationsbyplaying thefield

Backing afailingventure could

be harmfulfinancially andstrategically

In the short term, continue to maintain relationships with all major

players. However, establish long-term contractswith promising orsuccessful partners within the next 4-5 years

M i t i i Ch l R l ti hi


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Maintaining Channel Relationships

ARTISTS &PUBLISHERS

Digital music wouldgenerate more revenue

for artists

BMG can negotiatebetter terms (e.g. royalty

amount decreases withincreasing online sales

brackets)

Organize storeappearances to increase

visibility among fans

RETAIL

BMG currently needs toprovide support to

retail stores.

Poor long-term prospectsfor specialized stores,

potential competitionin digital space in the

near future.

Increase shelf space onsupermarkets &

general stores (ex. 4 -other stores provide 34%

revenue)

CONSUMERS

Encourage internettransactions as themedium of the future,

while maintaining a retailpresence as well

Enable ease of usethrough online payments,

multiple tech. anddownloading options

Increase advertising onprominent websites to

enhance recall

Upstream: Key factors are profit-sharing andbetter artist

visibility

Downstream: Concentrate on

online marketing and logistics


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THANK YOU

Documents

BMG entertainment