BMG ENTERTAINMENT

GROUP 6 Shiladitya | Kartik| Apurba | Sanket | Siddharth | Arushi | Srinivas | Ravin | Tommaso | Amber

Introduction

From its start, in the last decades of nineteenth century, music industry has proved to be an extremely dynamic context: an intricate system of roles evolved as a result of technologic and consumer changes. The majors, mainstream and highly diversified record companies, have been for seventy years undisputed protagonists in music industry, going through several market revolutions and consolidating their power. In late 1990s Internet gave the consumers the possibility to separate for the first time music from its material brace, and potentially from the power of Majors. In 1999 BMG Entertainment, as all the other majors, had to rethink its role as an intermediary between music and consumers in order to find a new, up-to-date way to deliver value in a radically changed context.

Agenda
Global Music Industry Major Players in Music Industry Music Industry in Internet Age Technology Adoption In Music Industry Decisions
Choice of Channels Managing Internet Business: Separate Division Managing Technology Partners

Development of Global Music Industry

The Early Oligopoly (1920s-1940s)
Initial Oligopoly due to patents By 1920s focus increased on records and recording royalties main source of revenue Industry leaders continued to experiment with new formats for distributing music

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

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

Reconsolidation(1970s-1999)
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 and Universal Music Group

Organization of Music Industry (1999)

Organization of Music Industry (1999)

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 and regulate 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

Organization of Music Industry (1999)

Independent Distributors
Were mainly regional, but some had national reach, supported mainly through alliances and mergers

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 releases aired

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

Organization Structure of a Major Record Company

Parent Corporation Record Company Other businesses

Manufacturing

Distribution

Music Publishing

Retail Interests

Label 1

Label 2

Label 3

Domestic

International

Artist & Repertoire

Marketing

Business Affair

Accounting

Analysis of Major players

BMG Entertainment
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

Universal Music Group

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

Sony Music Entertainment

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

Warner Music Group

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

EMI
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

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

Music Industry Average Market Share from 1991-99 (% US only)

Revenue of Major Players FY 1999 ($ bn)

6
15% 13% 11% 21% 24% 16% BMG EMI Sony Universal Warner Others 4 2 0

Music Industry in the Internet Age

Internet accounted for .3% for all music sales in 97 and slated to grow 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 and distributors diminishing. Artists are getting higher royalties Piracy and Sharing pose serious threat to the online distribution model New business models are emerging with unconventional distribution channels

Emerging Business Models in the Internet Age

Online Sale of Physical Products
Customers can browse and check sample audio in the website and then order CDs

Downloaded Music
New ecosystem comprising downloadable MP3 songs, memory device, portable player and media software New start ups such as MP3.com and Emusic.com provides a platform for consumers and artists Apart from revenue sharing on downloaded music, the websites are exploring other sources of revenue such as advertising

Piracy and Sharing

Napster provides users a platform to share their downloaded music with other registered users

Websites such as CDNow posts albums from composers and looks after all the marketing activities
Third party distributors such as Valley Media handles the logistics of supplying CDs to the end customer

Many of the MP3 songs are pirated and downloadable for free
Organizations such as SDMI along with software firms such as Liquid Audio are coming up with protocols to eliminate piracy of songs

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

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 of websites Later introduced Getmusic.com, an online store for all the genres 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

Adoption of Technology: Competitors

Sony Music Entertainment
Columbia House subsidiary launched Total E, an online store for selling CDs Decided to acquire CDNow and 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 stick as 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

Retail BMG Online MultiChannel

CHOOSING THE CHANNEL

Traditional Retail

For high cost and risky products, customers prefer to touch and try the product before purchase Immediacy Can take home purchase immediately 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 billing lines Added Cost of travel and time Free-Riding of online stores: People may visit stores to try product and then buy online to attain cost advantage

Online Retail

Lower prices for products Large assortment and variety Bulk breaking possible Stress free shopping Saves time Brings within reach Stores from around the world Lesser chances of stock out Can visit multiple sites without extra effort

Impossible to touch and try product before buying Time to receive order Possibility of damaged product Does not attract conservative people Loss of possible target market Inconvenience in delivery of product

Taxonomy of channel types

Channel type

Margin or turnover

Bulk breaking

Spatial convenience

Waiting and delivery time

Variety

Assort ment

Retailer

Both

No

Moderate

Moderate Moderate Low

Online

Turnover

Yes

High

Low

High

high

Multi channel Retailing

Retailers extending store bases business to internet- can run online presence separate from physical operations or integrate with existing channels. Multi channel commerce- bricks and clicks or clicks and mortar Suitable if realized benefits outweigh problems of integration Need for consistency across different channels

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

Phase I : Short Term

Structure for BMG

BMG

Downloadable Music

CDs

Through BMG website

Retailers Website

Retailer Linked through BMG Website

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

CHOOSING THE CHANNEL: THE WAY AHEAD

Internet: Market Potential Forecasted

PHASE II: Long Term

MANAGING INTERNET BUSINESS

Managing Internet Business: Separate Division

Need
Requirement of expertise
Different line of business Currently internet used for promotion only Limited experience with technology Different model Managing entities such as technology providers, service providers Can span different geographies at minimal cost Massive shift of customers towards online retail expected Developing skill set to meet growth Digital kiosks set up by Sony

Challenges Faced
Sidelining of traditional retail Inequity in distribution of resources New technology might be prioritized Internal competition Cannibalization of the channel sales Extra costs incurred Duplication of resources Technology costs, administrative costs, etc. Relations with current channel members Key aspect of the industry

Management of channel partners

Future trends

Sales innovation

Managing Internet Business: Separate Division

Place both channels under a joint head Equitable distribution of resources between brick and mortar and online channels Equal emphasis on both channels Monitor cannibalization Set fixed target for each channel Increase integration between the channels Online model can be used to estimate consumer trends and can be converted to increased traditional sales Promote cross channel initiatives

LEVERAGING EXTERNAL RELATIONSHIPS

Technology Partners The Way Ahead

Contracts with one or two partners Two options available Relationships with all major players

Long term contracts enhance oneto-one relationship Availability of exclusive software and technologies for music encoding, billing etc.

Industry still in nascent stage whom to align with? Exclusive longterm deals could backfire Insider knowledge decreases

Help s BMG stay industry insider with involvement in initiatives Facilitates knowledge transfer on an emerging industry Less risk w.r.t. licensing

Possibility of spoiling industry relations by playing the field Backing a failing venture could be harmful financially and strategically

In the short term, continue to maintain relationships with all major players. However, establish long-term contracts with promising or successful partners within the next 4-5 years

Maintaining Channel Relationships

ARTISTS & PUBLISHERS Digital music would generate more revenue for artists BMG can negotiate better terms (e.g. royalty amount decreases with increasing online sales brackets) Organize store appearances to increase visibility among fans

RETAIL BMG currently needs to provide support to retail stores. Poor long-term prospects for specialized stores, potential competition in digital space in the near future. Increase shelf space on supermarkets & general stores (ex. 4 other stores provide 34% revenue)

CONSUMERS Encourage internet transactions as the medium of the future, while maintaining a retail presence as well Enable ease of use through online payments, multiple tech. and downloading options Increase advertising on prominent websites to enhance recall

Upstream: Key factors are profitsharing and better artist visibility

Downstream: Concentrate on online marketing and logistics

THANK YOU