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BMG ENTERTAINMENT
GROUP 6Shiladitya | Kartik| Apurba | Sanket | Siddharth |
Arushi | Srinivas | Ravin | Tommaso | Amber
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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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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 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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Organization of Music Industry (1999)
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
Managing Internet Business: Separate Division
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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
Managing Internet Business: Separate Division
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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