BMG Entertainment

Group 1Amit, Aseem, Ajay, Ashish, Abhishek

20 January 20131

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

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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?

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Before advent of Internet

Understanding the industry

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Consolidated industryWhy have few companies dominated the music industry throughout most of the last century?

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Structural

Econ

omic

In order to answer this, we will have to understand the industry using the following framework

Figure 1: Framework for understanding the industry

Technological

Regularly impacted by disruptive technologies

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• Have been witnessing the advent of disruptive technologies leading to change in industry structure

• Companies need to keep on changing• For instance, when

broadcast radio was prevalent, old fashioned music record firms had to adopt the new technology.

Printed Sheet Music

Phonograph

Radio

Music Digitalization

Disruptive Technologies

Figure 2: Progress in music industry

Record companies were the most crucial element

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Figure : Value Chain of the music industry

Market dominated by few (US taken as proxy for World)

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Table : Music industry market share (US)

• High concentration oligopoly industry• Industry concentration witnessing an

increase

Table : Classification by Bain

High cost to consumer and low margins for record company

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• Making a recording was a risky venture; less than 20% of the 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

Table : Average cost and revenue of the compact disc sold

Advent of internet

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• Internet was penetrating households in late 1990s

• 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

Figure : Number of internet users per 1000 inhabitants

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How did advent of internet changed the industry?

Still highly concentrated industry

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Table : Music industry market share

• Still remained highly concentrated however, the top companies have changed

2,840

2005

16,960

6,378

3,502

3,903

3,177

2004

17,579

6,503

3,4373,290

6,578

13,782

2002

3,913

3,807

3,376

6,243

17,339

2003

3,706

3,93310,372

6,224

4,148

20072000

6,799

3,385

3,414

2006

10,406

3,516

4,050

4,036

5,811

9,847

2001

3,914

Universal

Warner

EMI

BMG

Table : Revenue of top 4 companies• Decrease in

revenues of BMG• Substantial increase

in revenues of Warner group, EMI

• Increase in revenues of Universal group

Changing roles

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Figure : Structure of music industry as of 1999

Value chain now focuses on involvement of internet

Post-internet industry roles •Physical product•Music download

Product

•Multiple ways of consumption•Convenience•Proximity to the artistCustomer

• Impact on sales•Option to open an e-commerce arm•Product category expansion•Sales of other forms of music Retailer

•Question mark on survival•complete transition towards music download will take time•Option of moving downstream or upstreamDistributer

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Post-internet industry roles •Ease of storing/transmitting music to make entry easy in this industry•To develop customer interface•Focus on increasing consumption•Develop new ways of earning revenues

Record Company

•Content being the key driver, it will have an important role•Blurring of roles (Music publishers and record company)Music publishers

•Can collaborate with artist directly

Composer/Lyricist

•More options & opportunities to reach audience•Closer to audience-better feedbackPerforming artist

•Transition period •Development of complex structure- to evolve in consolidation of roles •Ease of consumption – may increase consumption•Removal of layers-less cost of the final product•Development of new revenue streams

Overall

Economic impact

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• 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%

Steps taken by major music companies

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• 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

BMG

Steps taken by major music companies

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• Harbinger of cutting-edge technology• Pursued digital downloads• Installed “Digital Kiosks”

Sony Music

• Launched Getmusic with BMG• Went for digital downloads

Universal Music Group

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 MUSIC INDUSTRY---CASE OF DISRUPTION TECHNOLOGY

Sheet Music

Phonograph

Electrical Recording

Broadcast Radio(1923)

LP Vinyl Discs 22

TECHNOLOGICAL EVOLUTION…CONTD.Pre-recorded Cassette Technology by Philips( 1963)

MTV Debut in 1981 and Introduction of CD in 1983

Digital distribution and Internet Downloads

Download Entrepreneurship

Rights Management 23

OPERATIONAL ANALYSIS- SYSTEM APPROACH

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INPUTS PROCESS OUTPUT

CONTROL

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.

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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 : TYPICAL ORGANIZATIONAL STRUCTURE

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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.

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Initial Marketing Strategy• Basic Marketing Strategy:BMGs labels have been used for marketing day-to-day marketing activites and promotion of individual artists.Till now internet was mostly used as a promotion tool.• Distribution:Linking BMGs labels were to brick & mortar stores. Distribution personnel called major retailors, promoted BMGs latest products negociated price & terms and took orders. Overshow shipments and visited various retail sited with product placements and handed credit and collection.This service was not only serving BMGs 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 music television. 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.

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Drivers of Change• Consumers:The customer taste was changing time to time ie. Rock decreased from 36.1% in 1990 to 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 is distributed legitmately among all stake holders hence the profit margin was very less for BMG.• Online sale of physical products:CDs werebeing sold throiugh websites without requirement of brick & mortar shops anfd 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 pay then and there. • Napster:It helped in sharing personel music collections among Internet users. With this blow the music industry is still not able to recover.• Piracy:Internet facilitated piracy and this caused the launch if SDMI (Secure Digital Music Initiative) taken by Music Industry.

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Change in Market Strategy & Issues• Change in Basic Marketing Strategy:Mr.Zelnick & Mr.Conroy focused the new marketing strategy in developing online channel of sales and promotion.• Distribution:Internet was added as an channel for sales of Music. BMG had taken first step from music industry followed by Sony, Universal & EMI.• Promotion:Intenet is being actively used for promotion along with various opportunities for promoting new artists.• Industry Economics:The rising un-happiness among the retailers and threat to become Labels themselves and signing bands if traditional retailors are not protected.• Sales:Digital distribution will be the channel of future from where maximum sales will come. ie. Itunes store. Hence this has to be developed.

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BMG

SWOT Analysis

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 CD's 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 artist's websites, where they could download or purchase CD's.

Weakness

• Through sites like CDNow and Amazon.com customers had the option of having CD's 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 CD's.

• 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 volume,

cost-cuts

“BMG’s music publishing business was not included in the joint venture”

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2006: BMG Music Publishing Group Division Sale

• 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 Lambert's

(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 family's decision

• Deal will enhance the value of Vivendi's 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 Vivendi's Universal Music $60 million

to settle Napster litigation

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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

Explore new markets such as India and China

Focus more on the digital music market

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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 presence

PRESENT

• 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

recordings

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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).

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