MUSIC PRODUCTION & RETAILING Kelly Hansen Chelsea Karpenko
Katie Kenealy-Bredice Stephanie Pratt
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TABLE OF CONTENTS Introduction Industry Structure Background
Competition Organization Major Companies Pricing Strategies Brick
& Mortar Rhapsody Amazon iTunes Analysis & Recommendations
Investment Pricing Strategy
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MUSIC PRODUCTION IN THE U.S. Major Music Label Companies Sony
(BMG) Warner Vivendi/Universal EMI Distributors: Retailers &
Outlets Brick and mortar stores iTunes Subscription based
distributors Rhapsody Other providers of online music streaming
services Amazon
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ANSWER QUESTIONS. How are the market shares expressed in the
industry? How is this industry unique in how the product gets to
the consumer? What are the consumer buying preferences when it
comes to buying music? How do iTunes and other online music
providers play into the mix? How do they affect consumer purchasing
behavior and habits?
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TABLE OF CONTENTS Introduction Industry Structure Background
Competition Organization Major Companies Pricing Strategies Brick
& Mortar Rhapsody Amazon iTunes Analysis & Recommendations
Investment Pricing Strategy
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INDUSTRY Primary Activities Manufacturer of recordings
Production of master recordings Purchase of reproduction and
distribution rights to master recordings Release, promotion and
distribution of sound recordings Major Products Offered Digital
full-length albums Digital performance rights and subscriptions
Digital singles DVDs Full-length CDs Mobile applications Music
Videos Vinyl LPs
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In 2011, digital music formats comprised 50.3% of total
recorded music purchases. Digital single sales increased by 8.5%
from 2010 to 2011 and digital album sales increased 19.5% in the
same year. Due to the increase in the digital environment, there
has been a large shift in the ways that the music production
industry delivers its products to consumers. PRODUCT
SEGMENTATION
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CHANGES IN THE INDUSTRY The peak of the music industry struck
in 1999, just before the digital music boom. In 2008, annual sales
were 428 million units, less than half of the levels in 2000.
Consumers were beginning to use file sharing and other options to
attain music. By mid-2009, iTunes was the largest single retailer
of music in the US, and accounted for 65% of all music sold.
However, 95% of digital music downloaded in 2008 was not paid
for.
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WHOS GETTING PAID? Since the beginning of vinyl records, the
music industry has earned much of its revenue from selling physical
products. Music labels contract with artists to record albums, and
provide the funding for all of the necessary items associated with
production. The artists typically receive a percentage of their
sales, ranging from 6-18% depending on the artist (this is paid out
after the label regains their fixed costs).
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SALES/GROWTH FIGURES The industry is suffering from decreases
in revenue and profit. In the mid 1990s, profits exceeded 15%,
however in 2010 the profit margin was estimated to be 2.3%. 2012 is
forecasted to have the first industry increase in revenue in seven
years. The industry generates the majority of their sales from the
leasing and licensing of master recordings.
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It is common to associate the music industry with products
meant for younger consumers (aged 15-24). The 15-19 year old age
group has shown a decrease in purchasing habits, holding 16.8% of
sales in 1997 and dropping down to 10.9% of sales in 2009. Younger
age groups are more likely to download or illegally share music
than older groups. CONSUMER AGE SEGMENTATION
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The music production industry is very heavily concentrated with
almost 80% of market share falling under the top four firms. HHI =
1898.12 The Big Four are all headquartered in different countries,
but have large operating offices in the US. They own and control
more than 100 subsidiary labels. The increase is digital technology
is a potential threat for these large players, which would reduce
the effectiveness of the current economies of scale they obtain.
Barriers to entry are high due to increased capital investment
required, in addition to an industry that is heavily based on the
ability to network. COMPETITIVE OUTLOOK
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ORGANIZATION OF THE MUSIC INDUSTRY Artists and composers
Managers Lawyers, business manager, accountant, etc. Producers
Recording companies Publishing companies Retailers Distributors
Brick and mortar Internet/online Consumers
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ARTISTS PRODUCERS RETAILERS CONSUMERS
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In the US, Universal Music Group is owned by French media
conglomerate Vivendi (acquired in 2006). Vivendi is responsible for
more than 1 in 4 records sold around the world. Declining revenue
in 2011, despite increases in digital sales. 30.4% Market Share
Major labels include: Interscope Records, Def Jam Recordings. UMG
Nashville, and Geffen Records Some recording artists include:
Taylor Swift, Nine Inch Nails, Fergie, James Brown, Nicki Minaj,
Jack Johnson, Elton John, Bob Marley, Jay- Z, Nirvana, and Kanye
West *Currently waiting for regulatory approval to purchase
EMI
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Sony is headquartered in Japan. After taking a huge hit in
revenue in 2006, Sony increased its efforts in digital formats and
increased cost- cutting to bounce back in recent years. 26.6%
Market Share Major labels include: Epic, RCA, and Columbia
Nashville Some popular artists include: Chris Brown, Adam Lambert,
Jimi Hendrix, Kellie Pickler, Michael Jackson, and The Foo
Fighters
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Warner Music Group is the only US-owned major player in the big
four. WMG has experienced steady decreases in revenue each year
since 2006. By 2011, digital sales represented 32% of WMGs revenue.
13.2% Market Share Major labels include: WB Records, Atlantic, and
Warner Music Nashville Popular artists include: T.I., Metallica,
Jason Mraz, Ray Charles, Zac Brown Band, Fleetwood Mac, Red Hot
Chili Peppers and Cee Lo Green
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EMI is a UK based company EMIs total revenue has decreased at
an average rate of 6.1% per year for the last five years EMI was
obtained by its creditor Citigroup and auctioned off in late 2011.
A deal is currently pending with Vivendi. 9.6% Market Share Major
labels include: Capitol, Virgin Records, and EMI Records. Some
popular artists include: The Beatles, The Beastie Boys, Luke Bryan,
David Guetta, Pink Floyd, Snoop Dogg, and Katy Perry.
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INDUSTRY REGULATIONS The industry is dependent on legislation
to protect operators rights against reproduction, distribution,
performance or rental of its products. There is no specific
government assistance for this industry. Federal The Fair Use
Doctrine The Audio Home Recording Act of 1992 The Digital
Performance Right in Sound Recordings Act of 1995 The Performance
Rights Act The Digital Millennium Copyright Act State Anti-piracy
laws CA, FL & NY have specific legislation for disk
manufacturing International The Berne convention for the Protection
of Literary and Artistic Works Trade Related Aspects of
Intellectual Property Rights World Intellectual Property
Organization Copyright Treaty
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TABLE OF CONTENTS Introduction Industry Structure Background
Competition Organization Major Companies Pricing Strategies Brick
& Mortar Rhapsody Amazon Music iTunes Analysis &
Recommendations Investment Pricing Strategy
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DO CONSUMERS BUY OR LISTEN TO MUSIC ONLINE?
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RETAIL OUTLETS
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BRICK & MORTAR STORES
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PRICING STRATEGIES: BRICK & MORTAR Third Degree Price
Discrimination Consumers choose between: Buying the whole CD Buying
single CDs, which are comprised of 3-5 songs from the artist
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PRICING STRATEGIES: BRICK & MORTAR Versioning: Early
adopters buy the initial album Deluxe Versions released with added
songs or more features
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SONG PRICING ONLINE RETAILERS SongGenreAmazoniTunesRhapsody
Part of Me Katy Perry Pop$0.99$1.29Subscription $9.99 Honey Bee
Blake Shelton Country$0.99$1.29Subscription $9.99 Super Bass Nicki
Minaj Rap$0.99$1.29Subscription $9.99 With or Without You U2
Rock$0.99$1.29Subscription $9.99 Drive By - Train Pop$1.29
Subscription $9.99
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RHAPSODY
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PRICING STRATEGIES: RHAPSODY Versioning
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PRICING STRATEGIES: RHAPSODY Confusing pricing: Once you stop
the monthly subscription you lose all of the unlimited downloading
you had done previously Quantity Discount: Save money by purchasing
premium plus for more devices
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AMAZON MUSIC
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PRICING STRATEGIES: AMAZON Third Degree Price Discrimination:
Different prices for songs may vary from Free to $1.29 Free songs
from upcoming artists Album deals (ex. 100 albums for $5 each)
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PRICING STRATEGIES: AMAZON Second Degree Price Discrimination
Quantity Discounts buying in bulk (whole album) vs. buying per song
Rolling in the Deep Price of Individual Song Price of Song (with
Purchase of Album) Adele$1.29$0.99
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ITUNES
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PRICING STRATEGIES : ITUNES Third degree Price Discrimination
Variable pricing: Three tiers $1.29 (New Releases) $0.99
(in-between pricing) $0.69 (Weekly specials) Survey Results: Have
your purchased habits changed when the iTunes pricing changed from
$0.99 per song to $1.29 per song?
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PRICING STRATEGIES: ITUNES Bundling Combines single songs onto
one album (cheaper price per song) Sometimes bundles include music
videos or behind the scenes footage
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TACIT COORDINATION: ITUNES & AMAZON
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Price Leadership: iTunes, price leader, announces price changes
ahead of others (April 7 th, 2009) Amazon, price follower, soon
follows the price changes by matching the leaders price (April 9
th, 2009)
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TABLE OF CONTENTS Introduction Industry Structure Background
Competition Organization Major Companies Pricing Strategies Brick
& Mortar Rhapsody Amazon iTunes Analysis & Recommendations
Investment Pricing Strategy
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FUTURE Industry is moving towards a more digital platform
Uncertain future
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KEY SUCCESS FACTORS Control of distribution arrangements Having
a diverse range of clients Production of goods currently favored by
the market Access to the latest available and most efficient
technology and techniques Aggressive marketing/franchising Having a
wide and expanding product range
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RECOMMENDATIONS Rhapsody should alter their subscription to
allow users to keep songs after having it for a specific period
iTunes offering bundles: New Release with and older song: $1.99
Create Your Own Album: Buy any 10 songs $10.99 Name Your Own
Price????? Radiohead strategy