Major Label Music Production: The Music Industry By: Shane Savage, Nicholas Tandy, Rashad Campbell, & Elle Fenn

Quick Overview Past Present Industry Analysis Future

the PAST    

Music Timeline Industry had 6 major players 1960's Sony and Warner still remain today Players were comprised of several labels each focusing on a unique musical ‘identity’ different process of talent management.  Manufacturing, distribution and overhead were not differentiated Same product - Vinyl Records 1960's

Music Timeline 1960's Beginning of record store chains. stores stocked around 10 thousand titles each. Introduction of cassette players boosted sales in the industry. 1970's

Music Timeline 1960's Introduction of compact disk technology; replacing casettes Another boost in sales Distribution: by 1982, 8 retail chains sold 17.5% of retail music sales. 1970's 1980's

Music Timeline 1970's Revenues reach all time music industry high of 14.5 billion dollars by 1999. 1999 was the ‘peak’ for the industry, with revenues dropping since. Distribution: major retailers increased to selling 57.8% of music sales Trend of independent music retailers closing; larger chain stores emerging Walmart & Best Buy start stocking music, using it as a loss-leader 1980's 1990's

Positive Feedback 1970's 1990's 2000's Cassettes CD's MP3's Vinyl Technology Cassettes CD's

Structure & Product Overall: cooperation between artists and business people Corporations lead marketing, production and sales Compositions created and owned by songwriters, usually licensed to production companies.  Artists with the help of production companies create recordings. The companies usually own the recordings. Consumers own physical media, such as compact disks and MP3s. Retailers distribute these from producers to consumers

Financing led by production companies: Company covers touring, marketing, engineering, studio Artists earn a portion of album proceeds Companies integrated; outsourcing minimal Exception: live performances booked by promotion companies Livenation

Evolution of Napster Changed the music industry structure Disruptive technology Peer-to-peer file sharing network Mass distribution of music files Competition for classic record companies and retailers 50 million users Environment facilitating this Multimedia capabilities Internet as a distribution platform File compression; mp3 Legal action taken; copyright issues Damage already done, the industry has changed Other sites follow similar model Source: Bergmann, 2004

  the PRESENT  

Revolutionizing Music: iTunes Within last decade, CD sales have dropped by more than half Digital music sales has yet to come close to recouping the losses from traditional sales. Digital music has turned the music industry upside down Technology Evolution Challenge to create growth in digital and other non-traditional revenue streams that are strong enough to offset the decline in physical album sales.  2005 - 2010:  Digital downloads grew at an average of 41.6% annually CD sales fell at an average of 17.9% per year

Music Industry Role Players Creative Talent Major Labels Publishers Distribution Channels 

Creative Talent Artist Record on the track (Who you hear) No Intellectual Property rights to the song (unless they wrote some of it) Writer  Writes the words to the music (The words you hear) Split Intellectual property rights with Producer   Producer  Creates the musical soundtrack (Make the beats) Split Intellectual Property Rights with Writer Engineer  Mix the track (make sure everything flows) Mastering Center  Make the audio "Commercial-Ready" (Adjust Hi-Lows to for Radio Play)  

Major Labels 4 Majors, Many others Universal Music Warner Brother Group Sony Music EMI Other smaller Majors and Many independents Job of Music Label: Finding music talent Manufacture of recordings Production of master recordings Purchase of reproduction and distribution rights to master recordings Release, promotion, and distribution of sound recordings 360 Deals: provide brand management, merchandising, tour support and expanded artist services and in return get a higher percentage

Publishers Vertically Integrated Companies: Universal (Vivendi), Sony, WB, EMI Music publishers earn their revenue from licensing the right to use an artist's songs. They licensing them for inclusion on records (samples), film, TV and other media. Also seeking new uses for the compositions Administer and collect the proceeds generated, then royalties are collected by Publisher and paid out to  songwriter/producers Interesting Fact: In1909, royalties paid to songwriters were $.02 per song. Based on the Consumer Price Index, two cents in 1909 would be over $0.40 cents per song today

Distribution Channels Role: Bridge the gap between consumers and production companies Purchase the recordings from the producers and selling to consumers. Forms: Digital Role Players Online Radio Physical Distributors Evolution: The distribution of recorded music CDs has shifted from specialty shops to mass-market, online retailers and more recently to online digital media retailers and other digital music services.  

 

Break Down of Download Costs Digital Role Players in price of many iTunes songs from $0.99 to $1.25 per track Break Down of Download Costs Labels $0.60 - $0.70 Financial Transaction $0.10 - $0.15 Marketing $0.05 - $0.10 Staff $0.03 - $0.05 Bandwidth and Hosting $0.02 - $0.03 Start-up Costs Total Costs $0.82 - $1.03

Online Radio: Pandora Serves ages 13 to 90 Target market 18 to 34 years old 16 million registered users 1 million people listening per day Spend between 2 to 3 hour sessions 65 million stations created Increases by 10,000 a day iPhone App HUGE advertising opportunity Offer precision targeting to advertisers Use same model as Facebook & Google New business model Up to 40 hours of free radio $0.99 for over 40 hours = one download

Physical Distributors Decreasing market Higher shelving costs 39,000 songs on CD’s in average store Small consumer surplus Can only sell hit albums

5 Major Pricing Strategies Versioning A La Carte Downloading Subscription Tying Mixed Bundling

#1: Versioning Creating different forms of the same product to sell: Digital Full-Length Albums Digital Singles Product Placement Movies, TV, Events, Video Games Live Concerts 5. Physical CDs 6. Mobile Music Downloads 7. Music Videos 8. Vinyl LPs

# 2: A La Carte Downloading Unbundling CD’s to maximize consumer surplus Since 2005, consumers increasingly have turned to individual track purchases instead of bundled albums Dominance of single-track downloads over album sales Margins on new sales to narrow Revenue to fall

# 3: Subscription Certain online distributors require their customers pay monthly fees to access unlimited downloads Major Labels are establishing partnerships to create subscription based streaming models provides users with more access than free services increases revenue from distribution rights for labels

iPods and MP3 players are need to play the music for the customer #4: Tying  iPods and MP3 players are need to play the music for the customer

Buying multiple artists from the same record label for a concert #5: Mixed Bundling Buying multiple artists from the same record label for a concert

Snapshot: Industry Analysis

Music Production Industry at a Glance Key Statistics: Snapshot Revenue: $7.5 Billion Profit: $188.1Million Margin: 2.3% Annual Growth 05-10: -9.7% Annual Growth 10-15: 1.7% How Major Labels Feel Live Music Revenue: 22.4 B Profit: 1.6 B Margin: 7.1%

Why is Music Declining? Devaluation of music Pirating Access to free music makes consumers less inclined to pay high prices Cheap digital songs devalue physical bundled albums Big Time Artist Going Independent Madonna's, Michael Jacksons, Justin Timberlake's, etc bring in big amounts of money for labels. Radiohead Pirating Illegal downloading directly and indirectly caused the music industry to go into decline. Consumer Behavior Changes Since 2005, consumers have turned to individual track purchases instead of bundled albums, causing revenue to fall and margins on new sales to narrow.

the Facts of Modern Pirates! The International Federation of the Phonographic Industry (IFPI): Estimates 95% of music downloaded worldwide is done illegally! Illegal piracy of music costs the broader US economy as much as $12.5 billion in losses and 71,060 jobs annually Between 2003 through 2008, the industry sued over 35,000 individuals

Preventing File Sharing Attacking the pirating systems Napster, LimeWire, FrostWire, Kazaa, etc. Updating digital file protective encryptions Digital Rights Management (DRM) software that can detect, monitor, and block the use of copyrighted material limits or prevents the sharing of downloaded music opened the door for new ways of legally distributing digital content different versions of DRM allow different access to files The effect of these efforts appears to be positive, with growth in legal downloading now exceeding illegal file sharing.

4 Current Trends Profit margins decrease Shift to Tech Based Business Models Long Tail Marketing Digital sales increase, growth slows Pirating (world wide/ global figure). Jobs and #’s exaggerated, because people wouldn’t buy as much music if it had a price.

Profits Margins Sucked Dry Down from over 15% in mid 1990’s to 2.3% in 2010. Year Warner Brother Music Group Net Income Over the Years 2006 $60.0 Million 2007 ($21.0) Million 2008 ($56.0) Million 2009 ($100) Million 2010 ($143) Million Mid 1990’s known as the CD Boom

Profit Margins Across Industries

Shift in business models: Tech is future Physical  Digital In 2010, the big four shift budgets from physical distribution models to investing in new technologies for digital distribution. Itunes Advertising based models Pandora YouTube Invest

The Long Tail Marketing Trend Digital Music allows for greater variety amongst music groups and makes it easier for consumers to find lesser know artists of their liking up and coming artists to find a target market

Trends of Digital sales Digital Sales are increasing but growth is decreasing 28.1% growth (08), 18.7% growth (09), 5.4% (10) Mathematical terms: sales increasing but marginal sales decreasing Digital Music Sales

Structure & Market Share Industry Structure Market Share & HHI Life Cycle Stage- Decline Revenue Volatility- Medium Capital Intensity- Medium Industry Assistance- Low Concentration Level- Regulation Level- Heavy Technology Change- High Barriers to Entry- High Industry Globalization- High Competition Level- High Company Market Share Universal (Vivendi) 30.6% Sony 26% Warner Group 14.6% EMI 10.7% HHI=1,940.01 Math: (30.62+262+14.62+10.72) HHI Categorization: Less then 1,000= Competitive 1,000-1,800= Moderately Concentrated Greater then 1,800= Highly Concentrated

Target Market & Product Segmentation Target Market: Ages 15-45

the FUTURE    

Preparation for the Digital Age UMG: Adaptive pricing strategies for their most profitable sectors   Sony: Consolidation and innovation WMG: Aggressive new cost management strategy to prepare for digital age EMI: Enthusiastic about embracing the digital age, but very preoccupied with survival

Adaptive Pricing Strategies for their most Profitable Sectors Universal Music Group Adaptive Pricing Strategies for their most Profitable Sectors The label will reduce the average wholesale price of albums from $10.35 to $7.50. This is equivalent to a Large Meal at McDonald's UMG is actively working with cell phone manufacturers, including Apple and Google, to improve mobile digital music technology. Sales for streaming services as well as full track and album purchases. UMG is also the principal participant in VEVO, an online streaming music video service.       Short advertisements before the music videos provide income for the labels and allow fans to access the                  service free of charge.         Since  its launch VEVO has already grown to the #1 music video website, receiving 44.7 million unique viewers in July 2010.  

Consolidation and Innovation Sony Music Group Consolidation and Innovation SME joined in a partnership with UMG for VEVO launch in December 2009 Reconstructing cost have been the bulk of their losses to date   These costs include severance of benefits as well as lease and contract terminations.      Sony has incurred restructuring charges of $14.2, $8.69 and $67.73 million in 2007, 2008, and 2009 Abandoning the Physical CD Despite:        SME experienced market share increases in physical sales of new releases and catalogue albums as a result of strong demand for Sony artist Michael Jackson and Susan Boyle. Licensing Deals: Sony benefits from its advances in digital distribution including licensing deals with Apple, Nokia, Vodafone, MySpace and Amazon.

Aggressive New Cost Management Strategy to prepare for Digital Age Warner Music Group Aggressive New Cost Management Strategy to prepare for Digital Age           Unique Distribution:    WMG has partnerships that enable distribution of the label's music online and through mobile services                           including partnerships with News Corp's MySpace Music and Nokia. 360 Deals: Like its major competitors Warner Music Group has also expanded into artist image and brand management, which includes merchandising, sponsorship, touring and artist management.  By utilizing in-house resources and some acquisitions the label has been successful in embarking in these expanded-rights deals with a number of represented artists.

EMI Enthusiastic about the digital age, but preoccupied with survival   EMI has attempted to embrace digital music more enthusiastically than their competitors.      EMI removed Digital Rights Management (DRM) from their catalog well before its competitors, allowing files to      be traded easily.     EMI's current debt obligations to Citigroup, talks of a merger or, more likely, a licensing deal with Warner, Sony or Universal for the distribution of EMI's catalog in the US have resurfaced and been the focus of the EMI record label.     

Industry Recommendations Stricter Security of Intellectual Property Cheaper Physical Products Label Consolidation Artists Social Media Site Management  Free Music   Attractive Multiple Revenue Streams (360 Deals) Encourage Diversified Works for Multiple Industries