The Internet and Business

1. The Internet and Business Lecture 10. Industry Analysis Example: Music Industry.

2. Music Industry Size

3. What should we include when we talk about “the music industry”? • Live performances? • Sales of recorded music? • Licensing of recorded music? • Sales of MP3 players and recording equipment? • Sales of musical instruments?

4. Industry data sources • International Federation of the Phonographic Industry (IFPI) • Recording Industry Association of America (RIAA)

5. Broadly defined, the industry size is $155 Bn. worldwide • Recorded music sales – trade and retail • Music publishing revenue - income from public performance and broadcast rights • Musical instrument sales • Live music revenue • Portable music player sales Source: IFPI 2009. The Recording Industry in Numbers 2008. http://www.ifpi.org/content/section_resources/rin/rin.html

6. Trend in U.S. recorded music sales

7. Music Industry Structure

8. Who are the players?

9. Some industry participants • Musicians – performers, recording artists • Songwriters, composers • Record labels • Music publishers – ensure songwriters and composers get paid when their compositions are used commercially (royalties etc.) • Retailers • Online music sites • Music player manufacturers • Cellphone manufacturers and service providers • …

10. Before the internet… • Retailers: record stores, superstores • Some piracy: cassette tapes, but costly • Major labels, some independents • Talent spotting: label A&R • Distribution: physical goods • Manufacturing: factory • Selling product • Advertising supported: radio • Performances and merchandise

11. After? • Retail: Specialist bricks and mortar retailers extinct – replaced by iTunes, Amazon.com and retail superstores such as WalMart • Piracy: Greatly increased • Talent spotting: artists required to prove commercial viability prior to signing with label – self-release, sell on iTunes, count MySpace downloads • Revenue model: Increased emphasis on live performances to generate revenue (note the proliferation of old acts returning): major acts signing with Live Nation • Labels: Major record labels remain dominant, albeit in a smaller industry

12. Some bands doing own promotion and distribution • Push Play is an unsigned band that promoted themselves on YouTube and with free concerts. • Their self-released album sold 30,000 copies on iTunes. • They managed to book the 2,100 seat Nokia Theater in Manhattan despite being unsigned. • The Bear Hands is one of many bands that uses MySpace to promote its music. • The band distributes music via iTunes and CDs and merchandise via InSound, an Online Indie Store. • They are not signed to an Indie Label. • They self-produced a 4-song EP called Golden which sells for $6.99 in CD format and $3.96 on iTunes.

13. Dance music • DJ performance is the primary source of revenue • Web sites set up to market to DJs • www.beatport.com • www.worlddj.com • DJs can follow hottest music live via online radio • hottest BBC U.K. radio shows including Pete Tong and Judge Jules, 2 of the most influential players in the international world of dance music: “These guys get and play all the hottest tunes FIRST”. • www.bbc.co.uk/radio1/dance/

14. Major record companies EMI (private: owned by Terra Firma private equity Capitol, EMI, Virgin,… Universal Music Group (owned by Vivendi) Decca, Motown, Island Def Jam, Universal, Verve… Sony Music Entertainment Arista, RCA Records,… Warner Music Group Asylum, Atlantic, Rhino…

15. Warner Music • Financial performance for 3 months ended December 31, 2008: • Revenue: $878 million • Operating income: $41 • Operating margin: 5% • Only publicly traded music company • Equity partnerships in social media sites • Alternative Distribution Alliance • Growing artist services business

16. Warner Music Group stock vs. S&P500

17. Sony Music Entertainment • Revenue Q3 08 $1.16 B, operating income $0.16 B, operating margin 14% • Revenue decreased 22% compared to Q3 07; operating income decreased 41% • Digital sales represent 31% of SME’s US revenue and 18% of worldwide revenue • Sells music via MySpace • One of the founders of MySpace Music • Music sales, subscription, ad-supported entertainment • Participated in “Comes With Music” – bundles music with mobile phones • Sells MP3s via Amazon • Launched MusicPass (MP3 gift cards) • “Plans to develop a wide range of business models”

18. Sony Music has MyPlay.com • Music retailer; also video and movies, electronics, books • Through Amazon webstore – buyers sign in with their Amazon account • MySpace Music also uses Amazon for fulfillment

19. Why is the industry dominated by four large labels? Economies of scale • Manufacturing – CDs, DVDs • Global logistics • Promotion: media buy, radio station relationships etc. • Distribution: local languages, legal costs

20. Recorded music industry structure Potential Entrants • Grooveshark? • iTunes • Amazon • Wal-Mart Industry competitors Suppliers Buyers • EMI… • Sony Music • Warner • Indie labels… • Musicians • Songwriters • Composers Substitutes • Self-publishers

21. iTunes • iPod one of many “MP3” players, not the first • iTunes introduced January 9, 2001 as a digital jukebox for Mac users • iTunes store opened April 28, 2003 • Leading music retailer • Sales estimated $1.011 B for 3 months ended December 27, 2008. • Estimate annual sales $3-$4 billion • Worldwide recorded music sales about $30 Billion

22. Peer to peer file sharing • LimeWire • Uses BitTorrent protocol

23. Economics of the Industry

24. How has the internet affected costs? • Artists can record, mix, distribute their own product • Digital music represents lower distribution costs for record labels • Manufacturing costs and distribution costs  zero!

25. How has the internet affected revenues?

26. Business Models

27. New or more prevalent revenue models • Direct sales by artists • Subscription: Napster etc. • 360 degree deals • Licensing to marketers • Ad-supported sites: RCRD LBL • “Comes with music” – bundling with cable or cellphone services

28. Devices • MP3-players • Cellphones • SmartPhones

29. Music web services • Grooveshark – revenue from digital downloads, shares with person who uploaded • Grooveshark artists – revenue from promoting artists • Spotify – advertising revenue model • Last.fm, Napster, Pandora, Jango, Rhapsody,…

30. New ventures • How do they get financing?

31. Competitive Strategy

32. Labels compete head-to-head • Record labels compete by differentiation: signing different acts • Some focus on different market segments • Sony integrates content and consumer products, strong emphasis on Asia

33. Marketing Strategy

34. Pricing options • iTunes is the “price leader” for digital singles • Amazon prices at a discount to iTunes • Wal-Mart… • Bundling • Digital single sales reduces revenue per sale • Bundling attempts to get customers to spend more per purchase • Versioning (DRM free versions at a premium price)

35. Promotion • UMG in talks with YouTube to put music videos in a special area of the site (March 2009) • Viral marketing

36. Future Developments

37. Piracy • Pirate Bay web site on trial in Sweden • France seeking to legislate to demand ISPs cut off illegal downloaders

38. New business models • Increasing focus on cell phones as music players and distribution channel • Live performances provide an increasing share of revenue • ?