Major Label Music Production: The Music Industry

By: Shane Savage, Nicholas Tandy, Rashad Campbell, & Elle Fenn

Quick Overview

• Past• Present

o IndustryAnalysis

• Future

 

 

the PAST

• Industry had 6 major playerso Sony and Warner still remain today

• Players were comprised of several labelso each focusing on a unique musical

‘identity’o different process of talent management. 

• Manufacturing, distribution and overhead were not differentiated

• Same product - Vinyl Records

1960's

Music Timeline

• Beginning of record store chains. o stores stocked around 10 thousand

titles each.• Introduction of cassette players

o boosted sales in the industry.

1970's

1960's

Music Timeline

Music Timeline

1970's

1960's

1980'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.

Music Timeline

1980's

1970's

1990'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

Positive Feedback

Vinyl Technology

Cassettes

Cassettes

CD's

CD's

MP3's

1970's 1990's 2000'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

• 2005 - 2010: o Digital downloads grew at an

average of 41.6% annuallyo CD sales fell at an average of

17.9% per year

• Within last decade, CD sales have dropped by more than half

• Digital music has turned the music industry upside down

• Digital music sales has yet to come close to recouping the losses from traditional sales.

• Challenge to create growth in digital and other non-traditional revenue streams that are strong enough to offset the decline in physical album sales. 

Technology Evolution

Music Industry Role Players

1.Creative Talent2.Major Labels3.Publishers4.Distribution Channels 

Creative TalentArtist • 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

WriterEngineer • Mix the track (make sure everything

flows)Mastering Center • Make the audio "Commercial-Ready"

(Adjust Hi-Lows to for Radio Play)

 

Major Labels4 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.  

 

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 $0.02 - $0.03

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

1. Digital Full-Length Albums2. Digital Singles3. Product Placement

1. Movies, TV, Events, Video Games4. Live Concerts

5. Physical CDs6. Mobile Music Downloads7. Music Videos8. Vinyl LPs

Creating different forms of the same product to sell:

# 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

#4: Tying 

iPods and MP3 players are need to play the music for the customer

#5: Mixed Bundling

Buying multiple artists from the same record label for a concert

Snapshot: Industry Analysis

Key Statistics:

•Revenue: $7.5 Billion •Profit: $188.1Million•Margin: 2.3% •Annual Growth 05-10: -9.7%•Annual Growth 10-15: 1.7%

Snapshot

Live MusicRevenue: 22.4 BProfit: 1.6 BMargin: 7.1%

Music Production Industry at a Glance

How Major Labels Feel

Why is Music Declining?

• Devaluation of music – 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

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

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

• 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

Market Share & HHI

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= Competitive1,000-1,800= Moderately ConcentratedGreater then 1,800= Highly Concentrated

Target Market & Product Segmentation

Target Market: Ages 15-45 Product Segmentation

 

 

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

Universal Music GroupAdaptive 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.  

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.

Warner Music GroupAggressive 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 RecommendationsStricter 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