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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

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QUESTIONS