MQM 385 - Time Warner Paper

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Cover Sheet· Added later

Table of Contents· Added later

Executive Summary· Added last

External Analysis

Value Chain Analysis · The value chain of the Warner Music group is very similar to other large companies in its industry. The standard value chain for Warner Music is as follows:

1. Artist development2. Recording3. Manufacturing4. Marketing and promotion5. Distribution6. Retail

What is important to note here is that the value chain functions of manufacturing, recording and retail are often outsourced. Many years ago, major record labels used to own their own recording studios and perhaps record stores, though the manufacturing of records and CDs themselves were still generally outsourced. We still see an element of this today in small, independent record labels who continue to operate as record labels have for decades in the past.

In order to get a better idea of what the each of these value chain elements means for the Warner Music group, first we must define each step of the process:

Artist development – arguably one of the most important elements of the value chain, artist development involves putting money into developing artist groups and their music, scouting for new talent, taking current talent and improving them, promoting concerts, organizing tours, preparing merchandising, and constantly expanding, looking for new talent to add to the company’s portfolio

Recording – though Warner Music group does retain some of its own recording studios, there is a trend in the company as well as the industry as a whole to outsource this function as it is often quite expensive to acquire the equipment necessary for a recording studio and relatively inexpensive to outsource. Another expensive part of the process is mastering, or mixing, which involves taking the recorded instruments and vocals and combining them in a way that sounds best to the audience.

Manufacturing – the manufacturing cost generally from $0.75 to $1.10 for major record label per CD, or about 10% of the final retail price. Since there are relatively few CD manufactures in the world, the cost to produce a CD is quite competitive and relatively inexpensive given the highly level of automation involved in the process. (Strauss) Additional costs include developing and printing cover art for the CD. These costs can be mostly if not entirely avoided by

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distributing digitally through online music stores such as iTunes or Amazon. Since no physical product is being purchased, the cost of raw materials in this case is zero. Another advantage of using digital media rather than manufacturing “hard” CDs is that there are no inventory costs and over/under-production are no long an issue.

Marketing – another one of the most important steps in producing a record is the promotional efforts. Record labels today have to be more competitive than ever the marketing realm if the wish to sell their records. Marketing activities include general promotion, advertising, radio and television plays, catalogues, press releases, promotional tours and other events. Things like music videos, art festivals and concerts could also be included under marketing as well.

Distribution – representing about 40% of the final retail cost, the distribution process is one that can be quite costly, but is essential for ensuring a high level of sales. The process of distribution involves the physical transportation of the product to the retailer. Since, as mentioned, there are relatively new number of manufactures, distributing these products all over the world can sometimes be expensive. Some traditional distribution channels include chain music stores, chain book stores and independent music stores while other non-traditional distribution channels include things like catalogs, retail chains and online retailing via websites such as Walmart and Amazon or through an online music store like iTunes.

Retailing – going along with distribution is the final step of retailing. As mentioned earlier, the traditional distribution channels of music and book stores have made up the bulk of sales in the past few decades. This has rapidly changed over the past decade with the advent of the internet and online music retailers.

Since the Warner Music group focuses mainly three elements of the value chain, artist development, marketing and distribution, it is important that their core competencies lie in these areas. While the Music Warner group does have some of its own recording studios, they have neglected to take advantage of many of the benefits of living in the digital age, such as digital distribution channels, social media and online promotions. In order for the Warner Music group to remain competitive in their industry, they must be a source of constant innovation, and focus on creating new opportunities in the form of scouting new talent and developing new marketing and distribution channels

Key Success Factors· There are a number of factors which are critical to Warner Music Group’s success in the recording industry. These factors deal with all aspects of the business, including areas such as recruiting talent, recording, manufacturing, distribution, and marketing. Let us now take a look at these factors individually so as to understand how each one uniquely affects Warner Music Group. The first key success factor for Warner Music Group is the control of distribution arrangements. It is imperative for companies in this industry to have access to multiple channels for both physical and digital media. This control is absolutely necessary for Warner’s maintaining favorable profit margins on the sale of its music, as most sales are shifting towards digital media. Companies that choose to entrench themselves in physical media only generally trail the pack in the recording industry. A second key factor for success is having a diverse range of clients. The larger and more diverse a company’s catalog of prior hits and artists, the more stable, diverse, and profitable the revenue streams are. This is important because a

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large, diverse catalog attracts repeat customers without any additional investment. It is also necessary for Warner Music Group to have a blend of talent that appeals to a wide range of audiences. Companies in this industry who choose to market to a specific niche are generally not as successful. A third key success factor for Warner Music Group is to have supply contracts in place for key inputs. According to IBISWorld, “It is imperative that major labels secure comprehensive contracts with talented artists that appeal to the public” (IBISWorld Industry Analysis). The recording industry emphasizes artist development and promotion as key activities to ensuring success on this factor. Again, this key factor emphasizes the need for Warner Music Group to attract popular artists and secure contracts with them that make good business sense. This point is tied in with the next key success factor as well - production of goods currently favored by the market. It is important for WMG to understand that public acceptance of artists and their recordings ultimately affect company performance. Another key success factor for Warner Music Group is their access to the latest available and most efficient technology and techniques. In the current era, where technology changes and improvements occur more and more frequently, labels must have access to and efficiently and effectively implement the latest technologies. This applies to all areas of the business, but most importantly in recording, production, distribution, and marketing of their music. Yet another key success factor for Warner is the use of aggressive marketing and franchising. This factor is due to the high level of competition in the recording industry. As was previously stated, attracting and maintaining public acceptance is a key activity for Warner Music Group, and this is achieved through aggressive marketing techniques and extensive franchising. Warner must maintain a constant level of public awareness through the use of a variety of marketing and advertising media. Another key success factor for Warner Music Group is to possess an economy of scope. According to IBISWorld, “The size and strength of labels’ production, marketing and distribution operations build upon themselves by attracting established artists” (IBISWorld Industry Analysis). The larger and more prestigious the companies’ repuatation, the easier it is to attract established as well as up-and-coming artists, making the company’s reputation even stronger. Protection of intellectual property and/or copyrights of outputs presents another key success factor for Warner Music Group. This issue is becoming increasingly important for industry members due to the high level of online piracy that occurs. This gives incentive for music publishers to own the copyrights for more songs, so that they can be distributed legally. Another key success factor for Warner Music Group is upstream vertical integration. These ownership links guarantee access to reliable product promotion and distribution channels. Vertical integration allows companies to oversee all aspects of their operations, and allows them to ensure quality practices at all levels. A final key success factor for Warner Music Group is to ensure that management stays in touch with current trends and customer desires. Out-of-touch management can be a crippling force on a company, and in an industry where trends change at a rapid pace, this problem can be quickly compounded. Management must educate itself about its customer base and keep up with sudden changes. Companies that take all of these factors into account lay the foundation for success in the recording industry. If Warner Music Group can align its operations in accordance with these

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key success factors, they can climb atop the industry, whereas they currently sit in third in terms of market share.

Porters 5 Forces

The five forces or threats that make up the Porter’s framework include: threat of intra-industry rivalry, threat of new entrants, threat of substitutes, threat of bargaining power of buyers, and finally, threat of bargaining power of suppliers.

Threat of New EntrantsEconomies of Scale:An industry has economies of scale when a larger firm is able to recognize cost advantages over a smaller firm due to its size. The increased popularity of the internet has caused the economies of scale for the music industry to be moderately low. Independent artists and record labels can now offer their products online at very low cost, and in doing so skip several steps in the traditional value chain. Even though hard-copy CDs still account for the majority of industry sales, the significant shift towards digital downloading has eliminate this "economies of scale" advantage. Overall, the moderately low level of economies of scale in the music industry leads to lower revenues and profits.Cost Advantages Independent of Scale:The dominant, “Big Four” record companies are able to realize cost advantages independent of scale because of the learning curve effect. These firms have gained the knowledge and built a network of resources and expertise that allows them to be increasingly competitive in the industry. Independent labels don’t have access to the same resources nor have they gained the same level of experience. The “Big Four” have more consumer knowledge and larger amounts of capital, which allows them to better market their artists. Due to this learning curve effect, costs for industry incumbents will decrease while profits will increase.Although the learning curve makes entry into an industry more difficult, low product differentiation, and moderate economies of scales, eliminates any barrier the learning curve provides. Therefore, the threat of entry for the music industry is high.

Threat of SubstitutesThe next environmental threat we will take a look at is the threat of substitutes. A substitute is a product or service provided by a firm’s rivals that meets approximately the same customer needs in the same ways as the product or service provided by the firm itself. The vast majority of record company sales and revenues come from CD sales. So from the point of view of the large music groups, the biggest threat of substitutes comes from alternatives to CDs.The main purpose of a CD is to provide consumers with the power to listen to a particular artist or type of music whenever they want. Now, with the increasing popularity and access to digital file-sharing online and the various downloadable formats, consumers can obtain and listen to whatever type of music they like at a much lower price and sometimes even for free. Music downloading is available right in your own home, and is much more convenient then heading to the store. For this reason, it is safe to say there are many more attractive alternatives than using traditional CDs.Substitutes to CDs like mp3s and other downloadable formats place a ceiling on prices firms in the music industry can charge and on the profits those firms can make. These substitutes seem to be ultimately replacing the music industry’s traditional products and services. Ultimately, the threat of substitutes is high resulting in increased costs, decreased revenues, and therefore, decreased profits.

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Buyer PowerNumber of Buyers:Overall, the threat the music recording industry faces from buyers is considered to be relatively high. From the value chain, one can see that CDs are distributed by the record labels to retailers and in this industry a few larger brick and mortar retailers account for the majority of music sales. In 2010, Wal-Mart, Best-Buy, iTunes, Amazon, and Target control over 50% of the sales of CDs in the music industry. Because these five retailers control such a large market share within the industry they have substantial power in setting prices. The record labels are dependent upon these retailers to carry their products and therefore most offer prices that retailers must agree to. Furthermore, as an increasing percentage of music sales are occurring through the online channel, iTunes is gaining power and market share. iTunes controls over 70% of the digital music download market, causing record labels to be bound by pricing structures in which iTunes sets. These factors decrease revenues and decrease profits for the industry.Product Differentiation:While music is offered in various formats overall, the differentiation among products offered by the various suppliers is low. Most of the large record labels have artists representing all the most popular genres that target all the various consumer preferences. In addition, the retailers have access to all the record labels for their artists’ music. This low product differentiation decreases costs and decreases profits for the music industry.Threat of Backward Integration:Furthermore, the threat of backward integration by buyers is low in the music industry. In most cases, you won’t see the traditional retailers, nor the online retailers, enter into the business of recruiting talent and producing music. While there are some instances of backward integration, for example, Starbucks starting its’ own music company, these cases make up a very small fraction of the market. This low threat of backward integration works in favor of the industry and increases revenues and profits.In this new age, buyers have significant power within the music industry. Having to offer various formats through various channels increases the costs for firms in the music industry and decreases profits. The music industry has also been forced to reduce prices for their music. With the advent of peer based sharing applications, consumers have become much more price sensitive with regards to buying music. Now, record labels must begin offering much lower prices for their music just to stay competitive. Overall, because of the high buyer power, revenues are decreased, costs are increased, and profits are decreased for the music industry.

Supplier PowerNumber of Suppliers:In the music recording industry, the suppliers to the recording companies are the raw materials providers as well as artists and other talent such as writers and producers. The raw materials that are used in the recording industry consist of supplies such as blank CDs, recording equipment, and other rather homogenous products. Because there are many suppliers of these raw materials within this industry, record labels have the ability to choose the supplier with the lowest price thus decreasing their costs and increasing their profits.Product Differentiation:There is also a large pool of talent, which is favorable for the firms because it gives the recording companies more negotiating power. Some may argue that product differentiation is high because, for example, there is only one "U2" or “Jay Z”. At the same time, however, for every music genre there are a whole handful of popular artists signed to different record labels. This allows the largest record companies to play most of the cards while still being able to

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employ artists for many different music genres. Product differentiation for raw material suppliers is even lower. Low product differentiation among artist and raw material suppliers decreases costs for incumbent firms and increases their profits.Threat of Forward Integration:The threat of forward integration for suppliers of raw materials is very low. It is very costly for raw materials suppliers to create their own record label. However, forward integration among artists and musicians is a common occurrence. This is problematic for the record labels because it creates more competition. Increased competition acts negatively on incumbents in the industry.After analyzing and weighting the number of suppliers, distinctiveness of their inputs, and their threat of forward integration, it is evident that supplier power is low in the music industry. Because of low supplier power, record labels have the ability to achieve increased profits.

Intra-Industry RivalryNumber and Size of Competitors:Within this industry four market leaders know as the “big four” have emerged: Electric & Musical Industries Ltd (EMI), Sony Music Entertainment, Universal Music Group, and Warner Music Group. These big four firms control 80% of the United States music market and 70% of the world music market estimated to be a $30 to $40 billion industry. As you can see, the “Big Four” control a majority of the market share in the music recording industry with the rest of the market being made up of independent labels. Since there is a small number of large firms that dominate the industry, sales for each firm remain relatively high causing increased revenues and profits for these firms.Industry Growth:According to the RIAA (Recording Industry Association of America) the music industry's value based on sales has been decreasing over the last decade. CDs remain the industry’s largest revenue contributor, versus other formats such as digital downloads like mp3s. Sales from digital downloading, however, have been gaining market share since their introduction into the market in 2001. Digital downloads have been able to gain popularity because they are less expensive then CDs and give consumers more flexibility in terms of listening. Consumers can purchase their favorite songs, rather than purchasing the entire CD, with the use of digital distribution channel services such as iTunes and Amazon.In an effort to increase the attractiveness of CDs, the music companies have been decreasing their prices. Furthermore, firms have been increasing their marketing budgets to give their artists more public exposure to help drive sales. The “Big Four” have more capital and resources to help promote the music of any given artist, and independent labels are finding it increasingly difficult to compete. As a result of reduced prices, decreasing sales, and increased costs, the industry has seen negative growth. This lack of growth has led to decreased revenues and therefore, decreased profits for the industry.Product Differentiation:There is also low product differentiation across the music industry. While each label owns a selection of artists, the genres that they represent are common throughout the industry. Each recording company usually has a handful of popular artists that represent the different top genres. Given this, consumers are not dependent upon any one record company for a particular type of music. Similarly, the format of the music that is offered is driven by consumer preferences requiring every record label to offer both CDs and various digital forms. Low product differentiation causes revenues and profits for the industry to decrease.Given that the music recording industry is dominated by a few, large competitors, has seen negative growth, and has low product differentiation, intra-industry rivalry is considered to be high.

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Industry AttractivenessIn summary, the music industry is an unattractive industry as the threat of entry is high, supplier power is low, intra-industry rivalry is high, threat of substitutes is high, and buyer power is high. With a high level of threat from four of the five environmental forces, the music industry is one to shy away from.

Strategic Maps - see Appendix

When making a strategic map of the musical recording industry, it was important to determine two axes that could show how the “Big Three” competed against each other and some of the independent labels. One of the main things that wanted to be portrayed was how well these major record labels were competing against the smaller, independent record labels when it came to social networking. Therefore, the strategic map that was developed went in depth to determine the correlation between the number of artists making up each record label and the degree to which they used social networking as a part of their strategy. The social networking aspect was broken down even further into the number of twitter followers that followed each record label.

As would be expected, when comparing the “Big Three” record labels (consisting of Universal Music, Sony Corporation, Warner Music Group) to independent labels (consisting of Epitaph, Matador, Victory, and Saddle Creek) it was shown that the major labels far and away surpassed the smaller, independent labels in the number of artists employed. When it came to the major labels, Warner Music Group was second in the total number of artists employed. The research showing the wide disparity between the number of artists between the major and smaller labels was not surprising at all. It would be assumed that this disparity would also be similar when comparing labels on the number of twitter followers that each label had. The larger labels, which have the greater amount of resources, would be assumed to have taken advantage of the expanding technology and possibly gather new fans by promoting through things such as Twitter. However, this was not really the case. The results showed that while Universal Music group employed the greater number of artists and twitter followers, Epitaph was on nearly the same level as Sony when it came to twitter followers and actually ahead of Warner Music Group.

All of these results lead to the conclusion that, the major record labels either do not have the capabilities to take advantage of expanding technology or they are choosing not make it a bigger priority in their strategic planning. The fact that an independent label had more twitter followers then three of the top four major record labels is very telling. It shows that the smaller, independent labels are taking advantage of expanding technology and using it as a way to gain a potential edge on the larger labels. These independent labels are attempting to connect more with the fans and possibly use that connection to grow and be able to employ more artists. For labels like Warner Music Group, these results can be very troubling. They do not want to lose the position they are in with the music industry and these results show that a potential fall could be coming ever so slightly. Therefore, Warner Music Group and other major labels must start

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accepting that technology is playing an important role in the industry today and that making social networking a key part of the strategy can prove to be very beneficial and help keep them on top.

Opportunities and threats in the environment Threats

Large Number of new entrantsThe barriers to entry on the music label industry have been substantially lowered in

recent years. New technology has made it very possible for small independent labels to offer music samples online at a very low overhead cost. This has created a large influx of new entrants in to the music label industry. According to the American Association of Independent Music the overall market share of independent labels was around 32% of aggregate sales in 2008, which was a 1.5% increase from 2007. (Indies Rising, 2009) This shows a large threat to Warner Music Groups operation, as new labels tend to take up new talent from the larger labels. In order to combat this threat Warner Music Group will need to find new ways of appealing to artists in order to both recruit new talent, and maintain their current roster.

Devaluation of music As the music industry continues to change over time one of the major shifts in the consumers eye is the value they are willing to pay for music. In 1999 the standard price for a CD was around $14.99 (Music’s lost decade, 2010) where today you can expect to pay around $10 mark. One of the principal reasons for this drop in perceived value was Napster, the peer to peer file sharing program that was widely used in the late 90s. With the debut of Napster the price of a CD dropped from 14.99 to nothing, destroying the perceived value of music in the eyes of consumers. When ITunes was unveiled in 2003 they offered songs for 99 cents, but the damage was done. According to a music analyst at Forrester research center only 44% of U.S internet users and 64% of Americans who buy digital music believe the music is worth paying for. The end result is that music labels need to offer their products at a reduced price with a smaller profit margin per unit sold. As a result Warner Music group needs to find new ways of monetizing their talent possibly through new “360 deals” with their artists which focus more of the revenue on live performances as opposed to recorded music sales.

Labels are becoming less valuable In the past music labels were an artist’s only way of becoming widely distributed. The major music labels were the only way to get the connections, advertisement, and recording equipment bands need in order to succeed. Today the landscape is very different, it is entirely possible for bands to be self published. With some simple software a band can record their own music, distribute it online, and advertise using guerrilla tactics without ever being signed by a label. This has made many bands wonder why they would need a label at all in the information age. In order to combat this Warner Music Group has started to offer a number of services to their artists beyond the traditional recording and promotion services. These services include artist management, merchandising, touring, fan clubs, VIP ticking, as well as sponsorships and brand endorsements. (Artist services overview)

Music Pirating Music Pirating has been a hot topic since Napster was unveiled in 1999. After Metallica filed a lawsuit against Napster for copyright infringement a series of high profile court cases bogged the peer to peer network until it shut down in 2001. Even without Napster music pirating remains a large threat to the music industry as a whole. According to IFPI’s digital music report

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23 percent of active internet user’s visit unlicensed digital distribution sites on a monthly basis. While the direct sales implications are hard to track, debut album sales have fallen 77% between 2003 and 2010, giving a clear indication of the damage that online music piracy can do. To combat piracy the music industry has banded together in order to lobby governments for tighter restrictions on peer to peer networks as well as educating consumers of the detrimental effects of piracy on the music industry.

Opportunities

Growing Music Consumption While the overall sales of physical music have been on the decline for the past decade, overall music consumption is on the rise. The bulk of this music consumption is coming in the form of digital distribution means. A report published by Midem found that the most common way for polled consumers to consume their music was by watching music videos online. Their survey found that 57% of consumers watched music videos online within the last three months. This reflects the growing influence of the digital market in terms of music consumption. Sites such as groove shark and YouTube allow consumers to freely access music. While this increased consumption is an opportunity that Warner Music Group can’t ignore, it is also rather difficult to monetize. Midem’s report points out that no single digital distribution channel is used by more than 60% of consumers. Warner has already tried to capitalize on this trend by working with YouTube to gain higher royalties on each song played.

Expanding E-Commerce Sales As noted in the “Growing Music Consumption” section, E-commerce sales are quickly becoming the primary means of music consumption and sales. A report published by Nielson Soundscan (Christman, 2011) showed that while physical CD sales had dropped in 2010 by 12.82%, digital album sales increased by 13%. Unfortunately the profit margin on digital albums is much smaller than on physical albums, and the overall value of the recording industry has dropped over the past decade. As noted in Midem’s report, there is no single digital distributer used by more than 60% of consumers. This leaves plenty of room for a single digital marketplace to take the market. If Warner Music Group can create a unified digital distribution platform that can satisfy a wide variety of consumers, from those that want to download single songs, entire albums, watch music videos, or stream music they can create a strong competitive advantage for themselves.

Reaching Niche Markets Improved distribution electronic distribution channels will allow Warner Music Group to reach niche markets that were not profitable before. The phenomenon known as the “long tale effect” comes into play when the population on the far side of a probability distribution can be reached effectively. Netflix has used this phenomenon to great effect, with their distribution channels they can move niche titles that have only narrow appeal to a large number of distributed consumers. If Warner Music Group can capture the same affect with digital distribution, moving music titles with only limited appeal to a large number of geographically dispersed consumers they can open up new revenue streams. This would involve finding artists with limited appeal, and making them known to the proper markets as well as having to proper digital distribution network.

Changing Cultural tastes Each generation of music listeners have had their own music, Elvis and The Beetles are considered voices for their generation. Because cultural tastes are always changing from generation to generation there is always the opportunity of finding the next big act in the music

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world. To try to capture this opportunity Warner Music Group has accumulated a number of sub-labels to recruit as many qualified performers as possible. Warner has a total of 6 major sub-labels domestically, with a number of sub-labels below those. This wide distribution network positions Warner Music Group well in terms of finding and reciting new talent that fits with the current cultural tastes.

Conclusion· Will collaborate on

Internal Analysis

Financial AnalysisIn recent years, Warner Music Group has run into financial difficulty due to its highly

levered capital structure, poor fiscal efficiency, irresponsible operating costs, and the simple fact that they are competing in a struggling industry. Warner has incurred net operating losses each of the last four fiscal years, while continuing to finance numerous mergers and acquisitions with long-term debt. This practice over the last five years has created an extremely unhealthy and unsustainable capital structure. Poor cost management and fiscal efficiency has created a situation where 97% of revenues are absorbed by operating expenses resulting in cash flow variability. All these fiscal issues must be swiftly addressed internally, or Warner Music Group could find itself struggling to compete against the numerous independent labels rapidly entering the industry.

Financial IndicatorsIn comparing Warner Music Group’s financial statements to the industry averages, you

discover a number of key financial indicators exposing financial difficulty. On the balance sheet, Warner holds significantly less cash as a total percentage of assets in comparison to the rest of the industry. It also has considerably more of it total assets tied up in goodwill, trademarks, copyrights, and other intangibles resulting in the high percentage of fixed assets.

The most significant indication of financial trouble is the large percentage of liabilities tied up in current maturities of long-term debt and long-term debt in comparison to the rest of the industry. Due to these large amounts of debt and the recent net losses, liabilities have exceeded assets resulting in negative net worth.

When comparing the income statement with the rest of the industry, you notice Warner’s gross profit is only 3% of total revenue when the industry average is nearly 70% of total revenue. This means 97% of Warner’s revenue is absorbed by it operating expenses. These expenses include: artist and repertoire costs, product costs, licensing costs, general and administrative costs, selling and marketing costs, and distribution costs. You also notice negative working capital, which indicates Warner is currently unable to meet its short-term liabilities with it current assets.

Finally, the comparison of financial ratios is rather misleading because the recording industry has been greatly struggling as a whole. Warner Music Group is within the acceptable range concerning the solvency and profitability ratios, but all of those financial ratios indicate causes for concern. The solvency ratios may be acceptable by industry standards, but Warner’s quick ratio and current ratio indicate an inability to pay off short-term liabilities. If Warner were to liquidate all of its current assets, they would only be able to pay off 51% of its current liabilities. This is not a situation exuding financial stability. Again, the profitability ratios

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are within the industry standards, but they indicate losses of $0.05 on every sale and $0.04 on every asset purchased.

Cash PositionWarner Music Group currently holds a weak cash position as compared to other firms

throughout the recording industry. Warner has consistently underperformed the industry each of the last four fiscals years concerning both the liquidity and leverage ratios. Again, these issues are compounded, and arguably optimistic, due to the overall poor performance of the industry as a whole. For example, the quick and current solvency ratios both fall within the acceptable industry range, but the numbers themselves indicate Warner would only be able to pay $0.51 for every dollar of current liabilities if they were to completely liquidate their current assets. This figure may be acceptable by their current failing industry, but it is a red flag for any individual with a financial background.

Taking a look at the most recent leverage ratios for Warner provides a good indication of their current capital structure and their questionable access to liquid funds. The Debt to Equity ratio and Long-term Debt to Equity ratio have been improving over the short-term, but this negative debt to equity capital structure needs to be improved with a continued rapidity in order to avoid solvency. Even though their reliance on debt has been diminishing, their interest payments are steadily increasing. The Coverage ratio indicates that Warner currently does not have enough access to liquid assets to pay off their interest expenses for the current fiscal year.

Cash FlowThe overall cash flow for Warner Music Group has been moderate to poor over the

short-term. The most disturbing factor associated with Warner’s cash flow has been the short-term volatility. Some may argue cash flows are more important than net income, but Warner’s inability to maintain consistent, positive cash flows even during years of net loss, creates more uncertainty for investors. The other alarming figure associated with cash flows is the trend of decreasing cash flow from operations. In order to maintain its current market position, Warner needs to increase its cash flow from operation and investment while continuing to reduce the negative cash flow from financing.

Resources Warner Music Group’s primary resources are the artists that they choose to promote, develop, and record. The label’s success depends upon their ability to choose talent wisely and promote that talent to gain popularity, which translates into higher sales and profits. Important activities in artist promotion include producing and distributing music videos, setting up concerts/festivals, interviews, and television appearances, among others. It is important for labels such as WMG not only to create popular artists, but to have a diverse range of talent which appeals to a broad audience. Labels in this industry who choose to target a specific market niche are generally not as successful as their diversified counterparts. The more diversified a label such as Warner Music Group’s talent pool is, the larger the market share that is available for that label.

Tangible Assets

Warner Music Group’s tangible assets fall into four main categories: intellectual property, subsidiary labels, joint ventures, and artist contracts. Intellectual property is an extremely important tangible asset for WMG, and includes copyrights, trademarks, and patents on both recordings and recording processes. This collection of intellectual property provides Warner

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Music Group with its catalog of products and processes. Subsidiary labels are another important tangible asset for WMG. Subsidiary labels are smaller labels which have been purchased, acquired, or created by the parent label. These subsidiary labels allow Warner Music Group to diversify revenue streams and increase ROA. WMG’s three main subsidiary labels are Atlantic Records Group, Elektra Records, and Warner Bros. Records Inc. Warner Bros. Records is among the most successful record labels of all time, and continues to play an integral role in Warner Music Group. One other important tangible asset for Warner Music Group is its artist contracts. Without these contracts, WMG would be unable to fully utilize its primary resource, the artists. Another important feature of artist contracts is that they specify the terms of how WMG will collect its royalties from products sold. Royalties from products sold are the primary source of revenues in the recording industry.

Intangible Assets

Warner Music Group has two main categories of intangible assets: networking relationships and brand image. These types of assets, though extremely important, are not easily measured or quantified. Networking relationships are an invaluable part of recording industry activities, from artist recruiting to production to promotional relationships. The quality of these relationships can determine the level of success for Warner Music Group and other industry operators. Brand image is a similar important concept which cannot be easily quantified. Warner Music Group’s brand image is tied directly to their artists and promotional efforts.

The increasing importance and use of social media in this industry have led to record labels being able to gain a better understanding of these intangible assets. With the rise of websites such as Facebook and Twitter, labels like WMG can somewhat quantify who their customers are through the use of features like Insights, which record things such as daily views and media consumption on artist pages. This information can be used as crude measures for brand image. As you can see from our strategic map, Warner Music Group has a comparatively average social networking strategy in the industry (Twitter followers vs. number of artists). Warner Music Group has 54,933 Twitter followers, 18,987 YouTube channel subscribers, and 9,026 Facebook Likes as of November 18, 2011. Also, the advent of these websites allows record labels a channel to easily communicate with their network of clients, customers, and other contacts, which can help with networking relationships.

Core Competencies

Warner Music Group has developed three main core competencies. These core competencies are artist development, marketing, and distribution. The first core competency, artist development, involves investing money into developing artists, bands, and their music. Artist development also includes scouting for new talent, taking current talent and improving their positions, promoting concerts, organizing tours, preparing merchandising, and constantly expanding and looking for new talent to add to the company’s portfolio. Not only does WMG have to choose who to promote, but how, where, and to whom they must promote. This leads to the second core competency of Warner Music Group, marketing. Record labels such as WMG have to market more aggressively than ever before due to the high level of industry competition. Marketing activities include general promotional activities, advertising, managing radio and television play, building a catalogue, coordinating press releases, promotional tours, and other events. Other activities that could fall under the marketing umbrella would be producing and distributing music videos as well as the putting on of music festivals or concerts. Warner Music Group’s third core competency is distribution. The process of distribution involves the physical (or digital) transportation of final products to retailers. Because of the lack

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of manufacturers and range of distribution, this is an expensive activity (up to 40% of final retail costs) which requires a mastery of logistics and strategy. Traditional distribution channels include chain music stores (Border’s, etc.) and independent music stores. Non-traditional distribution channels include catalogs, retail chains (Walmart, Target, etc.), and other online retailers (Amazon, iTunes, etc.).

Competitive Strategy Current Strategy Corporate - TylerIntegration position

WMG’s integration position has changed quite a bit in the last few decades. In the past, record labels tried to integrate many aspects of their value chain, both to take advantage of the profits of these activities as well as to have better control over them. Previously, many record labels had focused on integrating parts of their value chain, specifically buying CD and vinyl record manufacturers, recording studios (backward integration) as well as points-of-purchase, retail locations (forward integration). One of the main issues facing the entire industry at the moment is that, not only have these activities decreased in profitability, but the core competencies of these labels generally no longer match those required to successfully operate these integrated value chain activities. As a result, many labels have begun to divest in these areas, and focus solely on the value-adding activities commonly associated with record labels. The Warner Music Group is no exception. As the times have changed, so has WMG’s integration position. Recently, they have begun selling off CD manufacturers, and investing into the primary areas of artist development, marketing and promotion, though some distribution functions still do exist in the form of WEA corp. and ADA corp. Additionally, WMG has outsourced many of their value chain activities, specifically the recording studios, formerly owned by WMG. One such example of this was the sale of Australian CD Plant to Summit Technology Australia Pty Lt. in 2004. (Warner Music International, 2004) They have also transitioned into selling their music to wholesalers, rather than directly to the consumer, though this has begun to change with the advent of digital distribution networks like iTunes, Pandora and Spotify. Though these networks do act as a retailer for music produced by WMG, it consolidates the value chain by eliminating the role of a wholesaler, instead allowing WMG to license their music to the networks to sell at a profit.

Diversification position (divestitures)

For many record labels today, including the Warner Music Group, diversification is the result of the variety and quality of the artists signed. WMG is divided into several subsidiaries, including the Atlantic Records Group, Warner Bros. Records Group, Rhino Entertainment, Warner Music Nashville as well as the Independent Label Group. Additionally, WMG also acts as a distributor of labels within the Alternative Distribution Alliance. In order to better serve their clients, WMG does not directly manage these record labels but rather gives them a relatively high degree of autonomy in order to allow them to adapt to the different genres. Examples of this strategy include Fueled By Ramen records, a sub-label of the Atlantic Records Group, which almost exclusively focuses on indie rock and alternative rock artists. Likewise, Rhymesayers Entertainment, a sub-label of the Independent Label Group, focuses on artists within the hip-hop genre.

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By allowing each sub-label within the subsidiary a degree of autonomy and freedom, the labels are able to focus on their own individual core competencies within their genre. Because each subsidiary has is relatively independent, there also tends to be a wide variance in profitability between them. The Independent Label Group, for example, has been very profitable in recent years, having acquired many smaller record labels in order to diversify its portfolio.In an effort to further diversify, WMG was in negotiations with the EMI Group of the United Kingdom, owned by Citigroup. The goal of such an acquisition would be to help WMG compete effectively against the other two major record labels Universal and Sony. These negotiations ceased when it was announced on November 12, 2011 that EMI’s recorded music operations would be sold to the Universal Music Group for $1.9 billion, and its music publishing operations to Sony for $2.2 billion. Warner was reported to have submitted a bit for EMI valued at $2.0 billion. (Matthew Campbell, 2011) Though the acquisition failed, it should be note that, had it taken place, it would likely have meant a consolidation of resources and massive layoffs for both companies. Other portfolio management issues (haven’t been able to find many that weren’t already mentioned above -Tyler)

Business - Clayton When determining what type of strategy to pursue, each company or corporation has many things to decide upon. In particular, a business level strategy is an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets (Wiz IQ). A company can choose to pursue a business level strategy that follows either cost leadership or product differentiation. Either way, the company must play to its strengths and do what will bring about a competitive advantage for the company over its competitors. In the case of Warner Music Group, they choose to differentiate themselves from their competitors with their music publishing. In an attempt to differentiate themselves from their competitors, Warner Music Group began becoming involved in the industry of music publishing. This industry is different from the recording industry, in that music publishing involves the acquisition of rights to, and licensing of, musical compositions from songwriters, composers, or other rights holders (WMG 2011). WMG has two different groups that make up their involvement in the music publishing industry and they include Warner/Chappell Music and Word Music. Warner/Chappell Music is one of the biggest and highly rated labels in music publishing. They have over one million different musical compositions and a songwriter list that ranges well over 60,000 (WMG 2011). The thing that sets Warner/Chappell apart is the fact that they are a leader in the creation of innovative strategies for marketing and promotion of songwriters and the compositions from this label are a part of television shows, films, and other aspects of visual media (WMG 2011). In order to bolster its business, Warner/Chappell Music acquired Non-Stop Music in 2007 (WMG 2007). This acquisition allowed Warner/Chappell to expand its musical compositions further into films and television shows, but also into commercials, trailers, and radio. The other music publishing label that is a part of WMG is Word Music Publishing. This label is the world’s leading Christian music publishing company and has more than 40,000 copyrighted songs and employs nearly 50

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different songwriters (WMG 2011). What sets this label apart from other competitors is the fact that they are the industry’s premier source for church hymnals, choral music, and vocal folios (WMG 2011). These different types of music are used by independent filmmakers and different ministries (WMG 2011). Besides being heavily involved in the music publishing business, Warner Music Group is primarily focused on the recording aspect of the music industry. WMG has a wide variety of artists that stretch over numerous genres and in order to expand their roster and keep its place among the “Big 4” recording companies, WMG uses a number of sub-labels. These sub-labels are a part of WMG but they each have a focus on a certain genre and group of artists. There are three main sub-labels that make up WMG and they include Atlantic Records Group, Elektra Records, and Warner Bros. Recording Inc (WMG 2011). When discussing labels, Atlantic Records Group is one of the most popular and it just so happens to be affiliated to WMG. Atlantic Records Group was founded in 1947 and was mainly concerned with the genres of R&B and Jazz (WMG, 2011). One of the things that this label is known for is the great quality that they produce and it has shown throughout history with artists ranging from the great Ray Charles all the way to one of the greatest rock bands in Led Zeppelin (WMG 2011). Today, Atlantic Records Group has expanded their horizons in respect to their genres which now include Contemporary Pop, R&B, Rock, and Hip-Hop (WMG 2011). Some of their popular artists today include Lupe Fiasco, O.A.R., and T.I. (WMG 2011). In order to streamline activities and make Atlantic Record Group an even greater force for WMG, it merged with Elektra Records (one of the main sub-labels) in 2004 (WMG 2011). Elektra Records is known for being one of WMG’s first labels to take its music global and their main focus as a label was folk music (WMG 2011). Finally, the last label that makes up the three main-labels of WMG is Warner Bros. Records Inc. While Atlantic Records Group is a recognizable name and has been one of the most popular over the years, Warner Bros. Records is known as being one of the most successful recording labels in music history (WMG 2011). To prove this, in 2007 they were ranked the number one record label in the U.S. and have been in the top three every year since 2003 (WMG 2011). The thing that has made Warner Bros. Records Inc. successful for so many years is the fact that they are a factor in so many genres and have had past artists including Prince, Madonna, Miles Davis, and Frank Sinatra (WMG 2011). Currently, this label employs artists including Linkin Park, Cher, and Goo Goo Dolls (WMG 2011). Overall, Warner Music Group does a few things that help to set itself apart and help to contribute to its business strategy. Warner Music Group attempts to differentiate itself from its competitors through its participation in the music publishing business. WMG has two different labels that participate in this industry and it helps them to expand their horizons away from just the recording aspect of the music industry. This company also tries its best to have a diverse roster of artists that expands of a large number of genres. Warner Music Group had three main sub-labels that was reduced to two after a merger, but these main labels employs artists over genres such as Rock, Pop, R&B, and Jazz. All of this adds up to help form the business

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strategy the Warner Music Group employs and will help guide the decisions they make in the future.

Functional - Ryans Quality - Summary

○ Most recording and manufacturing functions outsourced○ as a result of this outsourcing, there is no discernible

difference in quality between labels○ no competitive advantage to be gained through product

quality, must instead focus on artist quality Quality is not something that regularly comes to mind when you think of music. When a person buys a CD they don’t expect one label’s music quality to be higher than the other, it is something that doesn’t enter the mind of the consumer. The reason for this is that most labels outsource their music recording functions and CD manufacturing processes, and professional recording equipment is becoming more and more common.

Music labels, Warner Music Group included, regularly give bands pay advances in the form of a recording fund. The band is expected to use this money to find a recording studio that will provide the equipment and audio engineers necessary to record a master track. Any money left over from the recording process is then distributed amongst the band, promoting bands to seek out the lowest cost recording studios. Labels may also pay artists back for recording time and expenses from the artist’s own facilities. This gives the artist an incentive to create their own personal studio and recoup the expenses through the label. (Hull, 2004, p. 162)

Most music studios are clustered in 5 geographic locations, New York, Los Angeles, Nashville, Chicago, and Southeastern Florida. While these are the major hubs for music recording studios, smaller independent studios exist all throughout the world. This is possible because professional grade recording equipment is becoming cheaper and more common. The price of a 24-tack hard-disk recorder is about 1/50th the price of a 24-track tape machine. (Hull, 2004, p. 163) This means that studios of all sizes can afford professional quality equipment, and put out recordings rivaling the major studios in quality. Because Warner, EMI, Universal, and Sony all outsource their recording function there is no discernible difference in quality between the labels.

The last portion of product quality for the music recording industry would be the physical albums that are sold to wholesalers. Once again this is a function that is commonly outsourced, and therefore, has no bearing on competitive advantage. Both Warner Music Group and EMI sold of their jointly owned CD manufacturing business to Summit Entertainment in Australia in 2004. (WMG, 2004) The sale included an agreement that Summit would provide CD and DVD’s for both EMI and Warner. This of course means that Warner and EMI are using the exact same CDs for their albums, leaving no difference in quality between the two companies.

Quality in the music label industry has less to do with tangible assets, recording studios and CD manufactures, and more to do with their intangible assets, the artists. Unfortunately artist quality is subjective, as some consumers may like an artist that another likes. This leaves very little room in the music label industry to gain a competitive advantage through product quality. Warner participates in the standard industry practice of outsourcing recording and manufacturing functions, meaning that their quality is on par with the rest of the industry.

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Innovation - summary

○ Has shown a lack of innovation as cited by their refusal to work with YouTube, free streaming services, and music rhythm games

○ no other major label fought these innovations, showing WMG can grow considerably in the innovation department

Innovation is something that is lacking in the music label industry as a whole, and

Warner Music Group is no exception. The biggest trend in music is the rise of digital distribution, and with it new forms of consumers accessing music. Warner Music Group has made many missteps on the road to digital innovation, pushing them further and further back in their market standing. There have been a number of highly public cases in Warner’s recent history that has shown their lack of innovation, and has affected the way consumers look at them as well as their bottom line. In 2008 negotiations between Warner Music Group and YouTube broke down. They had been renegotiating their licensing deal, and Warner Music Group felt that the royalties being paid to them per song was far too low. As a result of this falling out, all music copyrighted by Warner was removed from YouTube. (Vascellaro, 2008) This caused a backlash from consumers, many called for a boycott of Warner Music Group, and many others created YouTube containing WMG songs that had loud noises overlaid so that they would not infringe on WMG’s copyrights. Negotiations finally were resolved between WMG and YouTube in late 2009, with content being returned to YouTube shortly after. (Vuskirk, 2009) Even though the issue was resolved this still caused a 9 month gap in Warner’s content on YouTube, one of the most popular ways for consumers to listen to music. Unfortunately this is not the only example of Warner Music Group’s lack of innovation. In 2010 WMG said that they would stop licensing its music to free streaming services such as Spotify and Groove Shark. WMG’s CEO Edgar Bronfman was quoted as saying “Free streaming services are clearly not net positive for the industry and as far as Warner Music is concerned will not be licensed.” (Youngs, 2010) Free streaming services are quickly becoming one of the most popular ways to consume music, and to ignore this trend is dangerously arrogant of WMG. Spotify did eventually get a licensing agreement with WMG, but only recently. The agreement was struck in the summer of 2011, leaving WMG out of the royalty revenue from this service for over a year. (Pham, 2011) WMG had also refused to do business with the creators of music video games such as the “RockBand” and “Guitar Hero” game franchises for a time. In 2009 CEO Edgar Bronfman called for higher licensing rates from the game manufactures, and though a few of WMG’s artists appeared as downloadable content for the music games, they were a result of deals struck before Bronfman’s comments. (Bruno, 2009) Eventually negotiations resumed between the two parties and artist such as Green Day started to appear back on “RockBand.” (Allen, 2009) An important thing to note about all these examples, though WMG fought for higher licensing deals in every one of these examples, none of the other major labels did the same. This means that WMG was the only company to fight these innovations. This all points to a company that is not very innovative. Each of these examples have shown possible new

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revenue streams for WMG, and instead of embracing them Warner Music Group held their music hostage in the hopes of raising their licensing prices. This reflects poorly on them as a company both in regards to their innovation and to their customer relations. Customer Service - summary

○ Looking at customer service in two areas - External and internal customers

○ Internal customers = artists○ External Customers = wholesalers ○ To handle external customers WMG has a number of

subsidiary companies to handle their distribution network.○ To handle internal customers WMG has acquired a

number of artist management companies and has expanded their artist services considerably in the past 7 years.

Warner Music Group’s customers are not the traditional consumer that we think of; instead their customers are the wholesalers that they sell finished goods to, and the artists that rely on WMG’s recording and promotion services. For their internal customers, the artists, WMG offers a number of services beyond the traditional recording, promoting, and distribution services commonly associated with a music label. For their external customers, the wholesalers, WMG has many subsidiaries that handle most of its distribution network. This helps WMG maintain strong customer support for both its internal and external customers. To distribute to all the necessary wholesalers WMG uses a number of different subsidiaries to fully control their distribution network, and keep their external customers happy. WEA Corp, which is a subsidiary of Warner Music Group, is one of the largest music distribution companies in the United States. This company takes care of the distribution for a WMG, and a number of their sub-labels including Rhino Entertainment, Asylum Records, Word Entertainment, and many more. In addition to physical record distribution WEA Corp has a newly founded e-commerce department that works with online and traditional retailers for all digital and wireless transactions on behalf of WMG. (WEA Corp) In addition to WEA Corp, Warner Music group uses the Alternative Distribution Alliance, or ADA, to distribute music from their “indie” labels. The ADA was created by Warner Music Group and Sub Pop Records in 1993 as a joint venture, and WMG currently owns 95% of the company. (Alternative Distribution Alliance) ADA Global provides distribution services outside of the U.S. through a network of affiliated and non-affiliated distributors. To handle their internal customers Warner Music Group has pursued a rapid expansion of their artist services since 2004. This included an expanded service list for artists such as artist management, merchandising, touring, fan clubs, VIP ticketing, sponsorships and brand endorsements. With these expanded artist features has come the 360 strategy, which is based upon a desire to be fully aligned with their artists careers. These deals are considered “expanded rights” deals, and allow WMG to provide services to artists outside of the traditional recording business. Instead of only offering recording services these 360 deals allow WMG to take a part in all aspects of the artist career such as live events, merchandising, and branding. WMG has also acquired a number of artist service companies around the globe, including the

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company Vivo in Italy, Newsicom in Spain, Nous Productions in France, Taisuke in Japan, and Helsinki Music Company in Finland. . (Artist Overview Section) While WMG has put considerable effort into their customer relations, very little of this will translate into a competitive advantage for them. The distribution network they have created is a necessity in their business, not an advantage. The expanded artist services they have created may give them some advantage in recruiting anfd maintaining popular artists. A music database site called HitTracker puts out a report on the top 100 A&R, artist and repertoire, report annually. A&R is the term used to denote the wing of the label used for recruiting and maintaing artist relations. WMG has maintained high standings in these reports coming in at within the top 20 on the list from 2004 – 2007, the only major label to do so. (World Top 100 A&R Chart 2007, 2008) This shows that Warner has created an advantage for themselves in terms of artist relations.

Efficiency - summary○ Most financial ratios show that warner is very inefficient

with their finances○ Universal music group and Sony music group have

considerably higher market share for the number of employees they employ compared to WMG

Warner Music Group has been trying to make itself a more efficient company. The main way they have been doing this is by shedding unnecessary portions of its business including employees, artists, and manufacturing plants. Starting in 2004 Warner Music Group started a five year restructuring plan that included a 20% reduction in staff globally, a 30% reduction in the label’s artist roster, consolidation of sub-labels, and outsourcing of some value chain functions. (Kathleen, 2011) At this point in time WMG employees just around 4,000 people, and holds 13.5% of the market share in their industry. The two other major labels, Sony Music Group and Universal Music Group, have also taken part in restructuring operations to make themselves more efficient. Universal Music Group has reduced their employees from 7,869 in 2006 to 6,825 in 2011 and maintains 30.6% market share. Sony Music Group went from 9,000 employees in 2003 to fewer than 5,000 in 2011 and maintains 26.0% market share. While it is hard to discern a label’s efficiency because of the nature of their business, these numbers lead us to believe that Warner is not as efficient as their competitors. Though Warner has reduced their numbers, the other major labels have done the same and maintain higher market share with comparably less employees. Some other indicators of WMGs efficiency can be found in financial ratios. As of 2010 Warner Music Group had an inventory turnover ratio of 80.65, meaning the turn over their inventory roughly 80 times a year. Compared to the industry average of 41.9 Warner is near the upper limit for the recording industry. WMGs receivables turnover, inventory day sales have also increased for the past three years. Unfortunately these are the only positive indicators of their efficiency. The receivable day sales for WMG is 52.36 with an industry average of 15, and their sales to working capital is -5.04 with an industry average of 4.3. As you can see these averages paint a very grim picture of WMGs efficiency, in fact, their revenue per employee has actually dropped from $918 in 2008 to $746 in 2010.

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Universal Music Group and Sony Music Group make due with nearly the same amount of employees as Warner, but have considerably higher market shares. This may be due to WMGs poor money management, as cited by their poor efficiency ratios compared to industry averages. There is little in the way of efficiency when it comes to producing records, that falls mainly on the artist as opposed to the label. But the numbers above suggest a company that is run very inefficiently from a financial and labor standpoint. Warner Music Group could gain considerable market share if it kept itself within industry standards.

Future Strategic Direction (3 Phase)

Given the state of affairs at WMG, we believe there need to be many changes on a corporate level if the company wishes to be profitable and stay in the business in the future. Because these changes are wide-ranging and need to be implemented during different time spans, we have segmented our future strategic direction into three phases. The first phase involves changing the corporate management. By removing the current chairman, along with other key executives that have been a hindrance to innovation and progress, and replacing them with fresh minds keen on placing the consumers and artists first, we believe the company will be prepared to make further changes in the following phase. The second phase, following a change of leadership, is to assemble a research and development task force whose goal is to seek out new, innovative ways of maintaining profitability while still serving the customers and artists at unprecedented levels. The third and final phase of this implementation is taking the results of the R&D task force and using them to come up with new, innovative solutions to share and buy music. Below is a detailed description of each phase of the implementation:

Phase 1: Change Corporate Management

One does not need to look far to discover why the Warner Music Group has lacked in innovation in recent years. Former CEO and current chairman Edgar Bronfman Jr. has long been opposed to any sort of digital media that does not require payment for music. Services such as Pandora, Spotify and MySpace Music have largely been opposed under Bronfman’s leadership, in favor of services such as iTunes which use a pay-per-download strategy. In an interview with BBC, Bronfman says “The ‘get all your music you want for free, and then maybe with a few bells and whistles we can move you to a premium price’ strategy is not the kind of approach to business that we will be supporting in the future.”(Youngs, 10) With such an obstructive stance on innovation, it comes as no surprise that WMG has had several fall outs with services like YouTube, Spotify, Groove Shark and many music video game creators after demanding high licensing fees, if even allowing negotiations at all. The company has also taken a rather strong stance with regard to peer-to-peer music sharing networks. These networks are often the source of music downloaded illegally and for free, and Bronfman claims they have been extremely damaging to record sales. A recent study done at Harvard University says otherwise, showing that music downoading on these networks has had no attributable effect on the declining record sales (McGuire, 2004). As a result, we believe that Bronfman and other like-minded executives should be replaced with leaders more keen on innovation. Future leaders should be more willing to work with all music sharing services and focus on the marketing and

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promotion parts of the value chain, the parts that have long been the key value-adding activities of WMG.

Phase 2: Invest in R&D Task Force

Once a change of leadership has been made, we believe the next phase of implementation should involve the assembly of a research and development task force whose goal is to analyze the company as well as the industry as a whole to find new opportunities. Such activities of this R&D task force may include analyzing sub-labels and determining what makes some more profitable than others. Using this information could also help WMG in the future by aiding in the decision to purchase new, profitable labels as well as selling off current sub-labels whose profitability has turned towards the negative or remained stagnant. Other activities of the task force would include conducting market research, and surveying both customers and artists to determine exactly why record sales have been declining and to seek out future market opportunities in niche markets. With regards to the artists, the company should also become more decentralized and less bureaucratic by empowering sub-labels to make more decisions on their own. Finally, the task force should also use their results of an in-depth internal analysis to find areas of the company that can be streamlined. As our earlier research has concluded, they have just as many employees as the other big three record labels, but their sales have historically only been a fraction of their competitors.

Phase 3: Develop new ways of sharing and purchasing music

The third and final phase of our implementation involves using the aforementioned market research to develop new, innovative sharing and pricing strategies with regards to the sale of music. One example of an alternative music pricing strategy is to give the music away for free, treating it as a loss leader and pushing for the sale of merchandise and events in order to maintain profitability. A second pricing strategy would be to offer the music to the customers for a price that is to be determined by them. The so-called pay-what-you-want pricing strategy allows listeners to pay artists what they feel each song/album is worth. Such a strategy has already been used by bands like Radiohead, who have seen sharp increases in record sales and profitability even higher than if the records would have been sold at $10 per album. A third alternative pricing strategy is called pay-by-popularity, which involves incrementally increasing the price of a song or album with the number of downloads it receives. This, along with all the previous strategies, allows smaller artists to penetrate the markets quickly, while maintaining profitability in the long run. A fourth pricing strategy currently in use by services like Rhapsody is a subscription-based service that allows the user to pay a flat monthly fee and download as much DRM-free music as they would like. Finally, a fifth alternative pricing strategy involves a voluntary tax charged by WMG to the customers of Internet Service Providers (ISPs) and cell phone carriers that, in exchange, gives them access to WMG’s music over the network.

In addition to new pricing strategies, WMG also needs to take a more active role with consumers by increasing their use of social media networks like Facebook, Twitter, Google Plus and MySpace Music. Allowing the use or at least licensing music to websites like Youtube and Google Music, could also help repair the brand’s tarnished image among internet users. Additionally, we believe that the Warner Music Group should continue to license their music to distribution networks like Pandora and Spotify while at the same time phasing out the use of digital rights management which restricts customers to only using music with an authorized account. In the end, we believe that the biggest key change that needs to be made in this phase is to give consumers more innovative means to listen, share and purchase music.

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Conclusion

Strengths/Weaknesses

Sources:

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Most Recent Warner Music Group SEC Filing:http :// investors . wmg . com / phoenix . zhtml ? c =182480& p = irol - SECText & TEXT = aHR 0 cDovL 2 lyLmludC 53 ZXN 0 bGF 3 YnVzaW 5 lc 3 MuY 29 tL 2 RvY 3 VtZW 50 L 3 Y xLzAwMDExOTMxMjUtMTEtMjA 5 MzA 3 L 3 htbA %3 d %3 d

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http :// www . pages .. edu /~ jbd 29/ Time _ Warner . pdf drexel

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Tyler’s Sources (Formatted in APA Fifth Edition)

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Matthew Campbell, A. T. (2011, November 14). Citigroup Sells EMI in Parts for $4.1 Billion to Vevendi, Sony. Retrieved November 20, 2011, from Bloomberg Businessweek: http :// www . businessweek . com / news /2011-11-14/ citigroup - sells - emi - in - parts - for -4-1- billion - to - vivendi - sony . html

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