Music Production & Retailing

Music Production

Music Production & RetailingKelly HansenChelsea KarpenkoKatie Kenealy-BrediceStephanie Pratt

Table of contentsIntroductionIndustry StructureBackgroundCompetitionOrganizationMajor CompaniesPricing StrategiesBrick & MortarRhapsodyAmazoniTunesAnalysis & RecommendationsInvestmentPricing Strategy

Music production in the U.S.Major Music Label CompaniesSony (BMG)WarnerVivendi/UniversalEMIDistributors: Retailers & OutletsBrick and mortar storesiTunesSubscription based distributorsRhapsody Other providers of online music streaming servicesAmazon

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?

Table of contentsIntroductionIndustry StructureBackgroundCompetitionOrganizationMajor CompaniesPricing StrategiesBrick & MortarRhapsodyAmazoniTunesAnalysis & RecommendationsInvestmentPricing Strategy

IndustryPrimary ActivitiesManufacturer of recordingsProduction of master recordingsPurchase of reproduction and distribution rights to master recordingsRelease, promotion and distribution of sound recordingsMajor Products OfferedDigital full-length albumsDigital performance rights and subscriptionsDigital singlesDVDsFull-length CDsMobile applicationsMusic VideosVinyl LPsBackground: What does the industry produce? What is the basic technology? How are production costs financed? Who buys the product(s)? How are the products distributed? Give illustrative data on output, prices, employment, import and exports, etc. 7

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 segmentationBackground: What does the industry produce? What is the basic technology? How are production costs financed? Who buys the product(s)? How are the products distributed? Give illustrative data on output, prices, employment, import and exports, etc.

8Changes in the IndustryThe 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.

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).

Sales/Growth FiguresThe 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.

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 segmentationNielsen SoundScan measurements indicate that 7% of music in 2011 was purchased from independent record stores, down from 44.5% in 1999, and 31.0% from mass-merchant stores like Walmart and Target, down from a peak at 53.8% in 2004. In 2012, IBISWorld expects these brick and mortar retail figures to fall even further, to total about 36.0%, as the dominance of iTunes has become entrenched, and more online competitors to Apple's online store have arisen. In the US, digital music sales account for 50.3% of the recorded music purchases. The digital music market is growing rapidly, with sales in CDs, DVDs, singles and other physical formats all continuing to decline. The single track and album download market and the growth of subscription services and digital performance licensing continue to push digital sales. As this continues, platforms like iTunes, Rhapsody, Spotify and Hulu are set to become bigger clients of the labels than traditional brick and mortar retailers.This move of younger and older music buyers alike towards digital music is affecting the retailers that buy music from the labels. The IFPI notes that global sales of digital music in 2011 rose 8.0% from 2010 to about $5.2 billion. Globally, digital sales account for 32.0% of the total recorded music market, up from 5.5% in 2005. By 2012, this number is expected to surpass 35.0%.

12The music production industry is very heavily concentrated with almost 80% of market share falling under the top four firms.

HHI = 1898.12The 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 outlookCompetition: How many firms are there in the industry? (If applicable and traceable, what is the HHI of this industry?) Is entry and exit easy or difficult? How competitive is the industry in its degree of rivalry? Are the industrys products differentiated and, if so, according to what characteristics (design, function, appearance, geographic market, etc.)? What role does government play in the industry? How does regulation or other government policy affect it?13Organization of the Music IndustryArtists and composersManagersLawyers, business manager, accountant, etc.ProducersRecording companiesPublishing companiesRetailersDistributorsBrick and mortarInternet/onlineConsumers

ARTISTSPRODUCERSRETAILERSCONSUMERS

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 ShareMajor labels include: Interscope Records, Def Jam Recordings. UMG Nashville, and Geffen RecordsSome 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

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 ShareMajor labels include: Epic, RCA, and Columbia NashvilleSome popular artists include: Chris Brown, Adam Lambert, Jimi Hendrix, Kellie Pickler, Michael Jackson, and The Foo Fighters

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 ShareMajor labels include: WB Records, Atlantic, and Warner Music NashvillePopular artists include: T.I., Metallica, Jason Mraz, Ray Charles, Zac Brown Band, Fleetwood Mac, Red Hot Chili Peppers and Cee Lo Green

EMI is a UK based companyEMIs total revenue has decreased at an average rate of 6.1% per year for the last five yearsEMI was obtained by its creditor Citigroup and auctioned off in late 2011. A deal is currently pending with Vivendi. 9.6% Market ShareMajor 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.

Major labels include: Epic, RCA, and Columbia Nashville.Some popular artists include: Chris Brown, Jimi Sony is headquartered in Japan

19Industry RegulationsThe 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.

Thus, the industry regulation is very heavy, and continues to increase to protect each of the companies. As of January 2012, there are two bills being considered by US Congress, the Stop Online Piracy Act and the Protect IP Act. Both attempt to curb copyright infringement, and discontinue file sharing. 20Table of contentsIntroductionIndustry StructureBackgroundCompetitionOrganizationMajor CompaniesPricing StrategiesBrick & MortarRhapsodyAmazon MusiciTunesAnalysis & RecommendationsInvestmentPricing Strategy

Do consumers Buy or listen to music online?Retail outletsBrick & Mortar stores

Pricing strategies: brick & MortarThird Degree Price DiscriminationConsumers choose between:Buying the whole CDBuying single CDs, which are comprised of 3-5 songs from the artist

Pricing strategies: Brick & mortarVersioning:Early adopters buy the initial albumDeluxe Versions released with added songs or more features

Song pricing Online retailersSongGenreAmazoniTunesRhapsodyPart of Me Katy PerryPop$0.99$1.29Subscription $9.99Honey Bee Blake SheltonCountry$0.99$1.29Subscription $9.99Super Bass Nicki MinajRap$0.99$1.29Subscription $9.99With or Without You U2Rock$0.99$1.29Subscription $9.99Drive By - TrainPop$1.29$1.29Subscription $9.99rhapsody

Pricing Strategies: RhapsodyVersioning

Pricing strategies: RhapsodyConfusing pricing: Once you stop the monthly subscription you lose all of the unlimited downloading you had done previouslyQuantity Discount: Save money by purchasing premium plus for more devices

Customers fail to identify best deal, the $14.99 subscription only allows more devicesCustomers dont realize when they stop paying the monthly subscription they lose all the music they had downloaded to their computer30Amazon music

Pricing strategies: amazonThird Degree Price Discrimination:Different prices for songs may vary from Free to $1.29Free songs from upcoming artistsAlbum deals (ex. 100 albums for $5 each)

Pricing strategies: amazonSecond Degree Price DiscriminationQuantity Discounts buying in bulk (whole album) vs. buying per song

Rolling in the DeepPrice of Individual SongPrice of Song (with Purchase of Album)Adele$1.29$0.99iTunes

Pricing Strategies : iTunesThird degree Price DiscriminationVariable 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?

April 200935Pricing strategies: iTunesBundlingCombines single songs onto one album (cheaper price per song)Sometimes bundles include music videos or behind the scenes footage

Tacit Coordination: itunes & Amazon

Tacit coordination:itunes & amazonPrice Leadership: iTunes, price leader, announces price changes ahead of others (April 7th, 2009)Amazon, price follower, soon follows the price changes by matching the leaders price (April 9th, 2009)

Table of contentsIntroductionIndustry StructureBackgroundCompetitionOrganizationMajor CompaniesPricing StrategiesBrick & MortarRhapsodyAmazoniTunesAnalysis & RecommendationsInvestmentPricing Strategy

FutureIndustry is moving towards a more digital platformUncertain future

Key Success FactorsControl of distribution arrangementsHaving a diverse range of clientsProduction of goods currently favored by the marketAccess to the latest available and most efficient technology and techniquesAggressive marketing/franchising Having a wide and expanding product range

41recommendationsRhapsody 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: $1.99Create Your Own Album: Buy any 10 songs $10.99

Name Your Own Price?????Radiohead strategy

Questions