Recording industry analysis

RECORDING INDUSTRY ANALYSIS

By J.Rolix

INTRODUTION

Since 1925 when the Bell company introduced the first electric recording and playback devices the changes in the music industry have been very fast.

Over the past 20 years, we’ve seen a metamorphosis in the traditional structure of the music industry and record market. There has been an extremely rapid change in the world of new technologies and processing information. Very quickly these changes have transformed the way to listen, enjoy and, above all, understand the music. An example of the relevance of these changes can be seen in the different types of musical support media: Vinyl's, cassettes, CDs and lately, musical DVD.

However, the real revolution has been the Internet, when it became established in the mid-80's, although the production and distribution of music in this sector, until recently weren't considered an appropriate environment to undertake the sale of music over this network. The United States is the current pioneer in the Internet market, ahead of Europe. The internet and the era of digital content is providing new opportunities for the recording music sector.

DEFINITION OF THE SECTORThe sector we are analyzing is the record industry or the music production industry, i.e., it is made up of companies that are responsible for:

• Detection of talented artists.

• Management of repertoire of the artists and searching for suitable compositions.

• Promotion of artists which is perform by the marketing department.

• Management of the process of production and distribution of music content, with collaboration from thirds parts i.e., recording, manufacturing, logistics, etc..

Producers trigger the process of music content creation. Investing in artists, according to their possible acceptance and their popular musical quality and accompanying them throughout the process, assuming an economic risk.

Their income and therefore their profitability is linked to:

• Sale of discs and music content.

• Percentage of merchandising, image rights, etc. from the artists with whom they contract and their live music.

• Secondary Rights from music producers.

There are three major music producers (four until 2012,the year in which EMI music was absorbed by Universal Music), that account for 91.18% of the world market (Emi Music Group Warner, Sony-BMG, Universal Music). The rest are small and medium sides enterprises, including many of them with less than ten employees, specialized in certain specific niche markets.

LABEL TYPES

The Majors: major distribution; dominant market

share.

Independents: a lacking of major distribution; can

be large or small, ‘Major Minors’.

Sub-labels & Imprints: separate companies or

divisions owned or distributed by major labels.

Specialty labels: non-traditional distribution;

focused on non-mainstream genres (i.e. classical,

gospel).

Distribution channels & market share define record

label types.

THE MAJORS

Six Major Labels – 1995

Time Warner (Atlantic, Elektra) 22.1%

Polygram (A&M, Mercury) 13.8%

Sony (Columbia, Epic) 13.6%

Bertelsmann (Arista, BMG) 12.0%

MCA (Geffen, GRP) 10.1%

Thorn EMI (Capitol, Virgin) 9.2%

THE MAJORS: INDUSTRY LEADERS TODAY

Universal Music Group (UMG Recordings Inc.) is the largest corporation in the

world. An American-based, French-owned multinational music corporation, it

currently operates as a subsidiary of Paris-based media conglomerate Vivendi

(French multinational mass media and telecommunication company

headquartered in Paris, France).

Sony Music Entertainment (SME) is an American music corporation owned

and operated by Sony Corporation of America, a subsidiary of the Japanese

conglomerate, Sony Corporation. In 1929, the enterprise was first founded

as American Record Corporation (ARC) and, in 1938, was renamed Columbia

Recording Corporation, following ARC's acquisition by CBS. In 1966, the

company was reorganized to become CBS Records. In 1987, SCA bought the

company and, in 1991, renamed it SME. It is the world's second largest music

company.

Warner Music Group (WMG), also known as Warner Music, is an American

major global record company headquartered in New York City. The largest

American-owned music conglomerate worldwide, it is one of the 'big three'

recording companies (the third largest in the global music industry). The

company operates some of the largest and most successful recording labels in

the world, including its flagship labels Warner Bros Records, Parlophone

Records and Atlantic Records. WMG also owns Warner/Chappell Music, one

of the world's largest music-publishing companies.

MAJOR MUSIC COMPANY CORPORATE

STRUCTURE

Corporate Conglomerate

Music Group

Record

Label(s)

Music

Publishing

Company

Distributions

Media-TV,

Telecom

Gas, Water

other

non-music

activities

ADVANTAGES OF MAJOR LABELS:

Size

WELL FINANCED: Can afford better…

Production

Distribution- major networks

Marketing

Talent Acquisition

And, sometimes, manufacturing

INDUSTRY BONUS: Can Offer artists…

Stability

Prestige

Advances

Top production resources

ADVANTAGES OF INDEPENDENT LABELS:

Vision & Knowledge

MORE CREATIVE:

Able to find more raw talent

Can use creative development, marketing and financing tactics

Able to build better brand loyalty among fans

SPEED:

Unencumbered by long corporate approval processes

Understand artists and trends faster

REGIONAL CONNECTIONS:

Better regional connections for publicity and sales

RECORD LABEL: KEY ACTIVITIES

Internal:

Talent Development

Artist Product Marketing

Legal

Providing services to artists

External:

Sales & Distribution

Marketing and promotions

Providing services to distributors and retailers

RECORD LABEL BUSINESS STRUCTURE: KEY

FUNCTIONS

Leadership/Vision

Talent

Adquisition

Marketing &

Sales

Admin Manufacturing

A&R

Product

Management

Marketing

Promotions

Sales/Distribution

Creative Services

Business

Affairs

Legal

Accounting

Royalty/Affiliate

Management

Pressing

Packing

Inventory

Management

RECORD LABEL BUSINESS STRUCTURE: DEPARTMENT HEADS

CEO/President(Chief Executive Officer)

General

Counsel

Legal

Affairs

Business

Affairs

COO

Administration

Human

Resources

Marketing &

Sales

CFO

Finance

Accounting

CTO

Technology

Information

Management

Online Security

ACCESS TO DISTRIBUTION CHANNELS AND

ECONOMIES OF SCALE

Distribution has a very important role in the business model of the

industry. Regarding disks or hardware, a large infrastructure is

necessary to reach the point of sale. This activity supposes a

important logistics and the existence of scale economies in

distribution, ie an optimum size needed large scale in order to

perform this activity advantageous. For many years this has been a

significant barrier to entry due to only the large companies could

face a distribution as complex. Being, thus, significantly their

importance to hinder the entry of new competitors. But the

changes happened in the channels of music distribution, ie the

emergence of new formats and technological advances have

produced that distribution, mainly through the Internet, no longer

suppose a barrier to entry to the sector due to access to this

channels is simpler and does not require from a large size.

INVESTMENT IN PROMOTION AND

MARKETING

A record label destines to promotion and marketing a very high

percentage of its budget, especially related to the release of some

artists or albums. On this lies that this factor is relevant to considered a

barrier to entry, since not all companies in the sector have the financial

capacity to face with these expenses. The promotion traditionally

performed through radio formulas, press overview, music press, video

clips, advertising in radio or television, billboards promotional on the

street and in stores. This effort could only be carried out by companies

with a significant size and market share. The internet has posed a

considerable change, not only because it represents a new channel for

content suppliers, but it is a channel with new marketing tools against

the traditional. These new resources for the promotion: you can send

over the Internet small samples of the songs from an album to decide if

you like it before purchasing; there is also the possibility of choose

between buying a whole album or just a song; or you can rent the

online music by files are deleted after a certain time.

DOMAIN OF TECHNOLOGY

Currently with using Internet as the main tool for

obtaining audio and video, it is there for necessary that

participants in this sector develop technology that

protects the musical contents, and thus it born, Digital

Rights Management (DRM content),i.e. all the means

which control the use of musical reproduction by

electronic or digital means through the Internet; The

development of all this technology is not easy, and this

coupled with the need to learn and master new

technology (linked to the formats and forms of

reproduction) makes it as an important barrier that can

prevent the entry of new competitors.

BARGAINING POWER TO THE CLIENTS

Wholesalers: Wholesalers ensure distribution to

small record labels who have limited ability to

negotiate directly with music producers. In every

country, there are usually not many wholesalers

music, but for the importance by volume that these

products represent to the recording industry its

power is limited. The trading power that the record

label have over wholesalers is very relevant to the

turnover that it generate and the costs and the

saving can be pass on to the customers.


Traditional Markets: Using wholesalers in the

distribution of music has increased the cost of the

product to the shops independent of size. Whereas

previously it was the music producer who was

responsible for providing them directly. Most

smaller size stores lack a sufficient sales volume

and have to use this kind of wholesale companies,

which in term, greatly reduces their trading power in

important factors such as price. The power of labels

over the small shops is very high due to they

belong to a very fragmented sector and low sales

volume.


Large areas and chains: The trading power of large

chains, specialty stores and chain stores is much higher

than independent stores, so they get special prices and

conditions; due to they negotiate and buying music

directly to music producers and in a much larger

volume.

Being half the power of the record on the distribution of

the large chains since their sales are very dependent on

them (in Spain, for example 53.7% of sales depends in

large stores).


E-tailers: Retailers are traders who focus their business on the Internet. With the change in business model of selling music retailers have become a channel for reaching the final consumer with high growth examples include iTunes and los 40.com. As customers are now gaining more power over the record companies, since selling songs. Satellite Internet pages have gained a significant amount and therefore sales to these retailers represent a growing trend in the sector. The big record companies also have a high bargaining power since they are most supply source and also songs often advertisers on these pages.


Final Customers: Final customers, collectively, have

increased their bargaining power due to changes

occurred which gave a tendency to consume music for

free, and more information on prices, products and

costs, which have strengthened their power and industry

requirements. All this combined with the importance of

taste and fashion in this sector has led to necessary

changes raise traditional industry model: passing from

offering their product directly to consumers, through

Internet, to lower the price of music. The industry has a

medium bargaining power of the exclusivity of certain

products offering to be very different, but as we

mentioned this power is threatened by changes sector.