MUSIC INDUSTRY

1
MUSIC INDUSTRY
2
OVERVIEW

• U.S. Sales 2002 (U.S. accounts for one third of
  sales)
  
• Music 12.6bn (12.5bn,1996)
• Games 10.3bn
• Movie Box Office 9.5bn
• Movie Rentals 8.2bn

3
MUSIC REVENUE TRENDS

• Worldwide Sales for Music were 32 bn 2002
• But they were 35.5 billion in 1994 (!)
• 2001-2002 sales of CD albums fell globally by
  6, singles by 16, cassettes by 36, while music
  videos grew 9.
  
• In 2000-2003 global revenue has fallen 25
• Piracy / CD burning represents annual lost
  revenue of 4bn.
  

4
MARKET SHARE 2002

• Universal (Vivendi) 25.9
• Sony 14.1
• EMI 12
• Warner (AOL Time Warner) 11.9
• BMG (Bertelsmann) 11.1
• Independents 25

5
PLANNED MERGERS 2003

• SONY CORP TO MERGE MUSIC OPERATIONS WITH
  BERTELSMANN (BMG) IN JOINT VENTURE (SONY BMG),
  EXPANDING MARKET SHARE IN US TO 28,SHARING RISK,
  AND CUTTING COSTS BY 300M. WILL MERGE ONLY THE
  LABELS, NOT MUSIC PUBLISHING OR CD DISTRIBUTION
• EMI PLANNING TO ACQUIRE TIME WARNER MUSIC (TW
  WOULD HAVE 25 SHARE)
  
• DREAMWORKS PLANNING TO SELL ITS MUSIC DIVISION TO
  VIVENDIS UNIVERSAL WHICH IN TURN IS LIKELY TO BE
  SOLD TO GES NBC

6
SOURCES OF COMPETITION

• Piracy of CDs and Cassettes. In No.2 market,
  Japan, 236m CD-Rs were burned in 2002, while
  legitimate CD sales were 229m. In Spain, two out
  of five records were pirated.
• In Mexico, 1 in 2 people buy pirated music
• MP3 file swapping
• Increased access to Internet worldwide
• Competition from new forms of entertainment
  including video games and DVD films
  
• Downward pressure on prices

7
Features of Consumption

• Cycles of rapid growth and relative decline
• Major growth periods facilitated by technology
  and content (e.g. rockroll 1955-1969)
  
• Considerable time spent listening to music
• More hours per dollar spent on recorded music
  than on other media, except TV
  
• Infrastructure of in-home consumer electronics
  changes in technology affect system
  compatibility, distribution, sales. Technology is
  expected to change
• Depends on socially-constructed culture of
  listening
  
• Subject to massive changes in taste

8
Industry structure

• Major companies own manufacturing and wholesale
  distribution facilities (Vertical integration)
  
• Major five Universal Music Group (Vivendi),
  Warner Music (AOL Time Warner), Bertelsmann Music
  Group, Sony, EMI. (High concentration, partly
  through horizontal integration).
• Popularity of product highly uncertain
  uncertainty reduced through star strategies,
  genre strategies, over-production, structured
  contracts (commonly five renewable 1-year
  contracts, and royalty system that pays the
  artist 7-15 payable after costs are met plus
  songwriter publishing royalties), controlled
  novelty (incl. cross-over music).
• Cheaper costs of production facilitate
  independents, often bought out by big companies
  when they generate appreciable revenues.
  Vertical integration (e.g. Motown) can prolong
  power and independence of smaller companies.

9
Promotion

• Promotion as important as production
• Single largest expense
• Includes attempts to influence positions on music
  charts, radio play time (payola), tours

10
Oligopoly

• Oligopoly a fairly consistent feature in the
  50s, 8 companies controlled 95-100 of weekly
  top-10 hits in the 80s and 90s, 6 companies
  controlled distribution of nearly all popular
  music
• New fashions (e.g. rock and roll 1955-1970) often
  upset existing hierarchies, foster independents
  
• Certain genres less controlled than others
  (rhythm and blues in the 1960s specialty labels
  today)
  
• Old-style concentration correlated with fewer
  successful songs, fewer artists, more established
  stars, and fewer sales. But in the 1990s,
  concentration coexisted with high product
  diversity and better music. Perhaps because high
  financial concentration coupled with
  decentralization of music making decisions

11
Conglomeration

• Synergies through ties to film studios, cable
  channels, multi-media conglomerates offers, e.g.
  film scores developed for general market rather
  than for particular narrative film yields
  cheaper music video music video channels provide
  vehicles for music artists stars can appear in
  chat shows, magazine articles, films etc. all
  owned by corporate parent vast archives provide
  competitive edge when transitioning to new
  consumer electronics formats
• Conglomeration spreads risks and losses

12
Economies of Scale

• Importance of first copy costs increases where
  ratio of fixed to marginal costs is high. More
  benefit to spreading of fixed costs across large
  numbers of units. Once fixed costs are covered,
  profit per unit is huge.
• Increasingly national character of radio, cable
  channels, record chains with nationally
  coordinated inventory, sets high barrier for
  definition of market success

13
Organizing for Uncertainty

• Structured contracts remove need for staff
  producers and engineers (though independents may
  have own studio, producers, staff), though most
  have own promotional office
• Track records and reputations celebrity power
• Pre-selection systems selecting that which is
  most likely to succeed in light of recent
  successes
  
• Overproduction covering bets - and differential
  promotion more products are produced than can be
  successful, while promotional efforts are
  differentially assigned to minimize risk