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© 2005 UMFK.

BMG Entertainment

internet business models

text and cases

Kristin Belanger

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© 2005 UMFK.

Development of a Global Music Industry

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© 2005 UMFK.

Overview

• Introduction

• History

• Strategies

• Stakeholders

• Get Big Fast!

• 20-20 Hindsight

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Introduction

• Music Industry– One of the fastest moving Industries

• CEO – Strauss Zelnick (in 1998)• Brick and Mortar company gone Online• Two of the Six leading companies merged

in the past year • Steered BMG towards online opportunities• Cautiously made strategic moves

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Introduction cont.

• Subsidiary of Bertelsmann AG (German company)

• World 4th largest media company (Billboard.com)

• By 1999, $4.6 billion music and entertainment company– More than 200 record labels and in over 53 countries

(Billboard.com)

• 1999 distributed 5 of the best selling albums• Cut money – losing divisions (apparel, video

distribution)

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Road Blocks

• The ever changing Music Industry– Company able to keep up with changes– Predict upcoming problems

• Five other competitive content providers

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History of Music Industry

• Sheet music to phonograph• Tin Pan Alley (NY, NY)• First popular song “After the ball” 1892 – then

industry spiked• Numerous roadblocks

– Broadcast radio – Sales dropped, radio’s soared– Depression (1920’s) Music Industry peaked– 1948 vinyl

• Major compeditors RCA/Victor, EMI, and CBS Records

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History (cont.)

• Rock and Roll – Hundreds of record companies

• RCA/Victor and CBS were afraid of marketing to teenage market

• 1960’s began merging multiple labels under one music corporation– Branding each into different genre’s of music

• Industry decline between 1980’s and 1990’s• Music Industry mergers helped in the 1990’s

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Music Industry Organization

• Composers & Lyricists– People who wrote the music and words

• Performing Artists– Performers of their own original songs or used some created by

lyricists and composers• Music Publishers

Bought rights to the pieces and promoted music through channels• Record Companies

– Artists under contract, bought musical rights, managed recording, made CDs, distributed, promoted products

• Independent Distributors– Distributed on behalf of independent labels and made cross-

regional mergers

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Music Industry Organization (cont.)

• Retail Channels– Sold through brick & mortar, record clubs, mail order, online

retailers

• Consumers– Directed at individual consumers (by genre)

• Promotion– Battled with radio stations to get new releases aired (equals more

record sales)

• Rights Agencies– Paid by royalties (payments tied to actual use of music)

• Industry Economics– Divided profits among various players

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Strategic Plans

• Mergers in 1920’s helped in 1999– BMG one of top 5 corporations

• Manufacturing, distribution, music publishing, sales and marketing activities were centralized over the 200 labels

• Labels responsible for individual promotion of artists

• Launched first website in 1995 with many different website for different genre’s– Peeps.com for hip-hop (non – existent anymore)– TwangThis.com (country)

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Strategic Plans cont.

• Teamed up with GetMusic.com – comparable to CDnow.com or Amazon.com

• Were first to experiment with downloads in 1997

• Had longer-term intentions

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Strategic Partners

• Microsoft, Liquid Audio, Real Networks, AT & T and IBM

• Helped stream in audio clips, music video’s and more

• All partners were needed to help set technological standards for downloading music

• Had hundreds of files on potential deals

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Don’t sell your copyrights or license them exclusively.

Don’t make long-term deals that you can’t change.

Once you’ve followed those rules, be willing to take risks and try things out.

If God forbid you’re wrong, you still own your copyrights.

-Strauss Zelnick

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Competition

• Universal Music Group– Still around today

• Sony Music Entertainment– (merged with BMG – now called Sony BMG Music

Entertainment)

• Warner Music Group– Still around today

• EMI– Still around today as well

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Brands (Labels)

• Some of the labels that were under BMG included:– Arista– Ariola– RCA– BMG Records– Red Seal– Windham Hill Group

• Had artists such as Christina Aguilera, DAVE MATTHEWS BAND, Grateful Dead, Kenny G, Barry Manilow, Notorious B.I.G., Puff Daddy, Santana, Sarah McLachlan, Whitney Houston, ZZ Top

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Serious Threats

• Napster, BearShare, Limewire– All free* MP3 download programs

• Listen.com, Emusic.com, MP3.com– Consumers sampled music for .99 cents a song

– downloaded an album for $8.99

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Why Content Provider?

• BMG Entertainment was clearly a Content Provider– Content included Artists, Songs, Lyrics,

Downloads, Appearances, and much more. (Original Professional content)

• Considered a horizontal content provider– Reached out to everyone– Reached out to people with different genre

tastes (had a little something for everyone)

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Stakeholders

• Customers– Strategic Partners

– Buying consumers

• Employees– Employees of BMG

– Shareholders (both employees of Bertelsmann AG and Sony)

• Partnerships– Microsoft, Liquid Audio, Real Networks, etc.

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Winner Takes All?

• Customer Acquisition Costs– Low to moderate - people keep returning for the content (i.e. Music

downloads, albums, information)• Network Effects

– Strong the more people go to BMG music to see their favorite artists the more they can download songs & info

• Scale Economies– Strong – the more people go to the webpage's the more people buy the

more revenue they receive– The costs are fixed – ad companies add to scale economies (the more the

exposure the more revenue)• Customer Retention

– High – great discounts (get 12 free buy 3 CD’s)– Appearance information– Usernames – keep sending updates to customers e-mail accounts

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Success?

• I definitely think that BMG will be around for a long time. They have been through the music industry (fast moving industry) and have continued to release Top 10 Best Selling Albums

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Update!

• August 2004 Merger – Sony Corporation of America and Bertelsmann A.G.

(Billboard, 9/24/2005, Vol. 117 Issue 39, p5, 2p)

• Reason for merger– Music industry = global crisis (Billboard.com)

– Costs risen and CDs fallen (Billboard.com)

• Andrew Lack is CEO of Sony BMG Entertainment (previous jobs include President of NBC News, CBS News, West 57th) (bmg.com)

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Questions??