mit sloan school november 14, 2000 bits, bytes & blues the digital delivery of music paul...

MIT Sloan School MIT Sloan School November 14, 2000November 14, 2000

BITS, BYTES & BLUESBITS, BYTES & BLUESThe Digital Delivery of MusicThe Digital Delivery of Music

Paul FenaroliPaul FenaroliManager, BostonManager, Boston

BCG IN THE NEW ECONOMYBCG IN THE NEW ECONOMY Assignments in the Public Domain (A Shameless Plug) Assignments in the Public Domain (A Shameless Plug)

.fr

.com

.com

Music and the New MediaMusic and the New Media

Changing music landscapeChanging music landscape

Meeting the new media challengeMeeting the new media challenge

Summary/lessons learnedSummary/lessons learned

UNTIL A FEW YEARS AGO THE MUSIC INDUSTRY UNTIL A FEW YEARS AGO THE MUSIC INDUSTRY WAS RELATIVELY SIMPLE WAS RELATIVELY SIMPLE

Source: Business Wire; Billboard; RIAA; BCG analysis

Majors controlled biggest labelsMajors controlled biggest labels Products were straightforwardProducts were straightforward

0

10

20

30

40

Growth was steadyGrowth was steady

$B$B

YearYear

Compact Compact discsdiscs

CEMACEMA

WEAWEA

PolyGramPolyGramCassettesCassettes

CAGRCAGR~5%~5%

Changing music Changing music landscapelandscape


99998686

BMGBMG$3.4$3.4

BB

OtherOther$6.4B$6.4B

Warner-EMIWarner-EMI$8.0B$8.0B

SonySony$4.1B$4.1B

UMG/PolygramUMG/Polygram$6.3B$6.3B

A FEW (FEWER) NUMBER OF BIG PLAYERSA FEW (FEWER) NUMBER OF BIG PLAYERS

Source: IFPI; annual reports; BCG music industry prime; 1998 Revenuer



14.5%14.5% 12.1%

28.4%28.4% 22.7%22.7%

22.3%22.3%

ON-LINE DISTRIBUTION HAS CHANGED THE BUSINESS ON-LINE DISTRIBUTION HAS CHANGED THE BUSINESS AND IS THE HOTTEST TOPIC IN THE INDUSTRYAND IS THE HOTTEST TOPIC IN THE INDUSTRY

No matter how this plays out, the implicationsNo matter how this plays out, the implicationsfor sale of digital content are hugefor sale of digital content are huge

Press is watchingPress is watching Even the popular mediaEven the popular mediaBroad, indelible Broad, indelible

mark on e-businessmark on e-business



SIGNIFICANT ON-LINE COMPETITION IS EMERGING SIGNIFICANT ON-LINE COMPETITION IS EMERGING ACROSS THE ENTERTAINMENT INDUSTRYACROSS THE ENTERTAINMENT INDUSTRY

AttackersAttackers

IncumbentsIncumbents

Music contentMusic contentprovidersproviders

Non-musicNon-musiccontentcontent

providersproviders

RepackagersRepackagers



MANY DOWNLOAD OPTIONS HAVE EMERGEDMANY DOWNLOAD OPTIONS HAVE EMERGEDPlayersPlayers Cool featuresCool features



THE FUTURE IS UNCERTAIN—JOCKEYING FOR THE FUTURE IS UNCERTAIN—JOCKEYING FOR POSITION—LEGAL BATTLESPOSITION—LEGAL BATTLES

““We will fight for our rights and those of our artists, whose work, whose creations, whose property We will fight for our rights and those of our artists, whose work, whose creations, whose property are being stolen and exploited. We will take our fight to every territory, in every court in every are being stolen and exploited. We will take our fight to every territory, in every court in every venue, wherever our fundamental rights are being assaulted and attacked.”venue, wherever our fundamental rights are being assaulted and attacked.”

- Edgar Bronfman, Jr., Seagram CEOEdgar Bronfman, Jr., Seagram CEO

““We will fight for our rights and those of our artists, whose work, whose creations, whose property We will fight for our rights and those of our artists, whose work, whose creations, whose property are being stolen and exploited. We will take our fight to every territory, in every court in every are being stolen and exploited. We will take our fight to every territory, in every court in every venue, wherever our fundamental rights are being assaulted and attacked.”venue, wherever our fundamental rights are being assaulted and attacked.”

- Edgar Bronfman, Jr., Seagram CEOEdgar Bronfman, Jr., Seagram CEO

““It’s good that these guys are beginning to think beyond the ‘product’ format that they’ve been It’s good that these guys are beginning to think beyond the ‘product’ format that they’ve been locked into since the dawn of the recorded music industry.”locked into since the dawn of the recorded music industry.”

- Aram Sinnreich, Jupiter Communications media analystAram Sinnreich, Jupiter Communications media analyst

““It’s good that these guys are beginning to think beyond the ‘product’ format that they’ve been It’s good that these guys are beginning to think beyond the ‘product’ format that they’ve been locked into since the dawn of the recorded music industry.”locked into since the dawn of the recorded music industry.”

- Aram Sinnreich, Jupiter Communications media analystAram Sinnreich, Jupiter Communications media analyst

““Napster has taken extraordinary steps to comply with Metallica’s demands to block hundreds of Napster has taken extraordinary steps to comply with Metallica’s demands to block hundreds of thousands of its fans from using the Napster system. Napster has always stated that it would act in thousands of its fans from using the Napster system. Napster has always stated that it would act in response to notice from copyright holders and it has lived up to that commitment in good faith.”response to notice from copyright holders and it has lived up to that commitment in good faith.”

- Laurence Pulgram, Napster attorneyLaurence Pulgram, Napster attorney

““Napster has taken extraordinary steps to comply with Metallica’s demands to block hundreds of Napster has taken extraordinary steps to comply with Metallica’s demands to block hundreds of thousands of its fans from using the Napster system. Napster has always stated that it would act in thousands of its fans from using the Napster system. Napster has always stated that it would act in response to notice from copyright holders and it has lived up to that commitment in good faith.”response to notice from copyright holders and it has lived up to that commitment in good faith.”

- Laurence Pulgram, Napster attorneyLaurence Pulgram, Napster attorney

““It’s really important to enter the space with more than one partner.”It’s really important to enter the space with more than one partner.”- Kevin Conroy, SVP worldwide marketing and new technology BMGKevin Conroy, SVP worldwide marketing and new technology BMG

““It’s really important to enter the space with more than one partner.”It’s really important to enter the space with more than one partner.”- Kevin Conroy, SVP worldwide marketing and new technology BMGKevin Conroy, SVP worldwide marketing and new technology BMG

Most Majors settle with MP3.com--one(Universal) soldiers on and wins bigMost Majors settle with MP3.com--one(Universal) soldiers on and wins bigNapster loses and is faced with (stayed) shut down--one (BMG) signs and LOINapster loses and is faced with (stayed) shut down--one (BMG) signs and LOI

Source: Daily Variety; Business Wire; Wall Street Journal; New York Times



AGENDAAGENDA




CONSUMERS UNDERSTAND AND LIKE THE IDEA OF DDDCONSUMERS UNDERSTAND AND LIKE THE IDEA OF DDD

Stimulus Learn Locate Decide Pay Delivery Use Discuss Repurchase

Instant gratification:“Great! I can learn a song on the radio and buy it right away downstairs at the computer! I won’t forget what I want”

“I’d use this at night, when the stores are closed”

Ease of location:“I’d use it for music that’s rare and hard to find”

Learn about new music:“This would be a great way to sample music”

“This will be good for artists in the free jazz scene who want to distribute their stuff”

Convenience:“How convenient! Why would I ever go to the store again?”

“I could take this [the Rio Player] with me anywhere”

“What a space savings if I never had to buy CDs”

Customization and control:“It’s like custom CDs only I do it myself so I know they won’t mess it up”

“I could buy parts of the album instead of the whole thing”

Digital downloading not too far-flung a concept for consumers to graspDigital downloading not too far-flung a concept for consumers to grasp

CONSUMERS HAVE AN IDEALIZED VISION CONSUMERS HAVE AN IDEALIZED VISION OF THE DDD PROCESS...OF THE DDD PROCESS...

Search for song/album

SampleAdd to cart,

pay

Download to

computer

Write to audio CD/ dig. player

ListenGo to online store

Boot PC, Log on

5 min 5 min 5 min 30 min / album

(passive time)

5 min / CD5 min

Ideally, search by artist, album, song, or lyrics

Must have complete selection: “Will all music be available this way?”

Must be able to sample all songs

Should sound as good as a CD on sampling

Ideally be able to skip through entire tracks, especially for Classical and Jazz

“I expect to pay less ($8-10) since I’m doing all the work, and it’s not the official version since I’m making it”

“I won’t have to pay for shipping and handling”

Needs• 1-800 hot line in case of download errors• Ability to download in background while working on

computer• Ability to leave computer to download without

supervision: “If I didn’t have to worry about download errors, I’d do it”

Wishes• Download album art and lyrics with music• Download entire album in minutes, one song in

seconds• Download directly to CD to save hard drive space

Must be portable: “I don’t want to listen to music only on my computer”

“I need a money-back guarantee that this will be CD quality”

“Ideally, I won’t need to buy new equipment, but if I do, it has to be compatible with my stereo system”

55 min per CD


Listen

……BUT TODAY’S PROCESS IS FAR FROM THEIR IDEALBUT TODAY’S PROCESS IS FAR FROM THEIR IDEALTechnology Remains the Largest BarrierTechnology Remains the Largest Barrier


(Sample)(Add to

cart, pay)

Download to

computer

Search for and go to DDD site

Boot PC, Log on


SampleAdd to cart,

pay

Download to

computer


ListenGo to online store

Boot PC, Log on

55 min Per CD

5 min 5 min 5 min 30 min / album

(passive time)

5 min / CD5 min

~5 hours Per CD

10 min 5 min 5 min1-4 hrs/ album

20 min - 2 hrs / CD

5 min

“It’s a hassle when I can’t find a MP3 link that

works”

“Sometimes I can’t find an MP3 at all”

“I don’t want to wait 1 minute

for a 30 second sample to download”

“There’s no point if it takes

4 hours. I could just go to the

store”

“I can’t tie up my phone line”

“There’s no way I’d do it at 20

minutes a song

“I don’t want to replace my

stereo with new

equipment”

“It [Rio Player] would have to

store at least 10 CDs before I’d

use it”

“I don’t want to listen on a walkman

(referring to the Rio)”

“I’m not too good with

technology – hooking up

wires sounds too

complicated”

Write MP3 to WAV format

30 min

(1) Numbers for U.S. onlySource: RIAA/NARM Consumer Survey; RIAA; BCG analysis

DIGITAL MUSIC OFFERS SEVERAL OPPORTUNITIESDIGITAL MUSIC OFFERS SEVERAL OPPORTUNITIES

% music vol(1):

% music pop(1) :

Money barrier

Heavy addict/ obsessive

Moderate purchase/

usageTime

barrierInfo

barrier

Low involve-

ment

No involve-

ment

Moderate user, barrier to purchase

43

12

23

18

20

35

8

19

6

16

$12.2B

67M

Totals (U.S.)

Opportunity to add +20% to market size if barriers removed, but..Opportunity to add +20% to market size if barriers removed, but..• Depends on penetrationDepends on penetration• Some benefit captured by online CD salesSome benefit captured by online CD sales

Demand for still more music?Demand for still more music? A lower cost option?A lower cost option?

A QUICK LOOK AT THE VALUE CHAIN (OF SORTS)A QUICK LOOK AT THE VALUE CHAIN (OF SORTS)

Artiste & Repertoire

MarketingManufacturing,

selling and logisticsRetail distribution

Administration & Overhead

$15$15$5$5$1.5$1.5$2.5$2.5$2.5$2.5$2.5$2.5$2$2

Ear for talentEar for talentFinancingFinancingTeamingTeaming

Connections/ Connections/ cloutclout

Mfg scaleMfg scaleSales force sizeSales force size

N.W.I.Y.C.G.I.N.W.I.Y.C.G.I. FragmentedFragmentedLow value addLow value add

KEY COMPONENTS OF THE BUSINESS MODELKEY COMPONENTS OF THE BUSINESS MODEL

ChannelChannel

ProductProduct

PricePrice

Technology platformTechnology platform

CostsCosts

HOW DO YOU GO TO MARKET?HOW DO YOU GO TO MARKET?

Through existing retailers DTC

ProsPros

ConsCons

ChannelsChannels

HOW DO YOU GO TO MARKET?HOW DO YOU GO TO MARKET?

Through existing retailers DTC

ProsPros

ConsCons

• Need aggregator/navigatorNeed aggregator/navigator• Can make low margin, agent Can make low margin, agent

modelmodel• No disruption to existing No disruption to existing

channelchannel

• Hold power over channelHold power over channel• Quick to marketQuick to market• Unfettered access use of Unfettered access use of

data data • Capture other add-on sales Capture other add-on sales

yourselfyourself

ChannelsChannels

WHAT PRODUCTS DO YOU OFFER?WHAT PRODUCTS DO YOU OFFER?

ProductsProducts

WHAT PRODUCTS DO YOU OFFER?WHAT PRODUCTS DO YOU OFFER?

Currently envisaged offeringsCurrently envisaged offerings

eSingleseSingles eAlbumseAlbums eAlbum+eAlbum+ Locked content--bonus tracks, Locked content--bonus tracks, stowaway catalogstowaway catalog

Jukebox (rental)Jukebox (rental) SubscriptionSubscription Kiosk delivery system(s)Kiosk delivery system(s)

Key challengesKey challenges

Album cannibalization; economicsAlbum cannibalization; economics Long downloadsLong downloads

What value “+”What value “+” What added value; retailer irritationWhat added value; retailer irritation

Download timesDownload times Adverse selectionAdverse selection

Investment/valueInvestment/value

ProductsProducts

AND AT WHAT PRICE?AND AT WHAT PRICE?

Album

Single

Physical

$10 - $18 actual retail

$2 - $4 actual retail

Digital

?

?

PricingPricing

HIGH PRICES WILL SUBSTANTIALLY INCREASE RETURNSHIGH PRICES WILL SUBSTANTIALLY INCREASE RETURNSBut Tradeoff May Be Adoption Rates and Standards InfluenceBut Tradeoff May Be Adoption Rates and Standards Influence

ProductProduct

eSingle eSingle eAlbumseAlbums eAlbums+ eAlbums+

DescriptionDescription

Current hitsCurrent hits Basic albumBasic album With extra contentWith extra content

Parity viewParity view

$4$4 $15$15 $18$18

+18%+18%

Pessimistic viewPessimistic view

$2$2 $10$10 $16$16

-2% -2% (2)(2)

Incremental DDD Incremental DDD contribution FY’05 contribution FY’05 (1)(1)

20%20% SensitivitySensitivity

(1) net of fixed / allocated costs(2) assumes 1/5% volume change for each 1% change in price

PricingPricing

ARGUMENTS APPEAR IN FAVOR OF ADOPTING A HIGH ARGUMENTS APPEAR IN FAVOR OF ADOPTING A HIGH PRICE STRATEGY INITIALLYPRICE STRATEGY INITIALLY

High pricesHigh prices

Protect near term profitability of DDD and the core Protect near term profitability of DDD and the core businessbusiness Capture a price premium from DDD early adoptersCapture a price premium from DDD early adopters

• The typical new technology rollout strategyThe typical new technology rollout strategy Moving down prices easier than moving them upMoving down prices easier than moving them up

• Do so only as market forces dictateDo so only as market forces dictate Avoid cheapening the musicAvoid cheapening the music Music sales not extremely price elastic in generalMusic sales not extremely price elastic in general

• Although channel choice is more price Although channel choice is more price sensitivesensitive

Protect “rest of world pricing”Protect “rest of world pricing”

• Keep low US street prices from leaking outKeep low US street prices from leaking out Slow the growth of a technology currently offering Slow the growth of a technology currently offering as much threat as opportunity as much threat as opportunity

Low pricesLow prices

Manage the buzz: be perceived as aggressive Manage the buzz: be perceived as aggressive leader in an important emerging marketleader in an important emerging market Maximize the adoption of a new technology to Maximize the adoption of a new technology to affect adoption of MusiCo standardaffect adoption of MusiCo standard

• Direct consumer contactDirect consumer contact

• Robust rights protectionRobust rights protection Crowd out piracy from unprotected music formatsCrowd out piracy from unprotected music formats Build chart position among the 5% of the market Build chart position among the 5% of the market using DDDusing DDD

Absent goal of standards adoption, high price strategy would be dominant• Balance of argument shifts when/if other majors join MusiCo

Absent goal of standards adoption, high price strategy would be dominant• Balance of argument shifts when/if other majors join MusiCo

PricingPricing

HOW MUCH DO YOU FIGHT FOR YOUR STANDARD?HOW MUCH DO YOU FIGHT FOR YOUR STANDARD?

Persistently protected contentPersistently protected content

• Better than CDsBetter than CDs

• vs. open standards now existingvs. open standards now existing

A royalty-generating opportunity if you winA royalty-generating opportunity if you win

But software and appliance providers have different objectives and But software and appliance providers have different objectives and greater resources greater resources

TechnologyTechnology

DDD COULD ENABLE (REQUIRE) COST RATIONALIZATIONDDD COULD ENABLE (REQUIRE) COST RATIONALIZATIONStill to Be ExploredStill to Be Explored

Near term, consider only narrowly defined incremental cost savings offered Near term, consider only narrowly defined incremental cost savings offered by DDDby DDD

• Especially prudent given 7% penetration expected in 2005Especially prudent given 7% penetration expected in 2005

However, large scale adoption of DDD may provide opportunities to realign However, large scale adoption of DDD may provide opportunities to realign cost structure, e.g., cost structure, e.g.,

• Shift/reduction of marketing dollars via direct-to-consumerShift/reduction of marketing dollars via direct-to-consumer

• B2B applications for delivering content globallyB2B applications for delivering content globally

• M&D cost reduction, given new channelM&D cost reduction, given new channel

• A&R changesA&R changes

Rationalization may move from opportunity to mandate if low price scenario Rationalization may move from opportunity to mandate if low price scenario emergesemerges

Cost structureCost structure

AGENDAAGENDA




THERE ARE A SET OF OBJECTIVES FOR DDD…THERE ARE A SET OF OBJECTIVES FOR DDD…Largely AspirationalLargely Aspirational

Maintain/extend client’s market leadershipMaintain/extend client’s market leadership

Preserve advantage of being a majorPreserve advantage of being a major

Maintain/enhance the value of intellectual propertyMaintain/enhance the value of intellectual property

Take costs out of the value chain and capture the savingsTake costs out of the value chain and capture the savings

Maintain/raise barriers to entryMaintain/raise barriers to entry

Grow the market for musicGrow the market for music

Change economics, lowering breakeven, to broaden accessible marketChange economics, lowering breakeven, to broaden accessible market

SummarySummary

...BUT THERE ARE CRITICAL TRADEOFFS TO MANAGE...BUT THERE ARE CRITICAL TRADEOFFS TO MANAGE

Growing DDD (fast and large) as a Growing DDD (fast and large) as a new line of business...new line of business...

Garnering market share and Garnering market share and developing a standard...developing a standard...

Preserving current economics...Preserving current economics...

Building direct access to Building direct access to consumers...consumers...

...Protecting the core business...Protecting the core business

...Maximizing near term profitability...Maximizing near term profitability

...Preventing artist disintermediation...Preventing artist disintermediation

……Maintaining brick and mortar retail Maintaining brick and mortar retail distribution networkdistribution network

DDD strategy must choose between these tradeoffs• Recognizing inherent uncertainty in the future• But trying to shape that uncertain future in a favorable way

DDD strategy must choose between these tradeoffs• Recognizing inherent uncertainty in the future• But trying to shape that uncertain future in a favorable way

SummarySummary

ORGANIZATION CAN BE DIVIDED ACROSS TWO ORGANIZATION CAN BE DIVIDED ACROSS TWO OBJECTIVESOBJECTIVES

Either Justified, Depending on Either Justified, Depending on BeliefsBeliefs

Land GrabLand Grab

Maximize penetrationMaximize penetration

• Low prices, some freeLow prices, some free

• Quick product developmentQuick product development

• Broad contentBroad content

Profit BedrockProfit Bedrock

Ensure positive contribution Ensure positive contribution on every saleon every sale

• Moderate pricingModerate pricing

• Careful product designCareful product design

• Content targeted for most Content targeted for most profitable segmentsprofitable segments

SummarySummary

DISCUSSION/Q&ADISCUSSION/Q&A

MIT Sloan School MIT Sloan School November 14, 2000November 14, 2000

BITS, BYTES & BLUESBITS, BYTES & BLUESThe Digital Delivery of MusicThe Digital Delivery of Music

Paul FenaroliPaul FenaroliManager, BostonManager, Boston

CHALLENGESCHALLENGES

Source: NY Times; BCG analysis

AssetsAssets ChallengesChallenges UncertaintyUncertainty

Channels?Channels?

Business models?Business models?

Partners?Partners?

Consumers?Consumers?

MAKING IT HAPPENMAKING IT HAPPEN

Traditional businessTraditional business

Valuable catalog

Artists (?)““Stealing an artist's musicStealing an artist's musicwithout paying for it is without paying for it is absolute piracy . . . and absolute piracy . . . and I’m talking about major-I’m talking about major-label recording contracts, label recording contracts, not Napster.”not Napster.”

- Courtney LoveCourtney Love

Meeting the challengeMeeting the challengeMeeting the challengeMeeting the challenge

PC: sales of digital PC: sales of digital downloads of music over downloads of music over the Internetthe Internet

Kiosk: purchase access Kiosk: purchase access to music catalog through to music catalog through ATM-like machines at ATM-like machines at retailersretailers

Broadband/wireless: Broadband/wireless: purchase downloaded purchase downloaded music through cable music through cable modems or wireless modems or wireless remote devicesremote devices

POTENTIAL TO SPAN MULTIPLE POTENTIAL TO SPAN MULTIPLE MODELS AND CHANNELSMODELS AND CHANNELS

ChannelsChannels PartnersPartners Business modelsBusiness models

Sale

Sale

• T

racksT

racks•

Titles

Titles

Sale

Sale

• T

racksT

racks•

Titles

Titles

Su

bscrip

tion

Su

bscrip

tion

Su

bscrip

tion

Su

bscrip

tion

New

Talen

t On

line

New

Talen

t On

line

New

Talen

t On

line

New

Talen

t On

line

How to do it?How to do it?


BCG ENGAGED TO HELP CONSIDER INTERNET BUSINESSBCG ENGAGED TO HELP CONSIDER INTERNET BUSINESSChallenges Common With Other Established CompaniesChallenges Common With Other Established Companies


• Determine productsDetermine products• Identify customersIdentify customers• Identify pricing strategyIdentify pricing strategy• Identify competitive issues and roll out planIdentify competitive issues and roll out plan

• Determine productsDetermine products• Identify customersIdentify customers• Identify pricing strategyIdentify pricing strategy• Identify competitive issues and roll out planIdentify competitive issues and roll out plan

ContinuousContinuousrefinementrefinement

ContinuousContinuousrefinementrefinement

• Identify partnering approachIdentify partnering approach• Determine value of specific joint venturesDetermine value of specific joint ventures• Identify partnering approachIdentify partnering approach• Determine value of specific joint venturesDetermine value of specific joint ventures

Define offerDefine offer

Select partnersSelect partners

Get it doneGet it doneGet it Done!Get it Done!• Design optimal organizational structureDesign optimal organizational structure

• Identify what capabilities partners offerIdentify what capabilities partners offer• Identify which existing systems and processes can be leveragedIdentify which existing systems and processes can be leveraged

• Identify what else can be outsourced, e.g., distribution, paymentIdentify what else can be outsourced, e.g., distribution, payment • • Identify what needs to be built nowIdentify what needs to be built now • • Define plan to meet aggressive timeline and measure resultsDefine plan to meet aggressive timeline and measure results

Get it Done!Get it Done!• Design optimal organizational structureDesign optimal organizational structure

• Identify what capabilities partners offerIdentify what capabilities partners offer• Identify which existing systems and processes can be leveragedIdentify which existing systems and processes can be leveraged

• Identify what else can be outsourced, e.g., distribution, paymentIdentify what else can be outsourced, e.g., distribution, payment • • Identify what needs to be built nowIdentify what needs to be built now • • Define plan to meet aggressive timeline and measure resultsDefine plan to meet aggressive timeline and measure results

Source: interviews

Report salesReport sales and pay royaltiesand pay royalties

Distribute andDistribute and record salesrecord sales

Market to Market to customerscustomers

ManufactureManufacture Create contentCreate contentDevelop andDevelop and

manage pipelinemanage pipeline

BUSINESS PROCESS ANALYSIS PROVIDED BASIS FOR BUSINESS PROCESS ANALYSIS PROVIDED BASIS FOR PLANNING CHANGES ACROSS DOMAINSPLANNING CHANGES ACROSS DOMAINS

Consumer Download and Distribution ProcessConsumer Download and Distribution Process


Customer Customer requests requests

specific music specific music downloaddownload

Digibox Digibox downloaded downloaded

without playing without playing rightsrights

Player Player installed?installed?

Customer Customer downloads downloads

playerplayer

Customer Customer installs and installs and

registers playerregisters player

Player connects to Player connects to account mgmt account mgmt

partnerspartners

AccountAccountsetup?setup?

Credit inCredit inaccount?account?

Customer plays Customer plays musicmusic

Clearinghouse Clearinghouse executes monetary executes monetary

transaction and transaction and reports salesreports sales

Customer sets up Customer sets up accountaccount

Customer deposits Customer deposits in accountin account

NoNo

YesYes YesYes YesYes

NoNo NoNo

Customer Customer requests songrequests song

Player searches Player searches for an up to date for an up to date

keykey

UpdatedUpdatedKey?Key?

User plays music/ User plays music/ contentcontent User on-line?User on-line?

YesYes

Use denied by Use denied by player, purchase player, purchase

initiatedinitiated

Player archives use Player archives use statistics until user statistics until user

on-lineon-line

Use stats reported Use stats reported to clearinghouseto clearinghouse

NoNo

NoNo

YesYes

New purchaseNew purchase

Repeat useRepeat use

Current viewCurrent view Two to three years outTwo to three years out

GlobalGlobal

RegionalRegional

LocalLocal

Manual Manual process process

Report salesReport sales and pay and pay royaltiesroyalties

Distribute Distribute and record and record

salessales


ManufactureManufactureCreate Create contentcontent

Develop andDevelop andmanage pipelinemanage pipeline

U.S.U.S.

JapanJapan

CanadaCanada

Tracs Tracs EuropeEurope

Royalties, repertoire and publishingRoyalties, repertoire and publishing

AIFAIF

E-MusicE-Music Interface MgrInterface Mgr

Digital infrastructureDigital infrastructure

PIPSPIPSCarlosCarlos

PIPSPIPSEuropeEurope

value value chainchain

E-MusicE-Music Interface MgrInterface Mgr

Digital infrastructureDigital infrastructure

CONTENTCONTENT

Royalties, repertoire and publishingRoyalties, repertoire and publishing

ON-LINE SALES ON-LINE SALES ITIT SOLUTION HAD TO FIT A FLEXIBLE, SOLUTION HAD TO FIT A FLEXIBLE, CONSOLIDATED AND GLOBAL VIEW CONSOLIDATED AND GLOBAL VIEW

Need results now!Need results now!


value value chainchain

Report salesReport sales and pay and pay royaltiesroyalties

Distribute Distribute and record and record

salessales


ManufactureManufacture Create contentCreate contentDevelop andDevelop and

manage pipelinemanage pipeline

CONSTANT CHANGE AND AMBIGUITY PRESENT CONSTANT CHANGE AND AMBIGUITY PRESENT MAJOR CHALLENGE TO MAJOR CHALLENGE TO ITIT

Pay royalties and evaluate Pay royalties and evaluate financial performance financial performance

Accommodate requirements of Accommodate requirements of multiple business models, multiple business models, channels, partnerschannels, partners

Do not disrupt the existing Do not disrupt the existing businessbusiness

• Mapped business processes and Mapped business processes and IT systems to understand needed IT systems to understand needed changeschanges

• Served as bridge between “let’s Served as bridge between “let’s make a deal” and requirements make a deal” and requirements for implementationfor implementation

• Proposed system to leverage the Proposed system to leverage the legacy base and manage risklegacy base and manage risk

• Identified process and technology Identified process and technology to prepare digital content for saleto prepare digital content for sale

Keeping in MindKeeping in MindActionsActions

Ready to launchReady to launch


Royalty/GL Royalty/GL interfaceinterface

Royalty/GL Royalty/GL reportsreports

InterfaceInterfaceManagerManager

Product # Product # translationtranslation

Data acceptanceData acceptanceand storageand storage

Audit Audit calculator calculator

Sales DWSales DWfeedfeed

Reporting Reporting capabilitycapability

Royalty/GLRoyalty/GLreportsreports

ConsumerConsumerDW feedDW feed

Royalty/GLRoyalty/GLFeedFeed

PaymentsPayments

RegistrationRegistrationDistributionDistribution

Consumer Consumer DWDW

Initial DEMD Initial DEMD reportsreports

SalesSalesDWDW

Product Product mastermaster

Label copyLabel copy

OtherOther

FalconFalcon

Complete DEMD Complete DEMD reportsreports

= To be completed FY X= To be completed FY X

= To be completed FY Y= To be completed FY Y

GATEWAY SOLUTION PROVIDED NEEDED FLEXIBILITY GATEWAY SOLUTION PROVIDED NEEDED FLEXIBILITY AND A WAY TO ACCOMMODATE NEW CHANNELS AND A WAY TO ACCOMMODATE NEW CHANNELS

External partnersExternal partners


RIGHT CONTENT AT THE RIGHT TIME IN THE RIGHT CONTENT AT THE RIGHT TIME IN THE RIGHT MARKET MEANS WE MUST PRIORITIZERIGHT MARKET MEANS WE MUST PRIORITIZE

Type of titleType of title

• New releasesNew releases

• Active catalogActive catalog

• Inactive catalogInactive catalog

• Preservation targetsPreservation targets

Number of titles (worldwide)Number of titles (worldwide)

• ~XK new releases per year~XK new releases per year

• ~100XK titles in catalog~100XK titles in catalog

• ~10XK active catalog titles~10XK active catalog titles

Where are the titles/moneyWhere are the titles/money

• Tier one—top five countries/75% of revenueTier one—top five countries/75% of revenue

• Tier two—next 10 countries/20% of revenueTier two—next 10 countries/20% of revenue

• Tier three—bottom 30 countries/5% of revenueTier three—bottom 30 countries/5% of revenue

Number of elementsNumber of elements

• CD audio, CD front and back cover, photos, CD audio, CD front and back cover, photos, Web-quality music videoWeb-quality music video

• CD package graphics, photos, tv-quality music CD package graphics, photos, tv-quality music video, artist bio, lyricsvideo, artist bio, lyrics

• Bonus tracks and promo graphics, multiple Bonus tracks and promo graphics, multiple videos in uncompressed format, all photos, bio, videos in uncompressed format, all photos, bio, lyrics, music sheetslyrics, music sheets

Quality of elementsQuality of elements

• StandardStandard: Compressed audio, package scans, : Compressed audio, package scans, flatbed photo scans, one video formatflatbed photo scans, one video format

• DeluxeDeluxe: Master and compressed audio, original : Master and compressed audio, original CD graphics, drum-scanned photos, multiple CD graphics, drum-scanned photos, multiple video formatsvideo formats

ReachReach RichnessRichness


From IT perspective, the solution needs to From IT perspective, the solution needs to identify and manage full variety of contentidentify and manage full variety of content

AddAdd

AddAdd

LAUNCHED!LAUNCHED!


OrganizationOrganization

PartnersPartners

CustomersCustomers

Content managementContent management

SystemsSystems

PlayerPlayer

Launch PlanLaunch Plan

Key components must be in placeKey components must be in place

AGENDAAGENDA



Lessons learnedLessons learned

LESSONS LEARNEDLESSONS LEARNED

Use 80/20 Use 80/20 • On importance to consumersOn importance to consumers• RevenueRevenue• SourcesSources

Outsource new parts of the business (consumer)Outsource new parts of the business (consumer)

Carefully structure deal terms, iterate with strategyCarefully structure deal terms, iterate with strategy

Identify technology deal pointsIdentify technology deal points

What do I want to know and why?What do I want to know and why?• Focuses the strategyFocuses the strategy• Guides technology decisions and cost Guides technology decisions and cost

estimatesestimates

Outsource talent if resources scarceOutsource talent if resources scarce

Use manual processesUse manual processes

Leverage legacy systems through middlewareLeverage legacy systems through middleware

1.1. Managing digital content is a Managing digital content is a big dealbig deal• IdentifyIdentify• DigitizeDigitize

2.2. Partner thoughtfullyPartner thoughtfully

3.3. Don’t gorge on data—think Don’t gorge on data—think valuevalue

4.4. Be creative and realistic when Be creative and realistic when thinking about technology thinking about technology solutionssolutions

EXTENDING OUR OWN BUSINESS MODELEXTENDING OUR OWN BUSINESS MODELTHROUGH iFormationTHROUGH iFormation

• World's largest private equity World's largest private equity investment firm focused investment firm focused exclusively on Internet and exclusively on Internet and information technology information technology investments - over $10b of investments - over $10b of capital under managementcapital under management

• Focus on active strategic Focus on active strategic assistance and building assistance and building strong partnerships with strong partnerships with portfolio companiesportfolio companies

• Premiere global investment bankPremiere global investment bank• Advisory and financial expertiseAdvisory and financial expertise• Deep relationships with Global 2000Deep relationships with Global 2000• Over $10b under management in private Over $10b under management in private

equityequity

ii FormationFormationii FormationFormation

• Leading business strategy Leading business strategy and e-commerce practiceand e-commerce practice

• Business development and Business development and operational expertiseoperational expertise

• Deep relationships with Deep relationships with Global 2000Global 2000

mit sloan school november 14, 2000 bits, bytes & blues the digital delivery of music paul...

Documents

new music

music landscape9986a

recorded music industry

music thats rare

new economy assignments

new technology bmgmost

good faith

napster attorneyits