© 2005 UMFK. 1-1 BMG Entertainment internet business models text and cases Kristin Belanger

© 2005 UMFK. 1-2 Development of a Global Music Industry

© 2005 UMFK. 1-3 Overview Introduction History Strategies Stakeholders Get Big Fast! Hindsight

© 2005 UMFK. 1-4 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

© 2005 UMFK. 1-5 Introduction cont. Subsidiary of Bertelsmann AG (German company) World 4 th 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)

© 2005 UMFK. 1-6 Road Blocks The ever changing Music Industry –Company able to keep up with changes –Predict upcoming problems Five other competitive content providers

© 2005 UMFK. 1-7 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

© 2005 UMFK. 1-8 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

© 2005 UMFK. 1-9 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

© 2005 UMFK 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

© 2005 UMFK 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)

© 2005 UMFK 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

© 2005 UMFK 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

© 2005 UMFK 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

© 2005 UMFK 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

© 2005 UMFK 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

© 2005 UMFK 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

© 2005 UMFK 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)

© 2005 UMFK 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.

© 2005 UMFK 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 accounts

© 2005 UMFK 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

© 2005 UMFK 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 57 th ) (bmg.com)

© 2005 UMFK. 1-23

© 2005 UMFK Questions??